Earlier this year, I wrote about a mortgage Note buyer’s “buy box”—the criteria a seller has to meet in order for a buyer (or even a broker) to become interested in purchasing (or brokering) a Note.
For us, at Faller Financial, we focus on 6 things when evaluating a Note:
1. Property value
2. Loan to value (LTV)
4. Payment history
5. FICO score
6. Whether or not there’s been a modification or bankruptcy
That isn’t the extent of our evaluation but that’s basically our “box.”
Here, I spend a couple of minutes expanding on Investment Yield.
Investors want returns, or income, and the yield is the income returned on an investment, usually expressed as an annual percentage rate based on the investment’s costs (i.e. time, effort, capital, and more).
When it comes to mortgage Notes, buyers look at the “hurdle” rate, which is the minimum rate of return (or yield). Generally, hurdle rates indicate risk; lower hurdle rate = lower risk; higher hurdle rate = higher risk.
Right now, for example, most performing loans are trading at anywhere between 6-14% in the secondary market. Buyers shooting for 6-8% yield are often banks or funds with a meager cost of capital. They could also be an individual investor, perhaps buying a loan for their self directed IRA. Quite often, though, you’ll see performing and reperforming loans sold between 9-12% yield.
Yield. Get to know it.
Keep checking in at fallerfinancial.com/note-resources to learn more and get smarter.
Photo by Christozov on Unsplash