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How a Real Estate Note is Valued

Value is based on these Considerations:

·        Value of the Collateral and Equity Protection of the note (more is better)

·        Value and terms of any Senior Liens (smaller low rate seniors are better)

·        Interest Rate, prepayment penalty, late payment penalty (more is better)

·        Maturity Date – when the loan is due in full (sooner is better)

·        Amount of monthly payments (more is better)

·        Fully amortized is better than interest only

·        Payment History (on time is better than a late payer)

·        A Negotiable and Saleable Instrument (required to sell a note)

·        Is the note current or in default

·        Borrower Credit Score

·        Marketability of the collateral

·        Title Insurance (helps facilitate a note sale, as well as protects the note holder)

·        Buildings covered by Fire/Hazard Insurance

·        Due on Sale Clause - (improves the value of a note)

·        Power of Sale Clause - allows non judicial foreclosure - (higher note value)

·        Subordination Agreement - (very bad for a note to allow subordination)

·        Current alternative investments in the marketplace, prime rate, etc.

A note buyer usually offers a price based on the risk & reward of the deal and the amount of effort, time and energy needed to collect the debt. The buyer uses these criteria to make that tradeoff. There is no set formula for deriving a price, as each property and each note are unique, however the “Time-Value-of-money” is one formula that is relied upon to calculate an expected rate of return for the note.  An explanation of this is out of the scope of this paper, but is a common formula used by bankers and investors,

The most a note buyer will pay for a note is the current balance on the note (principal plus accrued interest to date), even if the note has a very high interest rate! Why? This is because the borrower could pay the note off tomorrow and then the note buyer would be out the difference. One possible exception is if the note has a prepayment penalty.

If a note is viewed as less attractive or risky (due to low interest rate, poor equity protection, long maturity date, late payers, etc.), a note buyer will discount the note, meaning pay a price less than the current balance of the loan. The less attractive the note, the bigger the discount.

This information can be useful to:

Note Holders, Note Buyers, Home Sellers, Attorneys, Accountants, Financial Advisors, Real Estate Agents, Business Brokers.


I am not an attorney, laws vary from state to state, and any legal advice implied by this paper should be checked with an attorney.

About the Author:

I am a real estate broker licensed in the State of California as well as an investor of real estate and debt instruments. We buy real estate notes and real estate contracts nationwide and make private and hard money loans on real estate in California.

I hope you find this information useful, feel free to contact me with any feedback, or if you are contemplating selling your note.

-James MacArthur

JMAC Funding
PO Box 91472, San Diego, CA  92169
(619) 846-1550 voice
(815) 572-5600 fax
©Copyright 2006 JMAC Funding

Licensed by the California Department of Real Estate, DRE# 01440161