Just What is a Note Appraisal and How Can it Help My Cash Flow Business?
I just finished helping another Elite member prepare an Opinion of Value for a real estate note, and I sense a definite trend because I’ve now had several requests for assistance in preparing fee-based note appraisals in the past several weeks, a service that has been growing in demand.
These requests primarily result from Elite members’ marketing efforts to the professional sector, most notably attorneys. Given the effectiveness of this approach, now seems like a good time to share some insights on using Note Appraisals in your cash flow business.
The Free Note Appraisal
Offering a free note appraisal is a highly effective call to action in note broker marketing materials.
Actually, this free evaluation can be more appropriately called a “note analysis”.
In this form, you are really using a simple one-page letter that outlines an offer for the purchase of a note. It helps the note holder know what the cash flow is worth to a note buyer in today’s dollars on the secondary market. If you are using this type of note analysis, your goal is to eventually buy the mortgage note and earn a referral fee in the process.
Professional Fee-Based Note Appraisals
A professional note appraisal takes the form of a written report ranging from 5-10 pages with additional content in the appendix containing supporting documentation. It is an independent and unbiased evaluation of the present cash market value of the real estate note.
Fees range from $175-$350 depending on the complexity of the assignment and property serving as collateral. An attorney, financial advisor, personal representative of an estate, bankruptcy trustee, or retirement account administrator will often use them to help determine a fair market value.
Note Analysis or Note Appraisal – What’s the Difference?
A true professional appraisal is performed by a qualified third party with no personal interest in the transaction. And at the time you deliver the appraisal, you do not have a personal interest.
You will, though, oftentimes have the opportunity to help the client get that note sold at a discount and earn a fee, so it is important that you fully disclose your role. You will almost always be the first person the client looks to for assistance in placing the note with a reputable funder, and charging the client a fee for doing so is a widely accepted practice.
Factors Affecting Real Estate Note Values
So how is the value determined for either a note appraisal or analysis? It’s determined by a number of factors:
Payor’s Credit Profile – a credit history on each payor or maker obligated for repayment.
Collateral – type of asset, condition, and location of property serving as collateral.
Down Payment/Equity – the current unpaid balance of all amounts owed on the property compared to the current value of the collateral.
Seasoning – history of payments made including timeliness and duration.
Terms – terms of repayment including frequency, payment amount, interest rate, balloon payment, and/or special provisions.
Documentation – sufficiency of documentation supporting the transaction.
Substantiating the Note Valuation
If you have 20+ years in the note business, you have a pretty good feel for how the market will react to the factors affecting value.
But if you are just starting out or need a second opinion, what’s the best way to proceed?
A simple solution is to request quotes from 3 respectable note buyers. Think of these as “comparables” similar to what is used in a real estate appraisal or BPO (Broker’s Price Opinion).
What Goes Into the Evaluation Report?
While there is no uniform standard, a solid report will contain these elements:
Description of the Promissory Note
Description of Collateral Property
Purpose of Evaluation
Definition of Present Cash Market Value
Information and Documentation Provided for Valuation
Analysis of Information
Assumptions and Limitations
Final Opinion of Value
Appendix with Supporting Documentation
If you want to gain the ability to market your services as a Professional Note Appraiser and gain certification, go to the following page to learn more: