An offer on a note is a price plus the conditions it depends on. It usually starts as a written bid or a letter of intent and becomes binding only when both sides sign a purchase agreement. Sellers and brokers judge you less on your first number than on how often your accepted bids close at that number.
In the path the note investor guide lays out, this step comes after you have priced the note and before you close on it. It covers what to put in the bid, how a letter of intent differs from the agreement, how bidding on a loan tape works, and how to keep your bid-to-close record clean.
Start from your own price
Work out what the note is worth to you before you look at what the seller is asking. Take the yield the risk calls for, discount the remaining payments at that yield, and test the answer against the property’s value, the method laid out in pricing a note as a buyer.
| Illustrative note | Figure |
|---|---|
| Monthly payment | $700 |
| Payments left | 108 |
| Note rate | 8% |
| Unpaid balance | About $53,800 |
| Price at an 11% yield | About $47,900 |
| Price at a 12% yield | About $46,100 |
Illustrative example. The yields are chosen for the arithmetic, not as a guide to what any note should earn.
If 11% is the least you will accept on this file, $47,900 is your ceiling. Bidding well under it to leave room for haggling makes sense in a one-on-one negotiation. Where a broker is sending the same note to several buyers, it mostly means losing the note to someone who quoted their real number first.
State the balance your price is based on. The unpaid principal balance moves with every payment, so a price written against an old balance will look wrong to the seller by closing.
What goes in the bid
A bid that says only “$47,900” invites a dispute later. Put the conditions in writing at the start:
- Price and basis. The figure, the balance and payment date it assumes, and whether you are buying the whole note or a set number of payments.
- Title. A satisfactory ownership and encumbrance report or title search showing the lien where the seller says it is.
- Value. A valuation, such as a broker price opinion, at or above a figure you name.
- Payments. A payment history that matches what you were shown, backed by bank records or a servicer’s report.
- Documents. The original note, with the recorded security instrument and any assignments in an unbroken chain.
- Timing. How many days you need for review, a target closing date and who will act as closing agent.
Each condition is a promise as much as a protection. If the report, the valuation and the records come back as described, you have told the seller you will close at the bid.
Bid, letter of intent or purchase agreement
| Document | What it does | Binding? |
|---|---|---|
| Bid | States a price and conditions, often by email or on a bid form | Usually not; it opens the deal |
| Letter of intent (LOI) | Sets out agreed price, conditions and timing before lawyers draft the contract | Mostly not, though clauses on confidentiality or exclusivity may be, depending on wording |
| Purchase agreement | Transfers the note on stated terms, with the seller’s representations and warranties | Yes, once signed |
On a single private note the bid and the LOI are often the same piece of paper. The terms that protect you live in the agreement, so read the note sale agreement from the buyer’s side before you sign your first one, and have an attorney in the note’s state review it.
Bidding on a loan tape
Funds selling several loans at once send a tape and ask for bids by a deadline. Bids are often given per loan, sometimes as a percentage of the unpaid balance or of the property value. A bid on the tape is subject to review of the files, and the seller usually picks the winner on price and on how confident they are that the buyer will close. Expect some loans to drop out between award and closing, because they pay off, reinstate or turn out to have a problem. For how a holder prices a group of notes, see selling a note portfolio.
Bid-to-close: the number sellers remember
Bid-to-close describes how often your accepted bids actually close, and at the price you bid. Cutting a price after it has been accepted is called a retrade. A retrade backed by a real finding is fair. Suppose the bid above was conditioned on a valuation of at least $90,000 and the broker price opinion comes back at $75,000. Send the seller the report, show the new price your method produces, and let them decide.
A retrade with no new facts is a different matter. Sellers who have read up on note sales are warned about the strong quote that shrinks just before closing, and brokers keep track of which buyers do it. Buyers who close at their bid tend to hear about the next note sooner, from any broker. If you want to bid on the notes we broker, you can join the buyer list and tell us what you buy.
After the seller answers
A seller can accept, decline or come back with a figure of their own. Before you answer a counteroffer, rerun your price. If the counter sits above your ceiling, say so and say why, which leaves the door open if the seller’s other bids fall through. In a round of best and final offers, give your real number once.
Once a bid is accepted, the review period starts. Keep to the dates you proposed, and tell the seller early if something in the file needs more time. Most delays are simple: a missing assignment, a slow valuation, a payer who has not returned a call. A seller who hears about them from you, not from the closing agent, is far more likely to wait.
Related questions
Is a letter of intent on a note binding?
Mostly not. An LOI usually records the agreed price, conditions and timing before the purchase agreement is drafted. Some clauses, such as confidentiality or exclusivity, may bind you depending on the wording, so read it as carefully as the agreement.
Should I bid low and negotiate up?
In a one-on-one negotiation that can work. When a broker is sending the same note to several buyers, a low opening bid often just loses the note. Bid the price your yield and value tests support.
When is it fair to lower a bid after it is accepted?
When due diligence turns up a fact that differs from what you were shown, such as a lower valuation or a gap in the payment history. Show the seller the finding and the new price your method produces.