Selling Notes

[Jake E.]

So we currently hold property in Arlington, Tx. where I'm thinking about selling a note. To be honest, I've never sold one before and don't even know if I want to. I know everyone looks for discounts on everything we do in a real estate and I would expect to discount some but I'm certainly not going to take a hit. Its new to me because ordinarily we just assign contracts, buy and hold, or even fix and flip. Any insight or advice would be greatly appreciated.

[Jon Holdman]

@Jake E. let me show you how a buyer who want's 12% return would value your note.  I'm making assumptions here that may be incorrect, but this shows you how the calculations are done.  I'll assume this is a 15 year note at 9% with an original loan balance of $69,500.  That's gives a P&I payment of $704.92.  You say its been in place on year, so I assume 12 payments have been made and those were all exactly $704.92.  I get a current loan balance of $67.202.79.  I get that in Excel using the FV (future value) function.  A financial calculator could do that math, too.

Now @Darren Eady says he want's to make 12%.   What you're selling when you sell the note is the stream of payments.  In this case, 168 more payments of $704.92.  So, you use the PV (present value) function to determine the value of those 168 payments based on the desired return of 12%.  I get a value for that of $57,243.66.

These calculations are exactly the same as bonds.  Bonds are simply loans to companies or governments.  So, if you're puzzled by this google bond valuation and read that. 

 This is only one factor in what a buyer might actually give you.  Other factors include the value of the property, seasoning, and the quality of the borrower.

An additional consideration is Dodd-Frank and SAFE act rules for loans.  They would apply because if this is a residential loan originated only a year ago.  Hopefully you did all this with a knowledgeable attorney and you are fully in compliance if the buyer is occupying the property.  If not, that will greatly affect the value of the note because it might not be enforceable.