Board Topic: Present value of a mortgage note
Click here to view this topic in its original format
LoanUniverse Community > General Chat >

Present value of a mortgage note

Posted by: loanuniverse Nov 17 2003, 06:15 PM
Hello visitors:

Today a coworker came to me with an interesting real life situation, which solution some of you might find useful from the point of view of real estate investors. My coworker has a friend with a property overseas. This property had been until very recently been rented to one of the most recognized companies in this country. In commercial lending, your tenants can be classified into categories such as “anchor tenant”, “credit tenant” or “local tenant”. This particular tenant could be considered a “credit tenant”, which translates into good quality.

Anyway, the tenant came to his friend and asked to buy the building. He agreed to sell it via owner financing under the following terms: 1) A down payment of $100,000. 2) A monthly payment of principal and interest in the same amount a month that he was charging them in rent for twenty years. For simplicity, lets say that the monthly payment was $1,000. In actuality, it was much more, but using the real numbers would be too cumbersome.

Once the sale was done, my coworker’s friend wants to sell the note, but needs to have an idea of how much he should sell it for and what kind of rate he should be using. The whole situation was bounced around in the credit department as to how to determine the amount for which he should sell the note and when it finally came to my cubicle, it occurred to me that this had to be looked at as getting the present value of an annuity.

Solution:

The investor is buying a stream of payments for the next twenty years. At the numbers mentioned above, the total that the buyer of the note will receive is $240,000 spread over the next twenty years. { 12 monthly payments X 20 years = 240 payments }.

The problem now was getting a hold of a present value for an annuity table. And I found one here caution: it is an excel file so you will need Microsoft Excel to use it. Using the information, in the table, you can just multiply the amount of the payment for the number and come up with a present value. The value of course will be different depending on the discount rate used.

Now that I think about it, this would be useful not only for discounting real estate mortgage notes, but also for all other similar transactions such as those people that will buy your winning lottery tickets that pay you an annuity or lawsuit settlements that pay you over time. This would be a powerful tool, when it comes to figuring out where the amount offered comes from in those cases, and exactly how much they are making.

P.S: the table is yearly and results in an approximate present value since the payments are actually monthly.

It might be a little weird, but I found this interesting enough to share.

Link to Excel file: http://www.fiu.edu/~keysj/PVIFA.xls
email

Comments are closed.