How do you evaluate a note? - Posted by Jeff

import · May 25, 2004, 9:24am

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import · May 25, 2004, 9:24am

Posted by Jeff on May 25, 2004 at 09:24:15:

I was recently talking to a person who wants to sell 2 notes.

I’ll list the terms here, but I don’t know how to fairly evaluate these.

NOTE 1: $16K First. Property (in Baltimore, MD) was seller financed and was sold for $20K ($4K down). 8% rate, amortized 20 yrs ($133.83/month)with a 4-yr balloon. The note is 6 payments old (started 12/1/03), and the Payor has added $300 extra to the first 6 payments. That brings the current note value at $14004.

NOTE 2: $17K First. Property (in Baltimore, MD) was seller financed and was sold for $21K ($4K down). 7% rate, amortized 20 yrs ($131.80/month)with a 5-yr balloon. The note is brand spankin’ new, with first payment due 6/1. The only additional info to add to this is that the Payor is the same person as NOTE 1.

I drove by the area, and #1 isn’t in a great neighborhood. #2 is ok.

Any advice would be appreciated.

import · November 18, 2004, 5:19pm

Re: How do you evaluate a note? - Posted by Cecil Watson

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import · May 26, 2004, 12:09pm

Re: How do you evaluate a note? - Posted by Jeff

Posted by Jeff on May 26, 2004 at 12:09:12:

OK,

So I read thru the article, and I gathered that both notes are class “AB”, based upon 18-20% equity, unknown credit rating, 6 month old current note / new note.

I then read on, siting that is is an investment property note (so that’s “NOO”) and a go to the “Max Investment to Property Value” sheet. AB vs. “3” gives 70%, then I become lost.

70% of what?

What is ITV?

How do I figure out the last chart (“Max Investment to Wholesale Property Value”)?

Please advise.

At this point, I believe I can get both notes (current face value is $14K and $17K) for $19K. Is that good???

import · May 25, 2004, 12:09pm

Top To Bottom! - Posted by David Butler

Posted by David Butler on May 25, 2004 at 12:09:54:

Hello Jeff,

Well… you’ve come to the right resource! Now its simply a matter of tapping into it;-)

Just enter the term “note grading pricing” into the “Search” facility right at the top of this Forum, and you are on your way!

In addition to the mountain of previous detailed discussion you’ll pull up on this very point, you can gain even more additional valuable information by running through threads related to “creating notes”, “clauses”, “junior”, “commercial”, “business” - all of which will paint a picture of the basic information requirements you’ll come to recognize as applying to ALL notes.

This should pretty much get you all squared away. Best wishes for your success, and Many Happy Returns!

David P. Butler

import · May 26, 2004, 6:20pm

Carefully! - Posted by David Butler

Posted by David Butler on May 26, 2004 at 18:20:34:

Hey Jeff,

Pretty good job so far

Jumping right into your questions here…

“I then read on, siting that is is an investment
property note (so that’s “NOO”) and a go to the
“Max Investment to Property Value” sheet. AB vs.
“3” gives 70%, then I become lost.”

Not sure why you become “lost”, as it is all explained there, but let’s rerun it here. Also, I come up with 67% for AB in cateogry 3, so you’ll want to double check that.

Q.1) 70% of what?

A.1) As it states - 70% (or 67%?) of property value

Q.2) What is ITV?

A.2) As it states - Investment-To-Value (property value). So one of your two criteria here, GENERALLY, would be that IF property is TRULY worth $41,000, the maximum amount you would consider investing in the notes would be a total of roughly $41,000 x 70% (I’m using 67% here), or $27,470.

Then I compare that price with the price I would pay based on yield I would require. And the lower of those two numbers would be the purchase price, as that lower number is the only one that meets both my ITV and Yield requirements.

Q.3) How do I figure out the last chart (“Max Investment to Wholesale Property Value”)?

A.3) Referring to that chart (titled “Residential Mobile Homes in Parks”) which you haven’t indicated applies here?; you would simply follow the instructions for using that chart, including footnote #7.

Okay… should be all set now, I hope! Now last question below…

Q.4) At this point, I believe I can get both notes (current face value is $14K and $17K) for $19K. Is that good???

A.4) Not enough full information to know, but even if there were… in all honesty, only YOU can answer that! Is it? By the way, you’ll observe that footnote 4 for that chart mentions GENERAL “private investor” parameters. And they can swing wildly, as discussed in a thread sometime back regarding “investment value”.

You do have some advantages though. You apparently are working right in your own neighborhood, which gives you a very low-cost and “hands-on” opportunity to really research the property, demographics, values, Payor, and tenants.

So then you answer these questions for yourself… If you get these properties back - can you “ride-out” foreclosure timeframes and costs? Holding costs? If you winding up with properties, can you easily dispose of them quickly? And at what price and terms?

And… the big three MONEY questions…

why is seller selling now?
how much cash does he need?
what are his expecations? You’ve answered this one. Sounds like he expects $19,000 to be a good price.

Which brings up the question… why are his expectations only $19,000 for $31,000 of notes that he generated on property sales of $41,000 and he’s only recovered roughly $10,000 total from that $41,000, and only six months lapsed on first note, none on 2nd.

That’s almost the same as selling properties for the equivalent of $29,000 ($8k down, $2k principal reduction, $19k for note sale) - given the short time frames. That’s quite a “haircut”, right?

Could be a very good reason. Or maybe not. But good to know either way, right? And BEFORE you buy the notes, rather than after!

Either way, would be valuable to you here to also become familiar with the concept of “cash equivalent value” vs. “transaction value”, both of which can be found in threads discussing them, by way of the “Search” engine as well.

Okay… looks like you are on the right track, but a couple of laps yet to go! Hope this helps you get in the “Winner’s Circle” on this one!

David P. Butler