What to Offer for a Non-Performing Note

How to Calculate How Much to Pay for a Non-Performing Note

Investing in non-performing notes can be a lucrative opportunity, but it requires careful calculation to ensure you're making a wise investment. Here's a step-by-step guide on how to determine the right price for a non-performing note.

Step 1: Determine the Unpaid Balance

The unpaid balance (UPB) is the total amount owed on the note. This includes the principal balance, any unpaid interest, and any fees that have accrued. Start by obtaining this figure from the lender or note holder.

Step 2: Assess the Property Value

Next, evaluate the current market value of the property securing the note. This can be done through a professional appraisal or by comparing recent sales of similar properties in the area.

Step 3: Calculate the Loan-to-Value Ratio

The loan-to-value (LTV) ratio is calculated by dividing the UPB by the property's current market value. A lower LTV ratio indicates a safer investment.

Step 4: Estimate the Cost of Foreclosure

Consider the potential costs associated with foreclosing on the property. This includes legal fees, court costs, and any repairs needed to sell the property. Subtract these costs from your potential profit.

Step 5: Determine Your Desired Return

Decide on the return you want from the investment. This could be a percentage of the UPB or a specific dollar amount. Your desired return will influence the maximum price you're willing to pay for the note.

Example Calculation

Let's say you find a non-performing note with a UPB of $100,000. The property's current market value is $120,000. You estimate foreclosure costs to be $10,000, and you want a 20% return on your investment.

1. UPB: $100,000

2. Property Value: $120,000

3. LTV Ratio: $100,000 / $120,000 = 83%

4. Foreclosure Costs: $10,000

5. Desired Return: 20% of $100,000 = $20,000

Calculate the maximum price to pay:

• Property Value: $120,000

• Less Foreclosure Costs: $120,000 - $10,000 = $110,000

• Less Desired Return: $110,000 - $20,000 = $90,000

In this example, you should not pay more than $90,000 for the note to achieve your desired return after covering foreclosure costs.

By following these steps, you can make informed decisions when investing in non-performing notes. Always remember to conduct thorough due diligence and consult with professionals if needed.