Note Price vs Property Value - why sell the note?

[Chris Coleman]

I'm a newbie to Notes.  I own SF rental property, and am now exploring notes.  In doing my reading and studying, I started browsing LoanMLS to get an idea of what I'm looking at, terms, numbers, etc.  So here is the scenario and my question(s) in trying to understand buying notes only...

A Private Money Loan note (1st lien) has a Selling Price of $67K. The Loan Balance is $74K, term is 8.5%, 30 yr fixed. The Property Value is $150K. I think this looks pretty good, as its a 45% CLTV.

But am I understanding this correctly in that this Seller is selling a property worth $150K for only $67K? (assuming the property valuation is accurate).  Why would they do that? What am I missing here?

[Mike Hartzog]

@Chris Coleman

When you buy a note, you are inserting yourself as the lender and your investment return comes from the P&I payments which will now come to you. The property is viewed as security for the note only.  If the borrower defaults, you are secured buy the property and the value of the property has to be adequate to cover the amount of the debt. 

In your example, you are buying an loan with a principal balance of 74K for 67K, i.e., you are buying at a discount so your investment yield will be greater than the interest rate of the note.  (If you had provided the P&I payment amount we could have calculated the yield.)

@Don Hines

You are correct in that loans which are older and further along in their payment schedule return a greater ratio of principal to interest.  That said it is important to understand that each payment actually carries the same yield all the way to the end of the loan, i.e., the yield does not degrade.  This is because while the interest component grows smaller with each payment, the total amount of investment capital deployed is reduced more rapidly.  The upshot is that you will end up collecting working capital on the sidelines faster and will want to find a new loan to reinvest it in to keep it working.  A new loan is nicer because it keeps more of your investment capital deployed over a given time period as compared to an older loan.