How much to discount? - Posted by Trish

Posted by David Butler on July 09, 2001 at 16:08:23:

Hello Trish,

Typically, vacant land note pricing ranges from 50% to 75% ITV (investment-to-value). For example, if the lower of the sale price/appraised value is indeed $45,000, you might receive somewhere between $22,500 to $33,750… as a function of the ITV requirements. The dominant range for improved land in a solid market, tends to run about 60% to 65% ITV, which might narrow your range to somewhere between $27,000 to $29,250. To a large extent, the price range this deal might fall in will depend a lot on the information contained in an appraisal, related to zoning, market characteristics, sales activity, area demographics, etc.

The other half of the equation will be related to the Payors. Keep in mind that an astute buyer will generally look at the credit profile, and put the most weight on the credit history of the primary breadwinner. Additionally, income history, and total debt-to-income will weigh in, (along with down payment amount… 10% is acceptable, but 20%+ down is preferred in vacant land paper) toward determining the risk factor - which in turn, sets the yield requirements for such notes.

Prime, improved subdivision and vacation home lots generally fall in the 12% to 16% yield range. Based on the scenario you describe, my thinking leans more to the 18% to 24% range. But, it is not unusual to see these types of notes discounted in the 24% to 30% range, all possible risk factors considered.

Just for drill, let’s try an example using $40,000 carried at 180 months (15 years), fully amortized, including interest at 12% - and assuming the buyer requires a 22% yield on this particular note after evaluating all the associated factors related to property and Payor. In this instance, the yield requirement would price that note at around $25,190.

At the same time, the note buyer doesn’t want to be exposed to more than a 60% ITV on this property… which is $27,000. In this scenario, he might offer you $25,190… since the lower of the two numbers is the only price that can meet both his ITV and yield objectives.

As for improving the note… there are possible options, one of which is to carry back a small second for say $5,000, and make the first note $35,000. Even better, would be to see if the Payor has additional collateral you can get him to pledge as security for the note, over and above the land itself - or a combination of both strategies.

Or maybe sell only part of the note (or again, sell a part of the note, along with the other possibilities suggested immediately above). By the way, there are a number of active land note buyers who prefer purchasing only “partials” on these types of notes.

A Seller guarantee can be achieved by selling the note “with recourse”… how much value you receive for that added guarantee will be determined by your own financial strength and capabilities.

Where in the above ITV/yield ranges your note might fit, is difficult to determine with the information you have provided so far. But, this should give you some general idea of what you might be able to achieve, and how to achieve it.

Hope this helps, and Happy Note Creating :wink:

David P. Butler

How much to discount? - Posted by Trish

Posted by Trish on July 09, 2001 at 13:02:16:

I am creating a note on 5 acres with improvements but no house. Have buyers with dings on credit, am waiting on credit report now. Man and woman not married, in their 40’s or later. He has bad credit, hers is so-so.

$40K note, 12% int, looking at 15 or 20 year amortization. Property value is approx. $43K including well, septic, fence, etc. Raw land alone there is selling for $6,500/acre. (Buyers are putting up $5,000 down in addition to 40K note.)

Anyone want to do the math for me (since I am afraid I’ll make a mistake here) and tell me what I can expect to get if I sell this note as soon as it’s created? Do I need higher/lower interest rate? Higher/lower note value vs land value? Anything I could do to improve this note? Is it possible since I am owner of the land and creator of the note, to guarantee it myself, with whoever buys the note to increase it’s value (kind of like co-signing)?

Any help would be greatly appreciated!!


Land Collateral - Posted by Michael Morrongiello

Posted by Michael Morrongiello on July 09, 2001 at 23:51:06:

Land as collateral for seller financed notes tends to be on the lower end of the “totem pole” as far as general investor preference is concerned. You mentioned that the land had some “improvements” and depending on the nature of those improvements (fencing, utilities, paved roads, cleared, water, or well, sewer or septic, etc.) might allow for some latttude with respect to what David outlined as far as a note funders “ITV” investment to value or exposure level of comfort.

With the way you are struturing this sale, a PARTIAL sale of the note probably makes the most sense, unless you can shore up the collateral or are willing to spli the seller financing into (2) two seperate and distinct notes.

To your success,
Michael Morrongiello