how much is this note worth?

Question

First i'd like to say ive searched a ton about notes and feel i have at least a basic knowledge of them.  Im not looking to purchase any notes nor am i looking to sell one however I do want to know how much the note i currently own could be worth and if this is even a good note to have.  I get letters all the time from note buyers wanting to buy my note but i never wanted to call them because i always assume they just want to buy it super cheap which i dont blame them.

Anyhow ill try my best to explain the situation and give details on the note and hopefully I can get some advice or additional knowledge on if what I have is even any good.

In 2006 i purchased a foreclosed home via conventional financing.  It was pre bubble so I actually bought it with 100% financing.  At the time I thought it was a great idea to sell it via owner finance and do a wrap around mortgage.  Today I wouldnt do that but it doesnt matter, i did it and i sill have it and nothing bad has ever happened.  I dont make a ton of cash flow on it because of my mortgage on it but the little i do make is all infinite ROI since i never put a dime of my own money into it.  All this was done through a laywer in Austin who specializes in setting up wrap arounds and owner financing so im confident the paper work i have on it is legit.

What im looking to find out really is if this is a decent note and if I did decide to call one of these note buyer letters, what kinds of offers do you think they would throw at me?

Here is info on the note i have, i believe it to be all the pertinent information needed but if i left something out let me know.

performing note (1 late payment in 2012 which he paid that month, just a few days later then the late date, he paid the late fee)

30 year fixed at 9.10%

original loan amount = $101,850.00

current unpaid balance = $94,026.20

payments made = 105

setup date  11/2006

Amount owed on my mortgage (the wrap) = $79k and some change.

current market value about 115k

house is in del valle tx which is a suburb of Austin, TX.  its 12 miles to downtown austin if that matters which it probably doesnt.

What do you think?

Dion DePaoli · Answer

Pricing a loan is an interesting beast.  Some private investors will have aggressive pricing and some conservative.  This is always the challenge when trying to gain a market feed back on a note or sell it.We understand here that at par the return is 9.0%.  That is bid of $95K or 82% or RE Value.  Now, stop and think about that.  The loan has enough equity to refinance.  It is 2% away from a good conventional loan interest rate.  At 82% the rate would still beat the one he has now and he could just make a couple extra payments or bring cash to close of a little over $2k, maybe $3k with closing costs.    We know the loan has performed very well over 100 periods.  By the way, a "late" payment does not matter.  A missed payment does.  So this loan has a perfect pay history.  Do not let folks discount you for a borrower being late.  The prevailing risk here is more likely prepayment than it is default or delinquent payment.  The risk of prepayment would be what drives a good bid to a discount.  Assuming all other characteristics are good.  The Borrower sits at 9.10% more than double the prevailing market rate and as far as the details in the post go, there is no reason to believe they will not qualify for a conventional loan. That is also the disposition game plan for the note.  As a Seller you want a Buyer who realizes that.  No offense to the folks who priced this thing out already but they are WAY too low.  At 95% of UPB the IRR with a refinance in 12 months would be 13.68%.  Any time shaved off that 12 month period increases the IRR.  You are looking having to cut 3 months out and your are in the church of 15%.  If for some reason the loan does not or can not refinance within that time period the Buyer is still carrying the note at 9.10% and earning about 3% in equity each year.  Depending on what the Borrower's income documentation looks like, we have a pretty good mitigation plan to default and delinquency in place.  There is zero need to allow this loan to trade so an investor can carry at 15% with no work.  That is crazy pricing.  It is simply worth more.  At worst, perhaps add a couple extra points to the discount and poof, done.  This loan trades for more $85k all day long.  ($89k is 95% UPB)This is an issue in the market to some extent.  Investors have an idea of what they want in terms of return but they do not always price relative to obtaining that.  A good loan Seller will not simply hand their loan away.  The moral of the story, is any Buyer wants the highest return with the least risk.  As a Seller it is important to understand what view points might come up on the loan and usually the straight forward bid to yield method will bring a lower price as we see here.  That is not a cry for Buyer's to be reckless but this loan warrants a better price.

