What is the average discount on non-performing notes?

One of the questions we get quite frequently is "what is the average discount" on non-performing notes or bank direct notes in general.

This is a question that can't be answered, here's why...

The Property

There are all kinds of notes or debts to invest in. You can buy notes that are in first position secured by any kind of commercial real estate, multifamily real estate, construction project, farmland, raw land, the list goes on... you can even buy unsecured debts. Would you pay the same discount rate for notes on all of these assets?

If the LTV on a residential NPN is 110% would you expect the same discount on the note as if the LTV was 80%? No, you would not.

Would you expect the same discount on an NPN in Gary Indiana as you would on a note on a property in Calabasas, CA? Clearly not.  

The Borrower

Some notes have recourse and some don't. On some of the notes that have recourse, the borrower is in bankruptcy, and in others he is not. Some notes are cross-collateralized and some aren't. 

What discount would you want on a second position residential note where the borrower has a 530 credit score and never pays a bill on time? Would you want the same discount on that note as you would on a first position residential note that is re-performing and with a cooperative borrower? No.

The Seller

Some sellers will be very motivated and sell bulk. Other deals you find will have less motivated sellers who will be more patient with the market. Depending on your motivation to acquire you may or may not want to make a move on asset regardless of whether or not you agree with the seller's assessment of value; e.g. - you're looking to make a strategic acquisition of the property by purchasing the discounted NPN and foreclosing on the property. 

This is just a small sampling of the considerations in the discount on buying non-performing notes. 

The only way to truly price a note is to determine what you're willing to pay for the note based on the returns your money demands. If you're not sure what that means and you're interested in investing in discounted non-performing notes then you should get some training.