Real Estate

 

What Factors Do Note Buyers Use
To Determine Purchase Price?

 

There are typically, three factors note buyers use to measure their risks and determine the note purchase price.

 

Learn these factors and you’ll know how to structure your deals for maximum profit.

 

Don't learn them and your notes will probably collect a lot of dust and lose a lot of value before an investor decides to take a chance and buy them.

 

The most important key is thinking ahead when you are actually buying the property. You want to structure each and every deal in a such a way that makes them irresistible to note buyers. Do this even if your not thinking about selling the note right at the moment.

 

1). The Time-Value of Money

The note buyer’s first concern revolves around the business economics principle of the time value of money. This is the factor that determines the amount of time it will take for the note buyer to recoup their initial investment and start seeing a profit.

In layman’s terms, they are asking the question, “How much time will it take me to recover my initial investment?” The longer the term, the lower the purchase amount will be.

 

2). The Equity Factor

As the saying goes, “Equity speaks volume!” The more equity, the more a note buyer is going to be willing to pay. Consequently, the less the equity, the less a note buyer will be willing to pay for the note.

This is a critical point to be aware of when structuring your deals. A small amount of equity creates a minimal safety net for note buyers in the event that the payer goes into foreclosure. Seasoned note buyers will tender lower offers on notes with minimal equity to create artificial equity and a lower Investment to Value (ITV).

 

3). The Payer’s Performance
Note buyers will perform a thorough examination the payer. The end result is to determine the potential for default. They’ll seek the answers to vital questions such as:

 

(a) Does the payer have stable job history?

(b) Does the payer have recent history of steady payments?

(c) What is the payer’s credit history?

(d) What is the probability of payer default? High? Medium? Low?

 

Even if the payer's financial performance is not outstanding, that isn't necessarily an issue as long as there is sufficient equity to protect the note buyer's investment. However, when there is no safety buffer in the form of significant equity, the buyer will demand a deep discount on the note to close the deal.

 

 Source: Joel Marks, REODr.com

 

 


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