An investor offered to sell me a note he has

[Thembi Moyo]

Hi BP members,

A real estate investor offered to sell me a note which he has between himself (functions as bank) and a buyer of property.  he offered to sell me the note for $45K. here are the details of the deal:

Current balance of the note is $46K with 12 years left to pay off

Int rate is 9% so would receive $815 of P&I and escrow from borrower

The value of the home (according to Zillow) is $70K.

First, what are some of the things I should make sure to consider and evaluate before making a decision on this. 

The buying of notes is fairly new to me since I'm more of a buy & hold investor.

Any advice would be greatly appreciated.

Thanks

[Charles Kennedy]

Hey Thembi,

I'm not sure how you came up with the $815 in principal and interest. In excel I did a payment calculation and got $535.33 a month simply doing =pmt(9%,12, $46,000) and dividing the resulting number by 12. 

I made a basic calculation in excel. I'm very finance focused so I focused on IRR in the evaluation. With a $45k purchase price your IRR is 9.44%. A basic sensitivity analysis gave me the following:

If you require the following IRRs, here is the maximum you should pay for the note:

12.5% IRR: $38,800

15% IRR: $34,850

Overall, you should judge the risk of taking on this note and decide how much you need to be compensated for that risk. I would ask why he is wanting to get rid of this note! Does he need the money or is he wary of the property (and be aware, he may not be truthful if he is nervous about the property).

I can share my excel if you would like.