There’s a pandemic going on right now, which means cash flow may be limited. Some mortgage Noteholders, we’re finding, are considering this an especially good time to consider selling their Note. Cash flow.
So…what are potential buyers like Faller Financial looking for? It all comes down to the buyer’s “buy box.”
Think of a box, like a cardboard box. Its walls represent the different criteria a seller has for becoming interested in your Note. It helps you, the seller (or even a broker), know if your loan is something the seller might be interested in purchasing.
So a good initial question for your potential seller is this: what’s your buy box?
And to cut to the chase, experienced Note investors are looking for:
1. Property value, or what some refer to as the value band, which represents the range of property values a buyer is comfortable with when buying a note. For many investors, the minimum property value they’ll typically get comfortable with is $50,000-$80,000.
2. Loan to value (LTV), indicating whether or not the property has equity or is underwater. Some buyers are okay with borrowers being underwater and even prefer it because a higher LTV for a performing loan can sometimes translate into a higher yield.
3. Minimum return requirement or investment yield. Simply: the income returned on investment. Sometimes this is referred to as the “hurdle,” which is fitting. A buyer’s cost of capital often determines the minimum acceptable return. 6-14% is currently the range in which most performing loans are trading in the secondary market. The lower end of that range, which represents more aggressive pricing, would typically be for very clean loans. The buyer at 6-8% yield would usually be a bank or a fund with a meager cost of capital. They could also be an individual investor, perhaps buying a loan for their self directed IRA. Quite often, you’ll see performing and reperforming loans sold between 9-12% yield.
4. Payment history. An experienced Note buyer will be very specific, indicating whether or not it’s okay for the borrower to have ever been late. Most often, buyers like to see 12 straight months of on-time payments. The industry jargon for this is you might hear a clean 12×12 or 0 times 30 the past 12. Or it could be called a perfect pay or no later.
5. Credit or FICO score. Some buyers want to see at least a 620 FICO. Banks prefer a 580 score or higher.
6. Modification or bankruptcy. Most buyers will be okay with one adjustment but want to make sure that the borrower has made at least 12 monthly payments under that modification. The same preference usually applies to a bankruptcy file.
Keep in mind, a buyer’s Buy Box may vary based on whether or not the loan is performing or non-performing. For non-performing loans (NPL), which often result in foreclosures, a buyer will pay close attention to geography. It’s typically effortless to foreclose in Texas, for example, but very difficult in New York. In Texas, it often takes about 246 days to foreclose; it can take 5x that long to foreclose in New York.
Here’s the bottom line: be sure to work with a buyer who has a well-defined buy box.
Be well! And if you’re interested in selling your mortgage Note—increasing cash flow and liquidity—reach out.