Note Buying - Discount %
When buying a note, can the note purchaser arbitrarily pick a discount percentage, or is there some federally/state mandated amount they must go by?
If I *wanted* to, I could buy a note at face value, right?
If you wanted to you could pay a premium, and it is often done in the bond market when a note (bond) was written during a time of high interest rates and the rate has subsequently fallen.
When buying a note...
You are buying an asset and the price you want to pay is what ever you like. If the price happens to be something the seller is willing to accept then you have a deal. There are no regulations as to what two people can agree in terms of the price for the note.
John
[addsig]
Sooooo, if you are a secondary lender/note buyer, whatever you purchase the note for (discounted) is your own "number", not something mandated by the IRS or anything like that? You couldn't be audited for paying too much for it?
That is essentially correct. But something about the way you ask the question makes me suspect that you are up to something. The exception would be that your puchase price must have some reasonable expecation of profit. you could not pay so much for a note that your rate of return would approach zero-- the IRS might rule that you were engaged in some sort of sham transaction which has some purpose other than business. Most probably the transfer of assets to another person in a way intended to get around paying income or gift taxes.
I am just posing this hypothetically because I am trying to verify whether a third party is telling me the truth or not.
Just to clarify a point...There is no standard discount percentage in the note business. Each note is valued on its own merits and on many different factors.
For real estate notes we look at:
Credit score, size of the note, the interest rate, property type, equity in property, how many payments have been made, etc.
If you wanted to buy a note at face value that is great for the seller and if all things are good it could be a win for you, too! Only you as the buyer can determine if you want to offer less for the note and then like everyone says it is an agreement between you and the seller.
[addsig]
The note is an asset and it has a value. What you want to pay for that asset is a function of what you think it is worth.
As the note has legal rights it might make sense to pay a price that is more based on the legal rights rather then the cash flow. Notes in default where you are trying to get the building have a different value then if you were receiving payments and want to dump a note that is in default. What I am attempting to say is the value is likely different for different buyers and in different situations.
Oh, you can buy less then a whole note. The buyer would purchase X payments and then the remaining payments revert to the seller of the X payments.
John
[addsig]