If you’ve created a seller-financed note, you’ve essentially become the bank. But unlike banks, most individual sellers aren’t familiar with how notes are valued when it comes time to sell them. Why does one note sell for close to its balance while another receives a significant discount? The answer comes down to a handful of important factors that determine the risk and value of the loan
INTRODUCTION
Seller-financed notes are not the same as bank originated loans, and because of that they usually carry more risk. Seller-financed notes are not as strict on lending requirements and have less scrutiny during evaluation process.
Most often, buyers who use seller financing cannot qualify for a traditional bank loan. Because of this, factors such as the buyer’s credit, income stability, loan terms, and property condition can increase the overall risk.
When someone wants to sell their note to a note buyer or investor, the price offered reflects the level of risk and the likelihood that the investor will receive the expected payments.
THE 6 MAIN COMPONENTS THAT INFLUENCE A NOTE’S VALUE
- The Buyer (Most Important Factor)
The buyer’s ability and willingness to make payments is the most important part of a note’s value.
Investors typically review:
- Verifiable income
- Job stability
- Credit score
- Debt-to-income ratio
- Payment history at previous residences
As the note gets older, payment history becomes increasingly important. A strong record of on-time payments can sometimes compensate for weaker areas like credit score or income documentation.
- The Collateral
The property securing the note is the second most important factor.
Investors evaluate things like:
- Overall condition of the house or land
- Quality and zoning of the neighborhood
- Whether the property fits the typical size and price range for the area
- Ease of resale if foreclosure becomes necessary
- Local market demographics
A property well maintained keeps a higher value and is more desirable for buyers making resale easier.
- Equity
Equity represents how much value the buyer already has in the property.
Equity can come from:
- The original down payment
- Property improvements
- Appreciation in the property’s value over time
Higher equity usually means the buyer has more financial commitment to the property, which reduces risk.
- Loan Terms
The structure of the loan also impacts the note’s value.
Important terms include:
- Interest rate
- Length of the loan
Less common terms:
- Balloon payments
- Any special conditions
Notes with market interest rates and shorter payoff timelines are often more valuable.
- Payment History
The borrower’s commitment and ability to pay is reflected by the pay history.
Key questions include:
- Are payments made on time?
- Have there been late payments?
- How long has the note been performing?
A strong payment history significantly increases confidence in the note.
- Paperwork and Documentation
Proper documentation helps ensure the note is legally enforceable.
Investors look for:
- Was the transaction closed by an attorney or title company?
- Are the original documents available?
- Is the contract legally enforceable?
Incomplete or missing paperwork can reduce the value of the note.
OTHER FACTORS AFFECTING VALUE
Risk Affects the Price of a Note
All of the factors above are combined to determine the overall risk level of the note.
- Lower risk → Higher value
- Higher risk → Lower value
When investors make an offer, they evaluate these factors to determine the price they are willing to pay.
Understanding the Time Value of Money
Even when a note has strong components, the price offered is less than the total of the remaining payments. This is due to the time value of money. The offer is in today’s dollars not the value of what the note can produce in future terms. Offers are based on the value of the note (loan) in today’s dollars not the value of the house/land (property).
Money today is worth more than future money.
Example: Two Similar Notes
Consider two notes with similar buyers, property quality, and interest rates.
- Note 1: 20-year loan
- Note 2: Same loan but with a 5-year balloon payment
Even though the loans are otherwise identical, Note 2 is usually worth more because the investor receives the remaining balance sooner.
Example: Inflation
Another way to think about this is with everyday purchases.
- $100 worth of groceries today may fill one grocery cart.
- 20 years ago, $100 may have filled three grocery carts.
- 20 years in the future, $100 may only buy half a cart.
This illustrates how money loses purchasing power over time, which affects how investors value future payments.
SUMMARY
When selling a seller-financed note, you should generally expect a discount based on the total unpaid balance. The discount can range anywhere from 10% to 60%, depending on the components that make up the note, time value of money and the calculated level of risk.
However, the only way to know the actual value of your note is to request a quote.
If you are considering selling, getting a quote allows you to make an informed decision based on real numbers.
Connect with Peak Notes
Why not set up a meeting with a Peak Notes specialist to discuss understanding the value of your Note! Meetings are brief, cost nothing and can give you more insight into how you can maximize your investment potential!
If your property is located in Florida, please click on this link and set up a meeting with John .
If your property is located outside of Florida, please click on this link and set up a meeting with Karen .
DISCLAIMER-Peak Notes is not an accounting or legal firm and the recommendations above are best practices and observations from our years working with notes. Always consult a licensed professional for both accounting and legal issues.