How to value a note?

Hello: I’m trying to figure out the value of my note. Initial principal was about$43k, 10 year amortization at 9% with a 5 year call, paid at $500/month. Borrowers’ credit is bad, but they’ve paid me every month since November of 2006 and have made some substantial improvements in the property (new water service, new high end furnace). I’ve been speaking with two companies about selling the note, but it is at a very substantial discount. I’m looking for some cash to buy more properties that will generate more and more income, whether through rents or flipping. Any advice would be appreciated. Thanks - Kelly

All financial instruments (notes) can be valued using a net present value approach. For instance ask yourself what would I pay for this future stream of cash flows? First lets look at the monthly payment on your loan $500. In actuality the monthly payment on a 10yr fully amortizing note with an initial balance of $43,000 and a 9% interest rate is $545. Having said that lets discount your note payment streams to determine the present value.

You have a 5 year balloon on this note therefore your cash flow stream will be $500 per month for 60 months followed by the balloon payment of the remaining principal balance which should be about $29,600 in month 60. If you discount this stream back at the note rate of 9% it equates to your original loan amount of $43,000. However, an investor (note buyer) will look at the seasoning on the note, the borrower’s credit quality and the value of the security property (house) and determine an appropriate discount rate for their level of risk.

Lets assume you find a note buyer with a low return requirement of say just 5% this would price your note at about $49,500. More likely you are finding note buyers with much higher return requirements, below are some estimated values at specific discount rates. This should give you an idea of what the market is looking for.

9% $43,000
12% $38,700
15% $35,000
20% $29,800
25% $25,600
30% $22,100

From what I have seen, note buyers are paying between 75-85% of the value of the note. So 100k note, might get 85k. Sucks, really.