Note Buyer, My note payor has bad credit...

Calling all note buyers...

I just talked to a note buyer and he asked me what the credit score of the payor on my note is.
How do I know? He makes his payment on time, that's all I care about.

What's the dealio with the credit score of the note payor?

Answer: Like everything else I have said in these related blog entries, credit score of the note payor is just 1 factor in the 13 factors that determine the value of your real estate note.

Obviously, the credit score (good or bad) doesn't tell you what the payment history will be on the note in the future.

Credit scores are just a value that the credit bureau's assign based on the creditors who have reported to them, based on an individuals past accounts...

Some note buyers place a great deal of emphasis on credit scores, other note buyers place very little weight on the payor's credit score.

Want to sell your note? Call me and we can talk about what I would pay to buy your note.

Note buyer? I am selling a real estate note. I just found out that the payor has let the property taxes go delinquent...

I called the county tax office and they told me that the people I sold my house to have not
paid the real estate property taxes for the last two years.

They owe $1,603 in delinquent taxes.

I want to sell my real estate contract now. Is this going to be an issue?

A: Yes.

I am happy to buy a real estate note, but I do need the property taxes and insurance to be current and up to date.

(Many note holders forget to verify that their borrowers maintain hazard insurance on the buildings)

There are three ways to handle the purchase and sale of your real estate note when the payor has delinquent taxes owing on the property:
1. Contact your borrower and tell him to get in to the county asap, and pay the taxes.
2. You can pay the taxes and then have your borrower re-imburse you.
3. I can buy your note and pay the taxes out of the note proceeds and then you can seek re-imbursement from your payor.

Bottom line: I have to have the property taxes current at the point I buy your note.

It is certainly worth a phone call once or twice a year to the county treasurer and the insurance broker to verify that your payor is keeping up to date on property taxes and insurance.

Looking for the best price on selling your real estate contract?

Looking for a note buyer. How important is the payment history on my note I am selling?

Very Important.

Payment history is another important ingredient in the pricing of a real estate note.

In regards to Payment History, A real estate note is typically classified into 3 categories:
1) Perfect pay history
2) Spotty pay history - but currently Up-to-date
3) Defaulted Note.

That's it.

3 categories.

The most valuable notes are the ones that have a "perfect" pay history.
The fact that they have a perfect pay record usually means that the note holder is very
happy hanging onto the note because the payments come in like clock work...

Often the only time a note holder considers selling their note is when the payments stop coming in like "clock work."

This is often the wrong time to sell your note.

The note payment history issue is this: Your note will be classified into the 3 categories listed above.

...and it will be priced accordingly.

Lower discount for perfect paying notes.
Bigger discound for spotty pay history notes.
Humongous discount for defaulted notes.

Moral: Don't let your note payor miss a payment!

Once they miss a payment (for any reason) it becomes a "spotty" pay note.

Get the most for your notes - keep on top of your note payors.



Most note holders start thinking about selling their note when the payors begin to have trouble making their payments on time...

Looking for a note buyer?

Selling my note. Does it help if I have a balloon date in the note?

Or, do you like to see notes that have 25-30 years of payments left?

Balloon date or maturity date = good thing.

25 to 30 years of payments remaining = not so good.

Reason: To a note buyer, the YIELD on their investment in the note is what will (in part) determine the pricing of the note.

What is YIELD?

Yield to the note investor is the return divided by the investment.

The quicker the payback the higher the yield to the note investor.

All notes are purchased at a discount from the face value of the note...

Having a balloon date or early maturity date is similar to a previous post about the payment
amount (the larger the monthly payment, the better). It all relates to the quicker the payback on the note, the better yield for the note investor.

Concern: The balloon date or maturity date must be "realistic." If the payor on the note is an unemployed "F" credit borrower, it is not realistic for him to re-finance the note in 2 months.

If the borrower cannot perform, the balloon date is a bad thing...

Confused?

I don't blame you...

Payment amount. What is the payment amount on the note?

"I have a note that I want to sell. The balance is $89,213.44.

The monthly payment amount is $541.08. Is this a valuable note?"

A: It would be a lot more valuable if the payment amount was $925.

To a note buyer, the yield that is earned on the invested money is a function of
"how quickly are you paid back."

So, the quicker you are paid back, the higher the yield on the note investment.

In the above example, the lower monthly payment amount of $541.08 means it will take
349 months to pay off the entire balance at 6% interest.

Using the same principal balance and interest rate, the loan is paid off in only 132 months at a
monthly payment amount of $925.

The note buyer is paid off over 18 years quicker with the higher monthly payment amount!

Moral of the story: The higher the monthly payment amount, the better for the note buyer. And, the more valuable your real estate note will be, should you decide to sell the note.

Interest Rates. High, Low, talk to me about how the interest rate affects the sale of my real estate note.

"I love my brother in law. I sold him a piece of property and I have a note with an interest rate of 12.5% This should get top dollar right?"

Another note seller: "I hate my brother in law. I sold him a piece of property and my wife said I couldn't charge anything over 4% interest. She loves her brother. I don't. I assume I am toast as far as selling this note right?"

Interest rates... Like we have learned so far, the interest rate you carry on your real estate note is simply one piece of the big puzzle. There are 12 other factors that determine the "value" of your real estate note to a note buyer.

Obviously, in simple terms: The higher the interest rate you charge on your note the less the potential discount you will incur if you sell your note.

Some people think that a low interest rate note will prevent a note buyer from buying the note.

This is not true.

I have bought many notes with 3 to 5% interest rates.

I have bought many notes with a zero interest rate...

Usually it's a family thing.

A low interest rate simply means that the discount to buy the note will be larger than if the note carried a higher interest rate. The present value of a note with a 9% face rate will always be more than the present value of a note with a 2% face rate...

Moral of the story: A low interest rate note can easily be sold. The note seller will simply be looking at a bigger discount to sell the low rate note (probably should'a thought about that when he was negotiating the terms of the note back when the property sold).

A note with a high interest rate doesn't mean that it's a great note, but everything else being equal, a higher interest rate note is worth more than a lower rate note.