Why Are Mortgage Notes Discounted Anyway?
Posted by Frederick Webb
There is a lot of confusion about why notes must be discounted and what determines the degree of the discount. Here is some basic information to shed some light on this subject and hopefully bring you more clarity about this concept.
When real estate note brokers purchase partially paid notes, they pay the note holder a discounted price after factoring in the time value of money, the payer history, and property condition.
If Â there is still a significant period of time left for the payer to make payments, the future payments are not worth the same amount in current dollars. Calculations are made to equate all the payments into current value, which is how the discount is determined.
After purchasing notes at a discounted price, note brokers try to restructure the loan and increase its value. Increasing the value of the loan requires the payer to refinance or increase payments, which requires a new contract.
Factoring the same concept of time value of money, we can understand how increasing payments now creates more value. The note can then be sold for a higher price.
Discounts must be taken from the loan amount due to inflation and the time value of money. There may still be years left on the loan repayment, but the payments far in the future are not worth the same amount in dollars today.
Calculations are made using special formulas to equate the future payment amounts into today's prices, making today's price discounted significantly.
On the other side of the coin, notes that are well seasoned can fetch near remaining balance face value.
Additional Major Reason Notes Are Discounted
Although I am a broker myself, I put this site here because I want to bring you a clear understanding (from an insider's perspective) of the nuts and bolts mechanics of how the secondary market mortgage note industry works.
A major reason many people are turned off from selling their real estate notes is because of the discount factor......but what you probably don't understand is that when you use a broker, like myself or any other broker anywhere, you pay additional fees that further drive down the amount of money you walk away from the table with. Significantly.
Let me give you an example:
You have a $50,000 note you need to sell. Although you could sell only a few payments or the whole note, for this example, let's say you wish to sell the whole note.
You do a search on the internet and find a long list of brokers hawking phrases at you like, We can get you top dollar for your note..." and the like. So you choose one and give them basic information about your note so that they can give you a quote on what you could expect to receive for your note.
So, the broker calls you back after speaking with an "actual investor" about your note. The investor has told the broker that he'll pay, say $41,000 for your note. Your broker says to you, "We can pay you $37,500 for your note".
He explains the whole reason notes are discounted but never mentions that other $3,500 discount you had to take because of his broker fee. So, without ever discussing fees, you just paid $3,500 to have a guy make a phone call on your behalf to an "actual note buyer/investor.
A Smarter Way To Sell Your Note
What I am about to reveal to you is the subject of many nasty emails I get from other brokers....angry brokers. Angry because what I am about to tell you takes money out of their pockets and back into yours.
All brokers are in possession of a "little black book" of the "real note buyers and investors". Private individuals mostly but it also includes institutional note buyers.
Check it out yourself. It's the $67 Solution!
Frederick Webb is a Certified Cash Flow Consultant and is President of Webb Funding Group, a small debt brokerage agency he runs with his wife, Kashita Webb
Get more information about this and other information by visiting their website at: http://www.mortgagenotecash.com