How Much Do Mortgage Notes Sell For?

An Basic Investors Guide to Mortgage Note Valuation

Buying a mortgage note can be a great investment.

They pay regular passive income, and your investment is secured against physical real estate.

But figuring out exactly how much to pay for a mortgage note – or how much to sell one for – depends on a number of variables.

In this article, I’ll walk you through the major factors that influence the potential price of a mortgage note so you can start to assign accurate values when you find mortgage notes for sale (or you want to sell one).

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How to Value a Mortgage Note

If you are going to pay the right price for a mortgage note – or sell one for the best price possible – the very first thing you need to do is figure out your own note investing strategy.

Your personal preferences and investing strategy will dictate exactly how you assign value to a particular mortgage note, and this might be very different from the next guy.

As such, how much any one mortgage note sells for is subjective and is ultimately dictated by the perceived value of the buyer.

I’ll give you an example…

Let’s say you find a non-performing note for sale in Colorado.

A note investor from Colorado might well pay more for that note than a buyer from California, simply because the property is located close-by, and if the note in non-performing they may end up owning the real estate.

As such, the value of that particular mortgage note will be subjectively different to each potential buyer.

There are lots of other factors to consider, too, all of which will mean more or less to different buyers.

This is why it’s so important to set your investing strategy ahead of buying a mortgage note…

…because you will definitely want to pay more or less for a note than the next guy depending on how the specifics of the note match your own investing goals.

Setting Your Note Investment Strategy

I bought my first mortgage note in 2010, and I’ve bene involved in well over 100 note and private lending investments since.

My own personal note investing strategy varies…

…I may buy a non-performing note because it is secured on a house in an area I am buying rental properties, or flipping houses.

I also own notes that I have carried when I sell a home with owner finance. These mortgage notes are very much passive income investments.

So for me personally, I look at each note through the appropriate respective lens. Does this note fit my house buying strategy? or does it fit my passive income strategy?

When you are figuring out your own note buying strategy, breaking things down onto the following 4 areas really helps:

1. Investing goals,
2. Risk
3. Time effort and resources,
4. Budget.

All of these play a part, so let’s break each one down a little further…

Investing Goals

Are you looking to invest in mortgage notes as a passive income tool? or are you hoping to use mortgage notes as a way to ultimately own (or sell) the real estate?

Answering this question first of all will give you a good idea as to whether you look for (and place more value on) performing notes, or non-performing notes.

Related: Performing Notes vs Non-Performing Notes – Which is the Better Investment?

Tolerance for Risk

How much risk you want to take, or even perceive to be, is highly subjective. But answering this question ahead of time will dictate how you assign value to a mortgage note based on the it’s specific features.

In lending, there are a number of ways to assess risk, the most common being:

• Investment-to-value,
• Collateral quality,
• Paperwork quality,
• Borrower quality & performance.

Let’s take a brief look at each of those factors here…

Investment-to-Value

This is effectively how much you pay for the note as a percentage of the as-is collateral property value. It is not the same as loan-to-value.

Here is an example of the lending ratios for a performing mortgage note:

• Unpaid Balance: $100,000
• Property Value: $120,000
• Loan-to-Value: 83%
• Note Purchase Price: $90,000
• Investment-to-Value: 75%

The lower your investment-to-value, the lower the risk you lose money in a foreclosure, and the higher your yield while the note is performing.

So, if a note has a particularly low loan-to-value, you may be prepared to pay more. Whereas, if it has a high loan-to-value, then you may want to try and purchase the note for a discount to the unpaid balance in order to lower you investment-to-value.

Collateral Quality

While ‘being the bank’ means you don’t have to deal with day-to-day property ownership costs and/or management issues, the quality of the underlying property is still very important.

The property is the ultimate backstop for your investment, so you want to tray as best as possible to understand the current condition of the home, and it’s likely as-is value.

Your ability to do this when buying a note might be very limited, especially if the hose is occupied. But if you are originating the loan as a private lending investment, then you will have much more control over the asset quality – or at least how much you lend against it.

Either way, you can often acquire drive-by photos and a Brokers Price Opinion from a local realtor or using an online service.

Paperwork Quality

As you may have to rely on the paperwork if you end up in court in a foreclosure, you want to make sure everything is in order before you buy a note.

If the paperwork is a mess, or there is a lot missing, then you will want to pay less due to the higher risk and the fact there is more time effort and resources involved from you to protect your investment.

Explaining a full review of a collateral file is beyond the scope of this article, but checking you have the original note and mortgage or deed of trust is a great start, along with a robust chain of assignments and allonges if the note has changes hands between lenders before.

I do suggest paying for an expert opinion. There are companies out there that will provide a review of your collateral file for a fee, or you can use a local real estate attorney.

Borrower Quality & Performance

Once of the first things to do when buying a mortgage note is to review the servicing notes.

Here are 3 key questions to answer:

1. Has the borrower always paid on time?
2. If they are in default, for how long and how for much money?
3. Have they been responsive to communication?

The answers to these questions will give you a  decent idea as to how solid your borrower is, and how difficult it may or may not be to communicate with them to find a resolution if needed.

