| Understanding The Logic Behind Note And Structured Settlement Discounts |
| Articles - Mortgage |
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When the owners of real estate notes liquidate their investments the resulting sales will almost require discounting. Here's an easy explanation of the Investment to Value (ITV) method that many Note Buyers use to determine their pricing.
When the owners of real estate notes liquidate their investments the resulting sales will almost require discounting. Here's an easy explanation of the Investment to Value (ITV) method that many Note Buyers use to determine their pricing. Most experienced Note Buyers have predetermined guidelines in mind that serve to narrow their focus to the notes that are likely to fit their buying preferences. Still, buyers will buy almost any note if the price is right - in other words, if the financial rewards are in line with the associated risk. To compensate for added exposure buyers adjust their pricing guidelines downward, which results in a higher yield. Many buyers gauge their risk in a deal by considering their Investment to Value (ITV) percentage. ITV measures the amount of protective equity the Note Buyer has by comparing her purchase price to the property value. The amount of protective equity in the property is calculated by subtracting the ITV from 100. The lower the number or percentage the safer it is for the Note Buyer. When a Note Buyer thinks that acquiring a note may be risky, one potential solution is to make a lower offer that decreases the ITV. A lowered ITV results in more protective equity for the Note Buyer. An ITV-based buying example Consider a house valued at $100,000 that secures a $95,000 note. If the Payor in this situation had poor credit or a history of missing payments this would be considered a risky situation. Since there is only $5K in equity any respectable Note Buyer would want a mitigating factor to offset the risk involved in this purchase. A logical way to improve this deal from the buyer's perspective is to make a discounted offer. If a buyer offers only $60,000, the ITV would be 60 percent, giving the Note Buyer 40 percent of protective equity. That $40,000 of protective equity could help her to make a profit, even in a foreclosure situation. If the Note Buyer incurs extra costs when foreclosing and reselling the house, the $40,000 of protective equity should more than cover the extra expenses. Note Buyers always have to look after their own interests. Consequently, notes with little equity and a poor payment history are likely to see deeper discounts in order to create protective equity for the buyer. This protective equity will help ensure that Note Buyers can recoup their funds if Payor default leads to foreclosure. In addition, depending on how much the Payor has invested in the deal. For instance, if the purchase price of the home is $100,000, and the person only puts down $1,000, then the investor won't feel that the payor has all that much invested in the property and the possibility of default is greater as opposed to the payor having invested a much greater amount. We call that "Teeth in the Deal". How invested is the payor in the property. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. John Manzanet is a formidable expert in the Real Estate Note and Structured Settlement Note Business. For more information on How to Structure your Real Estate Note, visit John Manzanet's Web site. In order to Get your FREE Quote Today, visit the site |