Calculating a Bid

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How to Calculate a bid for Performing and Non Performing notes?

Calculating a BidI.  Introduction

When it comes to investing in mortgage notes, it’s important to have a good understanding of the different types of notes and how to calculate a bid.  We recommend getting a basic understanding of Note Investing if you are new to this investment space.  Check out our Note Investing Training !

A performing note is one where the borrower is current on their payments, while a non-performing (default) note is one where the borrower is behind on their payments by 90 days or more. Understanding the differences between performing and non-performing notes is crucial for investors, as it affects how they calculate their bids and potential returns. Sub-Performing notes are just loans that are not in default but have a spotty pay history.

The Note is an IOU with certain numbers that make a note’s value. Here are some common items found in the Note all playing a role in calculating a note’s value and Makes a note valuable

  • First payment Date
  • Original Balance
  • Full Note Term
  • Interest Rate
  • Maturity Date
  • Any Balloon Amount

Calculating a bid is an important aspect of investing in mortgage notes. Your bid SHOULD ALWAYS be based on your desired return.  You should never bid based on % of UPB (Unpaid Principal Balance) or BPO (Broker’s Price Opinion) Property Value.  You can see an example in this video.  Dont make these MISTAKES bidding notes on UPB or BPO

Bid Calculating allows investors to determine the fair market value of the note and make an informed decision on how much to pay for it. In this guide, we’ll discuss the factors to consider when calculating a bid for performing and non-performing notes, as well as the formulas used to determine the bid price. By the end of this article, you’ll have a better understanding of how to calculate a bid and make smart investment decisions in the mortgage note market.

You can never predict what a note will do in the future so always be prepared for all exits.   So the best method is to calculate all scenarios and select the lowest bid price.

II.  Understanding Performing and Non-Performing Notes

  • Performing notes are considered lower risk because the borrower is current on their payments, meaning the investor can expect a steady stream of income from the monthly payments. Non-performing notes, on the other hand, carry higher risk due to the borrower’s payment history. However, non-performing notes can also offer higher potential returns, as the investor has the opportunity to purchase the note at a discount and potentially work out a payment plan with the borrower.  When it comes to calculating a bid for performing and non-performing notes, there are several factors to consider.

III. Factors to Consider When Calculating a Bid

  • Interest rate
  • Remaining Term
  • Current Note Status
  • Loan-to-value ratio (LTV)
  • Property condition
  • Location
  • Borrower’s creditworthiness

The most important factors are interest rate, Remaining term, Status of the note, Location of the property . The interest rate on the note will determine the monthly payment amount and ultimately, the return on investment. 

The condition and location of the property are also important factors. A property in good condition and located in an easier foreclosure state may command a higher price. Additionally, the loan-to-value ratio (LTV) should be taken into consideration. This is the ratio of the loan amount to the appraised value of the property. A lower LTV generally indicates a safer investment.

IV.  Calculating a Bid for a Performing Note

To calculate a bid for a performing note, investors typically use a Yield to Maturity (AKA Yield, Interest Rate) Calculation.  You can try our Free Financial Calculator and 

  1. What to do : “Buy a Note / Parital” 
  2. Solve for :  “Purchase Price”
  3. Enter in your desired return
  4. Enter in Remaining Payments
  5. Enter in Monthly Payment (P&I Only)
  6. Click Calculate

V.  Calculating a Bid for a Non-Performing Note

Understand that even though a Note could be performing at purchase it can default at any time. Calculating a bid for a non-performing note is more complex than for a performing note. Investors will need to take into account 

  • the borrower’s payment history, 
  • the likelihood of recovering the debt, 
  • Property Value
  • The Foreclosure timeline and process for the state of where the property resides
  • Statute of Limitations
  • Occupancy status
  • Legally Collectible Amount
  • Expenses while foreclosing (Property Taxes)
  • Possibly chance of Borrower filing for Bankruptcy.

Our Advanced Note Investing Training walks you through creating a non-Performing Bid Calculator. 

VI.  How Much to Pay for a Note

Determining how much to finally pay for a note is a critical step in the investment process. Investors should conduct thorough due diligence to ensure they are paying a fair price for the note. This includes researching the property, analyzing the borrower’s payment history, and estimating the costs associated with foreclosing on the property, if necessary.

VII. Calculating Return on Investment

To calculate return on investment for a note, investors can use yield, IRR, NPV.  Yield (to maturity) is the percentage of the total amount invested that is returned annually.  Yield often has issues as it only calculates return until maturity and does not take in account if the borrower refi’s, pays off or sells the property.  IRR and NPV can better calculate your returns but are higher math calculations.   Although you can use Return on investment (ROI) it is not the best math calculation. ROI is the total return on the investment expressed as a percentage of the initial investment. It’s important to understand the differences when calculating potential returns on mortgage notes.

VIII. Conclusion

Calculating a bid for performing and non-performing notes is a critical step in the mortgage note investment process. By understanding the factors that influence the bid price and the formulas used to calculate it, investors can make informed investment decisions and potentially earn a high return on their Investment.

Other Resources:

Note Investing Blogs

Note Investing Training

Advanced Note Investing Training

Note Investing Webinars

Note Investing Due Diligence

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