If the note is non-performing, has been in default for months, and the borrower is non-responsive, that could well mean you end up using the courts gain possession of the home.

In that case, this note will take you more time, effort and money to bring to a profitable resolution, and you should factor this in to your note pricing model.

Time Effort and Resources

This is an important factor that many novice note investors forget to consider.

Mortgage note investing can be very complex. There are 1,001 things to know, and there are always new challenges that crop up.

While that makes things interesting, it also means you have to invest in your own knowledge base and education in order to avoid potentially costly mistakes.

There are 3 routes to take here:

1. Invest the time and money in quality note investing education.

2. Build a team of professionals you can pay to provide expert services (attorneys etc.)

3. Only invest in high quality performing mortgage notes with a low probability of problems

Remember, while real-life experience always trumps classroom learning, a bit of both never hurt. So, do what you can to educate yourself as well as possible before buying your first note, and don’t bet the house on your first investment.

Budget

Last but not least, you should consider exactly how much you want to invest in a note.

Most novice note investors want to start off small for the reasons alluded to above (potential loss limitation essentially).

You should also consider how much you want to allocate to note investing as a percentage of your overall portfolio.

If you’re just starting out investing in general, then $20,000 might be half of what you have in total, but then you have plenty of time to recover from any losses.

You wouldn’t want to out half your money into a single asset if you’re retiring in 3 years!

Take this into consideration and look for mortgage notes to buy that fir an acceptable budget.

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Due Diligence and Underwriting

Now you’ve got an idea of how to set you own mortgage note buying and investing strategy, we can start to drill down into the specifics of an individual note, and you can figure out how to assign value according to your own preferences.

Every mortgage note is different, but here is a rough list of variables that will serve you well as a good starting point:

• Current unpaid balance,
• Current note performance,
• Amortization,
• Interest rate/monthly payment,
• Lien position,
• Collateral dynamics (location, condition, value, etc.),
• Title quality (title, taxes and liens),
• Lending/investment ratio,
• Term remaining,
• Borrower quality,
• Servicing history.

Once you have all of this headline information down, you can start your own due diligence process to verify and assess the information and arrive at a price for the mortgage note that works for you as an investor.

Again, while the scope of this article does not allow for the layout of a comprehensive mortgage note buying due diligence process, I can certainly give you the basic questions to ask…

Note Specifics

1. Is the note performing or non-performing?
2. is the mortgage or deed of trust is 1st or 2nd position?
3. What was the original loan amount?
4. What is the current unpaid balance?
5. What was the original term?
6. How long is left (number of payments)?
7. What is the current interest rate?
8. What is the current monthly payment?

Collateral file

Does the collateral file contain the following documentation?

1. Original promissory note.
2. Original deed.
3. Servicing notes.
4. Original loan application/origination file.
5. Assignments and allonges.
6. Servicing notes.

If there is anything missing or incomplete, is it possible to acquire that information ahead of bidding on the note?

Property

What do you know about the property?

1. Property particulars – property type (SFH, duplex, commercial etc.) sq. ft., bedrooms, bathrooms, property style (ranch, townhouse etc.).
2. Current use/occupancy – owner-occupied, rental property, second home.
3. Current condition – recent photos, inspection reports, drive-by.
4. Valuation(s) – online tools (Propstream etc.), Brokers Price Opinion.
5. Taxes, Title, Liens, Insurance – O & E report.

Note that the last item mentions an O&E report. This is a Owner and Encumbrance report.

An Owner and Encumbrance (O&E) Report produces the title of a given property from the time that the current owner acquired it to the present time, along with a ton of other super useful information.

There are a number of companies that offer O & E report online, and I’ll provide some options in the references section at the end of this article

Servicing Notes

These will be found in the collateral file, and to be honest this is where I start my due diligence and underwriting process.

In almost all cases, you will likely require the cooperation of the borrower in order to bring your mortgage note investment to the best possible conclusion.

The servicing notes will tell you if they pay on time, and who responsive the borrower is to communication.

For me, this is a big factor in determining the amount of time effort and resources I might have to commit to the investment.

Conclusion

So, there you have it. While I have already mentioned that this article is not intended to provide you with a comprehensive step-by-step mortgage note buying due diligence process, the information above gives you a solid base to work form when determining how much a mortgage note should sell for?

Essentially, you are measuring the note against your own investing criteria, and then drilling down into the details to ascertain value and risk.

Once you’ve done both of those things, you can figure out what you think a mortgage note is worth, and there you have your price.

But remember, you price will probably be different to the next guy, because the next guy places a different value of some or all of these factors.

Happy investing.

Don’t Miss Out: Join 5,000+ investors and get exclusive mortgage note listings delivered to your inbox every Thursday in the Priority Investor email

Resources

here are some useful resources to help you on your mortgage note buying journey:

Mortgage Note Sellers

• Garnaco Investor Portal
• Paperstac
• CREXi
• Watermark Exchange

Owner and Encumbrance Report Providers

• ProTitle USA
• DataTrace
• Title Mark
• First American

Online Property Valuations & Market Data

• PropStream
• PropWire