How much to sell a note for? - Posted by JeredWA

Posted by David Butler on October 27, 2003 at 13:47:58:

You are missing a part of the overall premise on an amortizing note payment… that being recapture of a portion of his invested funds, as a part of each monthly payment! :wink:

In your example here, after receiving the first payment of $184.66 ($82.81 of which is interest), the remaining $101.85 of that payment has gone back into your buyer’s jeans. Now he only has $4,866.99 invested in that note. This same process continues all the way through the amortization of the note.

In month two, of that $184.66 payment, $81.12 goes to the interest on the note, while the remaining $103.54 from that payment goes right back into his jeans as another partial recapture of his original invested funds. So, after the end of month two, Mr. Investor now only has $4,763.45 remaining invested in this note.

Similarly, in the 12th month, he receives interest earnings of only $62.51 on a remaining balance (of his invested funds) of only $3,750.36. This continues until the note is fully paid off.

That is the underlying principle of a level payment amortizing loan schedule. Unlike an “interest-only”, or straight note “principal plus interest all due at some future date”, each payment in an amortizing note (or loan) includes interest on the then outstanding balance still due on the note, plus a portion of the original principal amount. So the investors dollar investment in the note declines a little each succeeding month.

Hope that helps, and best wishes for your success on this deal.

David P. Butler

How much to sell a note for? - Posted by JeredWA

Posted by JeredWA on October 23, 2003 at 17:25:53:

I am offering a buyer the following note (with recourse): 36 payments of $184.66.

He wants to earn 20% on the money he invests to buy this note.

  1. How much does he pay me for the note?
  2. How do I calculate this value?

Using Excel, I used the NPV function as follows:
=NPV(0.2/12, 36, -184.66) ==> $4,968.71

But, this is wrong!

If he pays $4,968.71 for a note that eventually pays him a total of $6,647.59, then he is only earning 33.8% on his money over 3 years ($6,647.59 / $4,968.71 ==> 1.338).

What am I doing wrong?