The Not-So-Secret Method to Pricing Junior Liens
The valuing of notes is often made out to be a complicated, mysterious process, but there’s really not much to it. With just four simple metrics, we will show you how we determine the value of the notes in our Note Vault, and how you, too, can price your own notes with ease.
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A note is an asset secured by real property that can be resold, traded, or held. Enjoy the benefits of owning a valuable asset without the hassle
of a rental.
Making a return on your money is nice; protecting your principal is essential. All of our notes carry an optional warranty that protects your investment.
Earn 8% to 15% Yields
With a purchase price as low as $8,000, individual notes bring healthy, steady yields of 8% to 15%. Note owners receive monthly payments and have the option to resell the note(s) at any time.
Frequently Asked Questions
Why is owning a note better than purchasing a rental property?
It may or may not be better. Being the bank instead of the landlord is usually the better way to go. There are fewer hassles, such as not having to maintain the property and not having to worry about finding tenants over and over. However, there are two potential disadvantages to being the bank. First, if the borrower stops paying, you may have to foreclose instead of evict. (This is a disadvantage because a foreclosure takes longer and costs more than an eviction.) Second, you don’t benefit from any upwards price movement on the property, but that also means you're protected from any downwards price movement.
Is there a lot of work involved in managing a note?
For most investors who purchase individual notes through Hughes Private Capital, managing a note is a very hands-off, passive investment experience. Investors generally choose to have us manage the notes and our servicer collect the payments. All that’s required on your part is a quick monthly bank reconciliation to ensure an accurate record of payments received.
How do you determine the purchase price of a note?
Here are the 4 main criteria used in pricing a note:
1) Whether the note is in a judicial or non-judicial state. (The foreclosure process takes longer in judicial states, making those notes less desirable.)
2) The borrower’s credit score.
3) The number of months seasoned. ("Seasoned" refers to the number of months the borrower has been paying.)
4) The ratio of the amount of equity in the property to its fair market value. (This is the "equity-to-value" or "ETV".)
The price also depends on whether it is a senior (1st) or junior (2nd) lien. For more information on how to price junior notes, click here to get our white paper, “The Not-So-Secret Method to Pricing Junior Lien Notes.”
Why do notes have different yields?
Every note is unique. The yield is a pricing structure reflecting some of the protections and risks unique to that note. For example, a note with a higher 13.5% yield costs less than a note with an 8% yield because it has less protection and involves more risk. It is important to understand what those risks are, and then you can decide if you are comfortable with them or not. Some investors find they are comfortable with the risk and want to collect the additional yield on their investment. In general,
Higher Yield = More Risk = Lower Purchase Price
Lower Yield = Less Risk = Higher Purchase Price
What happens if the borrower stops making monthly payments?
The answer to this question varies greatly, depending on the type of note and whether you have chosen to protect your note with a warranty. Either way, remember that you are secured by the property and its tangible value.
The first step is always to work with the borrower to try to get them paying again.
If it is a senior lien on one of our starter homes in the Midwest for which we have found a homebuyer, we will find a new buyer and structure a new note/mortgage.
If it is a junior lien, we look at whether or not the borrower is performing on the senior lien and implement an appropriate payment plan. Sometimes the borrower has run into a temporary setback and simply needs to adjust the payment amount for a few months.
The last resort is to start the foreclosure process.
If you have a warranty on the note with us, you can count on one of three options:
1. We get the note performing again
2. We replace it with a similar note
3. We refund your money, less any payments received to date
I would feel nervous owning a note in a different state. Are there any disadvantages to this?
We understand that owning a note in a different state can seem unsafe or unsettling, but rest assured that this is actually one of the greatest advantages of owning a note or mortgage over being a landlord. Think about your own mortgage. Did the lender make sure that someone was in your city, watching your home? No - all business was taken care of remotely, with no extra risk to the lender. The homeowner is responsible for the home, and you (or our servicer) are only responsible for collecting the payment. That can be done from anywhere!