What would a fair offer be?

[Christopher Brainard]

I have a note that I'm looking to buy - the property is in rural Nevada, so not a desirable area. Current balance on the note is $980k, interest rate is 6%, payments are $10k/month, 9 years left on the note, balloon at the end for the remaining balance, which I calculated is around 300k.

What would be a fair offer to buy this note? I'm interested in clearing the underlying debt on this property at a discount, but I have no idea what type of discount I should be asking for. 

-Christopher

[Christopher Brainard]

@Account Closed

It's the original owner for a property that I bought with seller financing. He said to make an offer, so I don't want to insult him, but I also don't want to leave cash on the table.

-Christopher

[Christopher Brainard]

Thanks :)

[Bob Malecki]

Hi @Christopher Brainard you may want to price your offer based on annualized ROI. You can use a PV (present value) calculator and plug in your desired ROI % to formulate your offer. This way you are buying the cash flow based on return. Using just a percentage of UPB does not provide much otherwise.

A rough rule-of-thumb is to multiply the monthly P&I payment *12 then divide by the desired return. This does not factor in remaining term though.

[Jay Hinrichs]

your buying your own debt ???   I would first start with what @Bob Malecki bob suggests and run it through your HP calculator PV formula at a  12% annual return 15%  20% etc... that will give you cash amount to offer.. and if its rural and not so desirable as you state.. investors may price this for a 20 to 30% annual return and that is what the PV cash value is today.. I would not pay more than what an investor would pay unless you have some ulterior motive.

depends on what type of property as well.. a note buyer is going to look to your strength as the trustor as well to price this baby.

[Bill B.]

@Christopher Brainard  

Listen to @Bob Malecki and @Jay Hinrichs before listening to anything I say.  They've forgotten more than I knew or know. 

But, my two cents:

The note holder is looking to receive a total of over $1.3 million in the next nine years.  

In my humble opinion, it depends on how long you've been making the $10k payments.  If the original term was 180 months, the previously suggested payoff of $800k is a lot more appealing than if the original term was 120 months.  And that balloon is quite a kicker!!!!

So, if I have this right.  (IF I have this right.) To calculate the return the calculator entries look like this:

Current facts

N             I/YR             PV             PMT             FV

108          6                 980,000    -10,000       -252026.51  (I solved for FV as it was not provided.)

Proposed Payoff 

N             I/YR             PV             PMT             FV

108                             800,000    -10,000        0                   

Then SOLVE for I/YR.  That calculates to 6.9876 percent. 

Again, I zeroed FV because you are extinguishing the debt, not purchasing a third party's debt.

Not much in it for the lender........IF (IF!!!) I'm correct with the calculator.

I hope the above calculation IS correct and that this is helpful.

Bill

[Christopher Brainard]

@Jay Hinrichs

Yes, I'm thinking of buying my own debt :) I don't own 100% of the asset in question and I need a safe place to put a bunch of cash that I'm bringing in this month. I figured that buying debt that I have direct control over and I know is solvent is a good place to start. I also know the owner of the debt is getting quite old (he is 80+ years old now) and is probably looking to cash out and either party or pay medical bills. I think this would makes sense for all parties, if we can come to an equitable agreement. I can always have the company that owns the debt refinance if I need cash at a later date.

@Bob Malecki @Bill B.

I did some calculations and was surprised how low the offer would need to be to achieve a 12% returns over the given period. Assuming I did my math correct, its only about $658k. I'm not sure he'll agree, but its a place to start. I'll let you know how it turns out.

-Christopher

[Jay Hinrichs]

@Christopher Brainard yes I figured the number would be quite low.. that rate is low and term is long always leads to very LARGE discounts.. on the open market if its rural and not something most note buyers want ( which tend to we SFR's) it would get an even bigger discount.