Joel A. · Answer

@Dion DePaoli

That is a great idea.  Im writing up an email now for them.  In the past usually just once a year ill send an email about refinancing but I never actually threw numbers in it showing him how it would affect the payment. This could be the tipping point and maybe then I can find out exactly why he thinks he cant get one at this time.  With the rates being so low it would be shameful not to try at least.

Dion DePaoli · Answer

@Joel A.

It is obviously difficult to understand what, if any, barriers exist to the refinance.  I am guessing the Borrower had less than stellar credit and believes it is relatively in the same shape.  That may not prove to be true.  Depending on who you have servicing the loan, the account is more than likely NOT reporting to the agencies.  So all of the on-time payments and all of the earned equity is not giving the positive impact to the Borrower's score as it likely should.  What I would do is chat with the Borrower and explain this to him in general.  Offer to give the Borrower a letter which details the Original Balance, Principal Paydown and the 105 on time payments.  In the letter state you are more than happy to confirm all that information in hopes that the Borrower might undergo a Rapid Rescore (or similar credit product) for the account to see if that boosts his score enough to be able to refinance.  Essentially that program will add your mortgage to his credit as a trade line and recalculate his score.  That just may give him the boost he needs, if not, if the LO is good enough to work with the Rescore program, he/she should also be able to give insight into any other trade line that might need to be addressed in order to boost the score.  All of this will at least give some plan of attack on the matter.  Now we do not know what the income and asset levels are of the Borrower.  So obviously those play into the picture.  Hopefully the Borrower has stable income and can document it well.  A couple of dollars in the bank or in a retirement account will also help.As far as incentives to refinance, be careful with monetary offers.  Any cash you give is income he receives.  More than likely not the best avenue to take.   I would start with the basic merit points like just showing him the difference in potential payment.  Today's rate for prevailing 30 years is 3.85%.  Let's just say it is 4%.  His payment will be around $455.  So about half than what he pays now.  I would like to think that is an incentive in and of itself.  You can not force him to refinance.  So, do not be over burdensome but perhaps take the approach that, he has been a good Borrower and he likely deserves a better rate than what you can provide and well... you get the idea.  If you want, perhaps chat with a local mortgage broker in your area about it (or a couple) to see if they have the capacity and where with all to be of assistance.  Then you can introduce them to each other.  Or just encourage him to go do it.  Usually the latter is a much slower process.  Again, the information here is limited but 100 on time payments does say something about the Borrower.  He hit some hard times 4 years ago and you gave him a chance to regroup and rebuild.  It sounds like he took that serious.  I would expect a couple of delinquent payments if he was struggling with juggling other obligations.  There are none, so perhaps he has spent the last 4 years paying other debts on time.  I guess the moral of the story, it is always worth a shot and at the least you both walk away with an idea of a future plan if it can not happen now.  Good Luck.

Andy Mirza · Answer

@Joel A. I've read a few posts from the BP note experts (sorry, I can't remember who to give credit to!) on here about giving the borrower some money toward their refinancing costs to motivate them to refi. Maybe you can offer to pay $500-$1000 towards the closing costs for your borrower. Maybe that'll be enough to get them moving....

Joel A. · Answer

@Dion DePaoli

Hi Dion,

Wow that is great news for me to hear and coming from a note expert.  I really appreciate you taking the time to explain that.

I hadnt ever taken into consideration the fact that the owner could refinance at anytime as it pertains to me selling the note but that is because of the history I have with these people. Ive actually been trying to get them to refinance for the past 4 years.  They wont do it and wont even apply.  He feels he will never pass the credit requirements.

Overall I feel now that I am holding onto a good note im just not entirely happy with it because of the super high rate I got on the underlying mortgage.  If I was just cash flowing a little more off of it i would be really happy.

