As soon as the owners of real-estate notes liquidate their investments the ensuing sales will almost always require some type of discount. Here’s a simple breakdown of the Investment to Value (ITV) approach that a lot of Note Buyers use to find out their pricing.
Most experienced Note Buyers have established guidelines in mind that serve to narrow their focus to the notes that may fit their buying priorities. Still, many buyers will purchase almost any note if the price is appropriate – quite simply, if the financial rewards are in line with the related risk. To compensate for added vulnerability purchasers adjust their pricing guidelines downward, which brings about a greater yield.
Many buyers measure their risk in a transaction by considering their Investment to Value (ITV) percentage. ITV calculates the sum of protective equity the Note Buyer has by comparing her purchase price to the property value. The value of protective equity in the property is determined by subtracting the ITV from 100. The lower the number or percent the safer it is to the Note Purchaser.
When a Note Buyer thinks that obtaining a note may be high risk, one possible option is to make a lower offer that reduces the ITV. A lowered ITV results in more protective equity for the Note Buyer.
An ITV-structured buying example
Consider a house appraised at $100,000 that obtains a $95,000 note. If the Payor in this situation had poor credit or a history of missing monthly payments this might be considered a high-risk situation. Since there’s only $5,000 in equity any Note Buyer would want a mitigating factor to offset the risk involved in this purchase.
A smart strategy to improve this deal from your buyer’s prospective is to make a discounted offer. If a buyer gives only $60,000, the ITV would be 60 percent, giving the buyer a 40 % of protective equity. That $40,000 of protective equity could help her to create a profit, even in a foreclosure situation. If the buyer incurs extra expenses when foreclosing and selling your home, the $40,000 of protective equity should more than cover the extra expenses.
Note Purchasers also have to look after their interests. Consequently, notes with minimal equity and a poor payment history are most likely to see greater discounts in order to achieve enough protective equity for the buyer. This protective equity will help make sure that Note Buyers can recoup their funds if Payor default results in foreclosure.
Also, based on the amount the Payor also has invested in the deal. For example, if the price of the house is $100,000, and the person only puts down $1,000, then the investor won’t believe that the payor has all that much invested in the house and property and the possibility of default is greater as opposed to the payor having invested a greater amount.
