Commercial Note Buyers
Buyers of Commercial Owner Financed Promissory Notes

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What is The Discount on Commercial Notes

So how do buyers of commercial notes calculate the discount amount? Unfortunately, many commercial note holders looking to sell their commercial seller financed note call and ask something like. “I have a commercial note with a balance of $250,000 and an interest rate of 7%. What would the discount be if you buy my note?” Unfortunately, it’s not quite that simple. Allow me to explain the process of arriving at the discount on commercial owner financed notes, as well as residential notes.

There are two components to note discounting. First is the establishment of a discount rate, which can vary widely due to the also varying “quality” of the note. In other words, a note where the buyer put down 35% in the sale is much less risky (lower discount rate) than one with 5% to 10% down, particularly for commercial notes as commercial properties are much harder to resell than a residential property. Secondly, a borrower with strong credit is of lower risk than one with marginal credit (Business or personal). The other element of setting the discount rate is the uniqueness of the property. An office building or apartment building is much lower risk than an industrial building or Church. A commercial promissory note buyer will take all this into consideration when they set the discount rate.

Once the discount rate is established, the second component of commercial note discounting comes into play. I call it pure math. In other words, this piece is not subjective. It simply involves applying the discount rate to the payment stream (full remaining payments of number of payments bought under a partial purchase). The lower the payment and the longer the payments go out in time, the higher the discount amount and therefore the lower the purchase price. So if you had two notes with the identical current balance but one had a payment of $1,000 per month and went out 10 years and the other had a payment of $750 and went out 20 years, the percentage discount (not dollar amount) on the $750 note would be higher.

So you can see, every note, even when similar on the surface can result in very different pricing amounts. So if you want to sell a commercial mortgage note to commercial mortgage note buyers, the best start is simply to get a quote. We are available 7 days a week at the number below. Be sure and have your documents in front of you to save you time. For more on the how note selling works go to our page on the process of selling a commercial note. We look forward to assisting you with selling your note. Call today.


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