Offering owner financing to facilitate the sale of a home or other type of property is increasingly becoming a more common occurrence.  When you sell a home or property with owner financing, a privately-held mortgage or trust deed will be created.  At this point, you have several options open to you.  You may collect the monthly payments on the mortgage or trust deed yourself, or you may elect to sell all or part of the mortgage or trust deed in exchange for a lump sum of cash.  Even if you intend to collect the payments yourself and not sell the note immediately, it is recommended that the note be structured to produce the greatest possible value in the event that you decide to sell the note in the future.  After all, you never know what the future will bring and when you may need to liquidate your assets.  In order to do this, it is important to know the basic factors involved in evaluating a note and determining what the note is worth.  Today we will discuss a few of these factors.

• Time value of money.  This is a concept that is related to the fact that money in your pocket today will always buy more than the same amount of money promised in the future.  To understand this concept, consider the cost of seeing a movie in a theatre 10 years ago and compare that to what it would cost today.  (Does anyone except me remember the days when seeing a movie only cost a buck and you could watch the movie as many times as you wished?) What this means in relation to your cash flow note is that the longer it takes for the note to be repaid, the less the note will be worth if you sell it for a lump sum today.  For instance, a note with a 10 year term will be more valuable than a note with a 30 year term. 
• Payor's credit history.  The payor is the person who will buy your property and be responsible for making the monthly payment.  That person's credit history is an important factor in evaluating the note.  The more solid the credit history history is, the less chance that the payor will default on the note.  If there is little chance of default, the note will not represent a large risk to the investor evaluating the note, and, therefore, the note will be more valuable.  The payor's credit rating is a good judge of their credit history.  When evaluating the FICO credit scale, a rating of 700 or above is considered grade A.  The lower the rating is, the worse the payor's credit is considered to be. 
• Equity.  Equity is defined as the current market value of a home minus the outstanding mortgage balance. Home equity is essentially the amount of ownership that has been built up by the payor through payments and appreciation.  The greater the amount of equity, the lower the chance that the payor will abandon the property and/or default on the note.  As a result, the higher the amount of equity, the higher the value of the note will be. 
• Seasoning.  Seasoning (for our purposes) is defined as the number of payments the payor has made on the note.  More seasoned notes will be more valuable than unseasoned notes.  As an example, let's look at a note with a term of 120 payments (i.e. a 10 year note with monthly payments).  If there have been 24 payments made, this note will be more valuable than a similar note with only 12 payments made.  However, the note with 12 payments made will still be more valuable than the same note with only 6 payments made.  Simultaneous closings are actually unseasoned notes in which no payments have been made.  What this means, in practical terms, is that the longer you hold a note, the more valuable the note will become (relative to the note balance) when you do decide to sell it.    
• Payment history.  The payment history on a note is another very important factor in determining that notes value.  If there are unpaid or late monthly payments, the value of note will be affected accordingly.  Naturally, the more payments which are delinquent, the less the note will be worth. 

These are a few of the most important factors involved in evaluating the value of a privately-held, owner-financed mortgage or trust deed.  There are other factors which may come into play in certain situations as well.  However, this should give you an idea of how an investor approaches the task of determining a note's value.  If you are in the process of selling your home and are considering how to structure the mortgage or trust deed, you will want to take these factors into account.  For more information, please feel free to contact us by e-mail, or call us at (401)-258-7158.   

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