Evaluating and Pricing Notes: A Broker’s Guide

Evaluating and pricing a note as a broker comes down to one idea: a note is worth what its remaining payments are worth today, at the yield a buyer needs for the risk. Your job is not to set the price. It is to estimate the range buyers will pay, explain it to the seller in plain numbers, and then let real bids confirm it.

This post covers the broker’s side. Sellers who want to understand their own number should read how note buyers calculate a price.

Three terms you need to use precisely

• Yield is the annual return a buyer earns on the money they pay for the note. Riskier notes need a higher yield to attract a buyer.
• Discount is the gap between the note’s unpaid balance and the price a buyer pays. A higher yield means a lower price and a bigger discount.
• Present value is what a future stream of payments is worth in cash today, at a given yield. Buyers price notes by working out the present value of the payments left.

Use these words the same way every time with a seller. Confusion about what “discount” means is where most mistrust starts.

A worked example

Here is a typical example with round, illustrative numbers. Say a seller holds a note with:

• Unpaid balance: $100,000
• Interest rate on the note: 7%
• Monthly payment: about $775
• Payments left: 240 (20 years)

The payer pays $775 a month for 20 more years, no matter who holds the note. What changes is the yield the buyer applies to those payments.

Two things stand out. First, the note’s own rate is 7%, below what buyers want, so even a strong note sells below balance. Second, each point of yield moves the price by roughly $5,000 on this note. Most of a broker’s pricing work is figuring out which row a given note belongs in.

What moves a note up or down the table

Buyers start from a base yield for a clean, first-lien note on a house and adjust from there. These are the factors that move it:

• Seasoning. The number of on-time payments already made. More history means less risk. See how payment history changes the price.
• Investment-to-value (ITV). The buyer’s price divided by the property’s value. The lower it is, the more cushion the buyer has.
• Down payment. A payer who put in real money is less likely to walk away.
• Lien position. First liens get paid first in a foreclosure. Second liens carry more risk and a higher yield.
• Property type. Owner-occupied houses are easiest. Land, mobile homes and commercial property usually need more yield.
• Payer credit. Weak credit pushes yield up, though strong seasoning and equity can offset it.
• Remaining term. Longer notes carry more uncertainty, so buyers often want more yield for them.
• Paperwork. Missing or unrecorded documents add risk and cost.

How to estimate a range before you shop

A practical approach that keeps sellers’ expectations grounded:

1. Confirm the payment stream. Check the balance, payment and payments left against an amortization schedule. Holders often guess wrong on the balance, and every price depends on it.
2. Pick a base yield. Use what your buyers have recently paid for clean notes.
3. Adjust for the factors above. A note with two years of on-time payments and 30% equity may sit at the base. A new note with 5% down on land may sit several points higher.
4. Price a range, not a point. Give the seller a low and a high, and explain what would put them at each end.
5. Check the ITV. Divide your estimated price by a realistic property value. If it is high, expect buyers to push the price down regardless of yield.

Our note pricing worksheet lays these steps out in one place. For the investor’s view of the same math, see how to price a note as a buyer.

Partials change the math

Sometimes the full-note price is not what the seller needs. A partial sells a set number of payments, after which payments return to the seller. Because the buyer is only exposed for a shorter time, partials are often priced at a lower yield, and the seller keeps the later payments.

Using the note above, the next 60 payments alone would be worth about $36,500 at 10%. The seller gets cash now and still owns the remaining 180 payments. Whether that beats a full sale depends on what the seller needs the money for. Run both and show them side by side.

Why buyers come back with different numbers

Even with good preparation, quotes will vary. One buyer may have money to place this month and accept a lower yield. Another may avoid land or long terms entirely. Some price the property more conservatively. This is the reason to shop a note to more than one buyer: the spread between bids is often larger than any adjustment you could make by fine-tuning the file. Our page on why note offers differ from buyer to buyer covers the common reasons.

Common pricing mistakes brokers make

• Quoting off the balance. Telling a seller “you’ll get around 90% of your balance” before you know the yield is how expectations get set wrong.
• Ignoring the property value. A note can look fine on yield and still fail because the buyer’s ITV is too high.
• Hiding the fee. The seller should see the buyer’s price and the broker’s share. Anything else erodes trust when they find out.
• Skipping verification. Pricing from the seller’s memory instead of documents leads to quotes that drop later.

Bottom line

Pricing a note is present value at a risk-based yield. The broker’s skill is in judging where a note sits on the yield scale, explaining that to the seller in plain dollars, and letting competing bids find the real number. If you want a starting range for a specific note, our price my note page is the place to begin.