When real estate note brokers purchase partially paid notes, they pay note holder a discounted price after factoring in time value of money, payer history, and property condition.
If there is still a significant period of time left for payer to make payments, future payments are not worth same amount in current dollars.
Calculations are made to equate all payments into current value, which is how discount is determined.
After purchasing notes at a discounted price, note brokers try to restructure loan and increase its value.
Increasing value of loan requires payer to refinance or increase payments, which requires a new contract.
Factoring same concept of time value of money, we can understand how increasing payments now creates more value. The note can then be sold for a higher price.
Discounts must be taken from loan amount due to inflation and time value of money.
There may still be years left on loan repayment, but payments far in future are not worth same amount in dollars today.
Calculations are made using special formulas to equate future payment amounts into today's prices, making today's price discounted significantly.
On other side of coin, notes that are well seasoned can fetch near remaining balance face value.
***Additional Major Reason Notes Are Discounted***
Although I am a broker myself, I put this site here because I want to bring you a clear understanding (from an insider's perspective) of nuts and bolts mechanics of how secondary market mortgage note industry works.
A major reason many people are turned off from selling their real estate notes is because of discount factor......
but what you probably don't understand is that when you use a broker, like myself or any other broker anywhere, you pay additional fees that further drive down amount of money you walk away from table with.