Understanding "NOTE VALUE" on the secondary market.

The following are contingencies which influence the value of a note that is being sold on the secondary market.

>Priority of Lien Position

>Payment Terms

>Property Classification

>Location of Property

>Protective Equity

>Credit Evaluation of Payor

>Loan to Value Ratio

>Investment to Value Ratio

1. Priority of Lien Position - Plays an important role in the marketability a note has on the secondary market.

A) 1st Position Notes- Are more valuable because the note holder has the authority to initiate the foreclosure process, if the payor defaults on the payments.

B) 2nd Position Notes- Are still valuable on the secondary market, but the risk to the note holder is increased, thus increasing the discount when optioning to convert into a lump sum. If the payor defaults on the payments of the second note the holder of the 2nd (note buyer) must keep the payments of the first note position current by using his own money, in order to initiate the foreclosure process and recover his investment.

2. Payment Terms- When structuring a note try to remember "Earlier is Better". The sooner you can collect the payments,the more valuable the note is today ( Time Value of Money concept).

A) Balloon Payments- Offer a great way to create value in your note. Balloons make the note's balance due and payable in full within a specified period of time. Structuring balloon payments 7-10 years from closing gives the buyer time to acquire equity in the property, earn more income, and seek out financing. Balloon payments may also be sold separately (at closing or any other time) for a lump sum payout.

3. Property Classification - The most desired paper on the secondary market is secured by a Single Family Residence (SFR). SFR paper usually has the lowest discount rate. On the other hand, paper secured by commercial property or vacant land tends to have higher discount rates. Why? Because "note" payments rely heavily on the income strength of the revenue source. For example, with commercial paper, if the business goes under so do the payments. Land Paper calls for higher discount rates due to lack of additional assets of buildings and tangible improvements. Property classification also effects the level of risk (ITV) a note buyer is willing to investment in the purchase of your note.

4. Location of Property- Property located in high growth areas will help to increase the value of the note. Why? Because if a note buyer realizes that in the case of default, resulting in forclosure, the property will resell quickly on the open market, then he or she is more likely to accept a higher LTV (Loan to Value).

5. Protective Equity- Is the level of protection a note holder has between the risk (amount owed on note) and the value of the security (the potential money that could be raised, by the sale of the property). If a default on payments does occur, the collection of the protective equity (resulting from the sale of the property) is the "earned compensation" for dealing with the default. There fore, the more protective equity a note has, the more valuble it becomes on the secondary market.

For example, in figure 1: A $110,000 property with an $85,000 lien against it has a Protective Equity of 23%.

"There is no substitute for protective equity"
Bill Broadbent www.arnettbroadbent.com/

6. Credit Evaluation of Payor - The credit risk of the payor is very important also. If the payor has a poor credit rating the discount rate will be slightly higher than it would be with a payor having good credit. A substantial level of protective equity and good pay history can help to offset the negative views of poor credit.

7. LTV- (Loans to Value) determines how much protective equity is protecting the note. Note buyers prefer low LTV so there is ample equity to compensate them in case of default.

LTV percentage is determined by taking the Amount Owed divide it by the Property Value and multiply the answer by 100.

Type of Property	LTV
Single Family Residence (own-occ)	70-80%
Single Family Residence (nonown-occ)	60-70%
4+ apartments	50-70%
Commercial	60% or less
Improved land	50% or less

The above chart are average Industry standards for preferred LTV ratios.

8. ITV- (Investment to Value) is one formula a note buyer uses to help determine his or her investment risk. The level of ITV is influenced by the property type, property condition, payor's credit, clear title, lien position, and acceptable documentation.
For example, in figure 2: A note buyer's ITV for the purchase of an $85,000 mortgage note, secured by a $110,000 property, for the amount of $73,000 would be 66.3%.

To determine the amount of purchase money given the ITV percentage use the following formula:

*Industry note buyers rarely exceed 85-90% ITV when purchasing a note on the secondary market.