"A good loan Seller will not simply hand their loan away."  This is exactly why I never took the time to contact any of these note buyers for the fear of being low balled without really knowing what I have.  I have no way to compare if im selling at a good price or now because I just  didnt know what it was worth.

Based on your feedback though I now have a much better grasp of what im carrying.  At 89k I would highly consider selling it.

Thanks so much!

Dion DePaoli · Answer

Andreas, you are correct.  "LTV" is loan to value and "ITV" is investment to value.  They are not the same thing.  I think the description here for ITV is a bit flaky.A LTV is relative to the specific loan being reviewed.  For instance a first lien can have an 80% LTV and a second lien 20% LTV.  LTV is simply the loan amount divided by the real property value.  A "CLTV" or Combined Loan To Value is then the sum of both loan amounts divided by the property value.  In our example it would be 100%.ITV works the same way.  The sum of the invested dollars into the asset divided by the real property value.  The idea about adding other balances into the investment to value makes little sense unless that dollar amount is being capitalized.  So for a second line investment for $25 on a $100 property the ITV is 25%.  Unless I am buying the first lien of $75, it would not be added into the ITV number.  Doing so would remove the little relevance ITV has.I don't care for the manner in which the article attempts to make ITV into some metric of worth.  It really is not and does not work that way.  ITV is not really used to derive a bid or capitalization amount.  It is really just a conversation idea.  ITV is sort of the same thing as saying 55% of BPO value. However, ITV is NOT used in trade conversations due to ambiguities that might be presented from the user of the ITV.  If I say BPO we understand what baseline the percent is derived from.  If I use ITV, there is no reference to that baseline.  The article is dumbing down a complicated idea (loan pricing) and it is not really doing a good job.  Starting with LTV and ITV is the wrong place to start.  It really is sort of a leap, why do you need an ITV of 75% as opposed to 55% or 95%?  In that, the elephant remains seated in the middle of the room with this article.

Andy Mirza · Answer

@Jim Farrell @Joel A.

Someone please correct me if I'm wrong, but ITV and LTV are definitely two different things.

LTV (Loan to Value) is the current balance of the loan divided by the fair market value of the collateral (property). In the example above: $160,000/$200,000 = 80%.

ITV (Investment to Value) is the total amount to purchase the note (plus expenses) divided by the value of the collateral (property). In the example above: $150,000/$250,000 = 75%

Joel A. · Answer

@Jim Farrell

oh i see now okay thanks for clarifying.  Yeah it does look like there is an iTV also.   This might help.

"

Investment to Value or ITV

ITV shows how much a note buyer has invested in the real estate note. It answers:

“What is the likelihood the investor will get their money back if the buyer stops making payments?”

Calculating ITV takes the invested amount divided by the property value.

Example: An investor offers to pay $150,000 for the $160,000 note with a property value of $200,000.

• Step #1: Take $150,000 divided by 200,000, which equals .75

• Step #2: ITV is also expressed as a percentage so move the decimal two points to the right for a 75% ITV

• Step #3: If an investor says they will only invest up to 75% ITV then just reverse the calculation. Take the $200,000 value and times it by .75 to get a maximum investment of $150,000 (subject to yield and minimum discount calculations).

This example is for a first position residential note. ITV should also take into consideration any senior debt that will survive closing. If the purchase is for a second lien then you add the balance of the first lien to the investment amount and then divide by the value of the property.  Second lien buyers may have additional restrictions and calculations when it comes to ITV."

taken from:

http://noteinvestor.com/notes-101/calculating-cash...

Jim Farrell · Answer

@Joel A. , by "this forum" I'm referring to the overall forum, not this particular topic--multiple topics/threads.

Joel A. · Answer

@Jim Farrell

i dont see anywhere on here other then your post of where lTV is.  I would imagine they just forgot to capitalize the L though and this is just a lowercase L

By the way, thanks for the response everyone.  Really appreciate it.  Definitely going to hold on to this note for now and only sell if i ever HAVE to.