Why Is My Seller Financed Mortgage Note Offer Less Than My Note’s Unpaid Principal Balance?

Full Video Transcript

Introduction

Hi, I’m Dawn, the Senior Note Analyst and Seller Finance Note Advisor with Moxxie Asset Group. Our team here at Moxxie has over 30 years in the seller financing note space.

Today I want to answer one of the questions I hear most often. You get an offer on your note and it’s lower than what’s still owed to you. Your first thought is probably, shouldn’t I get the full amount of the unpaid principal balance of my note?

A Fair Question With a Simple Answer

Well, that is a totally fair question. Here is a simple answer. When we price notes, it’s not that the buyer is trying to lowball you, although I’m sure it feels that way. Note values are based on the time value of money and the risk profile of the note, not the unpaid principal balance.

First: The Time Value of Money

First, let’s talk about time. Obviously, everyone knows that $10,000 today buys more than $10,000 will buy years from now. This is the time value of money. That’s just how all money works.

Your note’s interest rate already accounts for this. It’s built in to make up for the fact that the payments will arrive later, not all at once today. So, the interest rate makes up for the fact that the money will buy less in 10 to 20 years from now than it does today.

Second: The Note’s Risk Profile

Second, the note’s risk profile. This is where the discount comes in. A buyer needs to make a certain return to make the deal worth it to them.

A low-risk note, with good credit, solid down payment and payment history, doesn’t need to take much of a discount since there’s little extra risk to account for. A higher risk note needs a bigger discount because the buyer needs a higher return to make it worth taking on the note with more risk.

So, simply put, your rate handles the time value of money aspect of the note sale, and the note buyer applies the discount to account for how much risk they’re taking on to buy this note from you. Less risk, smaller discount. More risk, bigger discount. Same idea every single time.

“The Buyer Collects All the Interest”

One thing I hear a lot is, “The note buyer is going to collect all of the interest on my note. Shouldn’t I get the full balance today?” Here’s the thing. The interest rate is already doing its job covering the time value of money in the payments. The discount on top is strictly about risk, covering what could go wrong along the way.

“Isn’t 10% Interest Enough?”

Some of you may think, “My note already has a 10% interest. Isn’t that enough?” Ask yourself, “Is 10% enough return for a note with a low credit borrower, spotty payment history, or little or no down payment?” No, it’s not.

The risk is too high for that interest rate alone to make up for the high risk of buying that note. So, the discount brings the return back in line with the actual risk that the note buyer is taking on.

A Real Example

Here’s a real example. Say your note has a $100,000 balance at 8% interest with 15 years left. If it’s a lower risk note, a buyer might offer $90,000–$95,000. If it’s a higher risk note, they may offer around $70,000–$80,000.

Same note balance, different offer because of the risk.

Get a Free Note Review

If you have a note and want to know what a fair offer looks like, we offer a free no obligation note review and we’ll walk through it together and answer your questions whether or not it makes sense for you to sell right now or not.

You can reach out anytime by filling out our free note review form online on our website, or by giving us a call at 954-466-7111 if you’d like to speak to us directly to make you feel more comfortable.

I hope this video helped clear up why you may have been offered a sales price that is lower than your owner financed mortgage note’s unpaid principal balance. Thank you.