A note appraisal is a written opinion of what a privately held note is worth on a given date. It values the right to receive the payments, and its main uses are estates, divorces, gifts and tax reporting. A sale does not depend on one, because buyers carry out their own valuation.
When people ask for one
- Estates. A note holder has died and the executor needs a value for the note as of the date of death.
- Divorce. The note is a shared asset and has to be given a figure before it can be divided.
- Gifts and transfers. The note is being given to a family member or moved into a trust.
- Retirement accounts. The custodian of a self-directed IRA that holds a note may ask for a valuation from time to time.
- Disputes and partnerships. Co-owners are separating and one is buying the other out.
In each case the requirement comes from someone else: a court, a tax adviser or a custodian. They decide what kind of valuation they will accept and who is qualified to sign it, so ask them before you pay for anything.
How it differs from a property appraisal
A property appraisal estimates what the house or land would sell for, while a note appraisal estimates what the payment stream would sell for. The two figures are related without being equal, since a valuable house can secure a small note. The property value shows an appraiser how well protected the payments are.
What goes into the value
An appraiser studies the same things a buyer does, each of which has its own entry in the note basics hub:
- The terms: balance owed, interest rate, payment amount, payments left and any balloon, which is a large final payment.
- The payment record, called seasoning: how many payments have been made and whether they arrived on time.
- The payer’s credit and history on this note.
- The collateral: property type, condition, value and the payer’s equity in it.
- Lien position, meaning whether the note is first in line against the property.
- The documents, and whether the note, the security instrument and any assignments are complete and recorded.
From these the appraiser chooses a yield to suit a note carrying this much risk, and discounts the remaining payments back to today at that rate. A higher yield produces a lower value. Two competent appraisers can settle on different yields and so on different figures, which is why the result is called an opinion.
The figure an appraisal is aiming at
The balance owed is what the payer would need to pay it off today. The total of the remaining payments is what you collect if you hold to the end and every payment arrives. The value today is what an investor would pay now for all of those payments.
An appraisal aims at the last of these. It sits below the balance because money that arrives later, and might not arrive at all, is worth less than money in hand. As an example with round figures only, a note with $90,000 still owed that is valued at $81,000 carries a $9,000 discount, which is 10% of the balance. The page on why notes sell for less than the balance walks through the reasoning.
An appraisal, a quote and an offer
| What it is | Who stands behind it | |
|---|---|---|
| Appraisal | A signed opinion of value for a stated purpose | The appraiser, who is not committing to pay it |
| Quote | A buyer’s first estimate, based on what you have told them | The buyer, subject to checking the file |
| Offer | A price set after review of the documents, the title and the property | A buyer prepared to fund at that figure |
A buyer will not rely on your appraisal in place of their own review, which is the subject of whether you need an appraisal to sell your note. If the second row is what you are after, you can ask for a price on the note without commissioning anything first. Whether a buyer’s quote is acceptable as the formal valuation for an estate or a divorce is a question for the attorney, CPA or custodian handling the matter. We do not give tax or legal valuations.
Which one to ask for
For a legal or tax purpose, begin with the professional involved and get their requirements in writing: the valuation date, the form of the report and who may sign it. An appraisal ordered before you have those may turn out to be one they will not accept.
Where the question is what the note would sell for, an appraisal is the slower and more expensive way to find out, and a quote answers it. You will read either figure better once you know, from the guide to what a note is worth, which facts about a note move its price.
Related questions
Who can appraise a note?
It depends on the purpose. A court, a CPA or an IRA custodian may each have their own view on who is qualified and what the report must contain. Ask the professional handling the matter before you order one.
Is a note worth its remaining balance?
Not if you mean what it would sell for. A buyer pays less than the balance because the money arrives over time and carries risk. The balance is what the payer owes, which is a different figure from what an investor would pay.
Do I need a property appraisal as well?
Sometimes. The property's value shows how well the note is protected, so a buyer or appraiser will want a current estimate. Ask the buyer whether they will order it themselves before you pay for one.