In the pricing of seller financed notes there many things taken into consideration. Some people like to just put a certain percentage on the dollar for every note priced, but there is so much more involved than that. In this discussion, I will outline about the different factors that make up the pricing of every note whether it is a note on a single family residence, land contract, mobile home, RV park, or a business. Buyers interested in any seller financed note will put a grade on that note which is determined by 6 different factors. The information gathered in these 6 different areas results in a final grade for the note. Once the note is graded only then can a final price be determined for that note.
The first and most important factor in the pricing of any note is equity which is the amount money already in the property. One can see just how important this information is to buyers, since they base 50 % of their decision on this bit of information alone. If a large amount of equity is already in the property when the note holder decides to sell their note, they stand to get a much larger price for their note than if they just started paying on their note and did not have much into it. Thus, the more you have into the note, the more you will get out of it.
Secondly is the credit score of the payor. The credit score of the payor is important for the following reasons. The higher the score of payor, the higher the payout will be on the note that’s up for sale. The buyers base 20% of their decision on this information, and will pay more for a note when they have information telling them they will be getting their monthly payments, on time, and without delays. That’s what a high credit score shows the buyers and that’s the kind of payor they will want to have sending them their monthly payments. Thus, a credible payor shines in the eyes of the prospective buyers.
This also leads to our next factor in note pricing of seller financed notes which is payment history. Every buyer will examine the payment history of the payor on the note to determine gaps in payments, late payments, or payments that just did not get paid at all such as delinquent payments. Another 20% of their decision comes from this information so it is important for any payor to have all their payments made on time without delays or gaps between monthly payments. The better these numbers are, the higher the payout will be for the note up for sale. The number of payments made accounts for 10% of their decision and fourth on our list of pricing factors. This is also called “seasoning.” If more payments have been made, more money is into the the property, thus having more equity which is most important as previously stated.
Fifth on our list is the type of note considered for pricing. There are seller financed notes on single family residences, mobile homes, land contracts, RV parks, condos, apartments, and businesses. So the list is wide and every note is different with different circumstances connected to it. And finally, the sixth factor in the pricing of every note is the position of the note whether it be a first position note or a second position note. First position notes will always get a higher payout than second position notes. This is so because the buyers who buy any second position note are also responsible for the payment of the first. Thus, it is always best to go into a seller financed note deal selling a first position note over a second.
In conclusion, note pricing is a very detailed well thought out process that involves six different factors. Of the six factors of seller financed note pricing, equity being the most important followed by the payor’s credit score. The buyers then look at payment history followed by the number of payments made. After that, consideration of the type of note and its position are all taken into account leading to the note receiving a final grade. Once the note is graded, it is priced and ready to be bought by its prospective buyers.