Calculating Today's Cash Value of Your Note
It is well known that Seller Financing and Owner Financing for homes, land, and real estate is originated as an "alternative financing" medium when traditional Bank Financing is not available. There are a variety of reasons why a traditional mortgage loan is not available. It could be that the property is undesirable, the buyer/borrower's are unqualified for a whole host of reasons, or it could be that the neighborhood itself is not financeable. Hence, we must underwrite each file carefully to make sure that we are buying investment grade paper.
3 Redeeming Factors
For Seller Financed Mortgage Notes
Every single mortgage note or trust deed we purchase must have at 1 least of the following characteristics, otherwise it simply will not meet our investment criteria and will not receive an offer. It must have:
Each one of these redeeming factors is subject to our underwriting with our Investment Committee. If a Note deal has all 3 redeeming factors, then it will be considered an A+ investment grade mortgage receivable. If it has 2 then if would be considered a B, and if it has just 1 then it would be considered a C as an investment grade and will receive appropriate pricing. Of course, if there are no redeeming factors, then we view these contracts as glorified rental agreements that are not worthy of any cash purchase offer.
- Good Down Payment
- Good Seasoning NOTE: Must have at least 1 of these 3 factors.
- Good Credit
Each one of these redeeming factors is subject to our underwriting with our Investment Committee. If a Note deal has all 3 redeeming factors, then it will be considered an A+ investment grade mortgage receivable. If it has 2 then if would be considered a B, and if it has just 1 then it would be considered a C as an investment grade and will receive appropriate pricing. Of course, if there are no redeeming factors, then we view these contracts as glorified rental agreements that are not worthy of any cash purchase offer.
FINANCIAL VARIABLES
When we calculate offers on income streams, we will be dealing with five financial variables. These are numbers that change depending on the calculation we are performing. The five income stream variables are: number of payments, interest rate (yield requirement), present value, payment amount, and future value. These five variables are represented by the letters N, I or I/YR, PV, PMT, and FV.
N – N represents the number of payment periods that are being used in the calculation. N is expressed as a whole number. For example, a monthly income stream paid over five years would have 60 payment periods (12 X 5). An annual income stream paid over 10 years would have 10 payment periods. N may also represent the number of payments a funding source wants to purchase. (The funding source may want to purchase all of the payments of an income stream or only some of them.)
I or I/YR – I represents the annualized interest rate on the income stream. I is expressed as a percentage. A payor might be paying 12 percent interest on a note. A funding source might be earning 12 percent interest / yield by purchasing a note.
PV – PV represents the present value of an income stream. To a payor, PV is the principal balance of a note. To a funding source, PV is the amount the funding source is willing to pay today for an income stream it will receive in the future. PV is expressed in dollars. In cash flow problems, PV is always expressed as a negative number, because it represents cash being paid out.
PMT – PMT represents the amount of the periodic payment. PMT is expressed in dollars. If an income stream does not have regularly scheduled payments, but rather a lump sum payment (like a Straight Note with Balloon Payment), PMT may be entered as zero. PMT is a positive number, because it represents cash coming in.
FV – FV represents the future value, or remaining balance on the income stream. In other words, it refers to the balloon amount. (Many notes have lump-sum balloon payments due at the end of the payment stream.) Future value is expressed in dollars. Future value is usually a positive number, because it represents cash coming in. If a note is fully amortized, and no payment has come in yet, FV is zero.
OTHER VARIABLES
The price that a note buyer who buys land contracts, mortgage notes, and deeds of trust would offer, and the selling price of a note are determined by, but not limited to, the original down payment, the terms of the note, clauses within or left out of the note, the buyer’s credit, the current market value of the real asset securing the note, the seasoning (which is the length of time the note has existed and the number of payments received), the interest rate, how interest is compounded, the amortization schedule, the number and recency of delinquent payments, the LTV or Loan to Value Ratio, the payors DTI, or Debt to Income Ratio, the maturity date, whether or not there is a Balloon Payment, and local and regional market conditions…. ALL of which are risk factors that determine the current market value of a note. Basically, the qualities of a note, determine today’s cash value.
When we calculate offers on income streams, we will be dealing with five financial variables. These are numbers that change depending on the calculation we are performing. The five income stream variables are: number of payments, interest rate (yield requirement), present value, payment amount, and future value. These five variables are represented by the letters N, I or I/YR, PV, PMT, and FV.
N – N represents the number of payment periods that are being used in the calculation. N is expressed as a whole number. For example, a monthly income stream paid over five years would have 60 payment periods (12 X 5). An annual income stream paid over 10 years would have 10 payment periods. N may also represent the number of payments a funding source wants to purchase. (The funding source may want to purchase all of the payments of an income stream or only some of them.)
I or I/YR – I represents the annualized interest rate on the income stream. I is expressed as a percentage. A payor might be paying 12 percent interest on a note. A funding source might be earning 12 percent interest / yield by purchasing a note.
PV – PV represents the present value of an income stream. To a payor, PV is the principal balance of a note. To a funding source, PV is the amount the funding source is willing to pay today for an income stream it will receive in the future. PV is expressed in dollars. In cash flow problems, PV is always expressed as a negative number, because it represents cash being paid out.
PMT – PMT represents the amount of the periodic payment. PMT is expressed in dollars. If an income stream does not have regularly scheduled payments, but rather a lump sum payment (like a Straight Note with Balloon Payment), PMT may be entered as zero. PMT is a positive number, because it represents cash coming in.
FV – FV represents the future value, or remaining balance on the income stream. In other words, it refers to the balloon amount. (Many notes have lump-sum balloon payments due at the end of the payment stream.) Future value is expressed in dollars. Future value is usually a positive number, because it represents cash coming in. If a note is fully amortized, and no payment has come in yet, FV is zero.
OTHER VARIABLES
The price that a note buyer who buys land contracts, mortgage notes, and deeds of trust would offer, and the selling price of a note are determined by, but not limited to, the original down payment, the terms of the note, clauses within or left out of the note, the buyer’s credit, the current market value of the real asset securing the note, the seasoning (which is the length of time the note has existed and the number of payments received), the interest rate, how interest is compounded, the amortization schedule, the number and recency of delinquent payments, the LTV or Loan to Value Ratio, the payors DTI, or Debt to Income Ratio, the maturity date, whether or not there is a Balloon Payment, and local and regional market conditions…. ALL of which are risk factors that determine the current market value of a note. Basically, the qualities of a note, determine today’s cash value.
