How to price a mortgage note offer: verify the inputs before you back into a bid

A common note-pricing question is: “If I want a 12% yield, what can I pay?”

That is a present-value calculation. But it is only half the pricing process. The mathematical price assumes the note's cash flows are the cash flows you will actually receive. Diligence determines whether that assumption is defensible.

Use two separate gates. The cash-flow price: what purchase price corresponds to the target return? The risk and evidence cap: is that price still acceptable given collateral, lien position, payment status and unresolved facts?

Step 1: define the remaining cash flow

You need the contractual monthly payment, the payments remaining, any final balloon or residual payment, the purchase or settlement timing, and a target-yield convention.

Do not start with the seller's UPB and simply apply a percentage discount. Two notes with the same UPB can have very different cash-flow value because their rates, terms and maturity structures differ.

Step 2: discount the cash flow at your target return

For a level monthly payment with no balloon:

Price = Payment × [1 − (1 + r)⁻ⁿ] / r

where r is the target monthly yield and n is the number of payments remaining. If there is a balloon B in month n, add B / (1 + r)ⁿ.

Worked example

Assume a monthly payment of $1,110.21, 120 payments remaining and no balloon. If your target nominal annual yield is 12%, use a 1% monthly discount rate. The present value is approximately $77,382. In a spreadsheet: =PV(12%/12,120,-1110.21,0).

Step 3: do not confuse the yield price with the maximum safe bid

Suppose the 12% target-yield price is $77,382. That does not mean $77,382 is automatically a good offer. Now test the supported collateral value, lien position and senior debt, current payment evidence, taxes and encumbrances, note and transfer-document quality, servicing costs, expected legal or recovery costs if relevant, and the uncertainty around a balloon or modification.

If those factors imply that your acceptable risk basis is lower, the risk cap can be below the pure yield price.

Step 4: model uncertainty as scenarios, not blended guesses

If a material input is unresolved, do not hide it inside a single “best estimate.” For example: Scenario A, the note is current and continues paying. Scenario B, the note is three months delinquent and requires workout expense. Scenario C, the lien is junior to a larger senior balance than stated. Each scenario should have explicit inputs. Then you can see whether the bid is robust or depends on the most optimistic case.

Step 5: treat collateral value as a constraint, not a cash-flow substitute

Property value does not directly change the contractual payment stream. It changes the downside protection and therefore the price you may be willing to pay. If the seller's value falls from $200,000 to $150,000, the present value of a perfectly performing contractual cash flow does not change. But your acceptable bid may change because the recovery cushion is weaker.

This is why “price the note from yield” and “underwrite the collateral” should be two connected but separate analyses. The property value guide covers the collateral side; ITV vs. LTV covers the ratio your bid actually moves.

Common pricing mistakes

• Discounting UPB instead of valuing the cash flow. “70 cents on the dollar” may be market shorthand, but it does not tell you the return without the payment schedule and timing.
• Ignoring a balloon. A residual balance due at maturity can be a major part of the present value. See balloon payment risk.
• Pricing from an unverified property value. A low ITV based on an overstated denominator creates a false sense of safety.
• Treating a target yield as a recommendation. A 12% target is an investor preference, not a universal correct answer.
• Using one scenario for an unresolved fact. If the evidence cannot establish current performance or lien position, model or condition the uncertainty rather than silently picking the favorable state.

How to calculate yield on a mortgage note covers the solving side (price in, rate out); the due diligence guide covers the evidence side of every item above; the methodology explains why NoteGage refuses a calculation rather than guessing an input.

FAQ

How do I calculate the offer price for a target yield in Excel or Google Sheets?

Use PV for a simple level-payment stream and include any balloon as a future value or a separately discounted cash flow. For the worked example: =PV(12%/12,120,-1110.21,0).

Is the asking price relevant to the calculation?

The asking price is relevant when you compare the seller's price to your calculated value. It is not an input required to solve your own maximum price from a target return.

Should I price a non-performing note with the same formula?

A simple contractual present value is usually not enough when the investment thesis depends on workout or recovery. Build explicit recovery, timing and cost scenarios instead.