Episode 34: Calculating Your Max Bid Price

Most note buyers throw out a number and hope the math works out — but knowing how to calculate your max bid price is what separates a disciplined investor from someone who learns expensive lessons. In this episode, we break down the pricing logic that drives every offer in the secondary mortgage market.

🔍 What you'll learn:

✅ Why performing and non-performing loans are priced in completely different ways
✅ How lien position determines which value anchors your bid
✅ How to calculate equity coverage and what it tells you about pricing
✅ Why the status of the first position loan can make or break your offer
✅ Why your max bid should always be built around the worst-case scenario — not the deal you hope plays out

This program is for informational purposes only and should be independently verified before taking action.

Transcript

SPEAKER_00 0:00

Welcome to the show, where you'll learn how to invest in mortgage notes, the savvy real estate investor's secret weapon to create cash flow without tenants and property acquisitions for pennies on the dollar. My name is Robert Haitha, founder of Fix Notes, and my mission is to make note investing ethical, profitable, and accessible for you. In every episode, we're democratizing the industry to put these powerful Wall Street assets into the hands of Main Street investors like you. So without further ado, let's get into the show where you're in good hands with my AI clone. Let's go. This program is for informational purposes only and should be independently verified before taking action. The first thing to understand is that performing loans and non-performing loans are priced in completely different ways. Performing loans, loans where the borrower is making their monthly payments, are priced based on yield. You are essentially buying a stream of future cash flow, so what you pay depends on the return you want to earn on that income. That non-performing loans where the borrower is in default are priced based on a discount to an underlying value. And that underlying value depends on lien position. For first position liens, the primary driver of price is the fair market value of the property. That makes sense because first liens more often resolve through the collateral. If the borrower doesn't pay, you are eventually going to end up dealing with that property, either through foreclosure or a sale. So you price based on what the property is worth, subject to a cap at the unpaid principal balance. You will never pay more than what the borrower owes. For second position liens, the primary driver of price is the unpaid principal balance, not the property value. That is because junior liens resolve more often through the borrower. You are working out a deal with the homeowner, a modification, a discounted payoff, a payment plan, rather than moving through the property. That's so the balance the borrower owes is your anchor for pricing, and equity becomes the key risk factor layered on top of that. Equity is where things get interesting. On a second lien, equity is calculated by taking the fair market value of the home, subtracting any outstanding property taxes, and then subtracting the unpaid balance of the first position loan loan. What is left over is the equity available to protect your second lien. If that number is strong, say the home is worth $200,000, the first lien balance is $100,000, and your second lien balance is $50,000, you have real equity coverage and you can price more aggressively. If the property is underwater after accounting for the senior debt, pricing comes down significantly. The status of the first position loan matters just as much as the equity number itself. A non-performing second lien sitting behind a current first lien is one of the highest value assets in this space. The borrower is still protecting the property by paying the first mortgage. That tells you they want to stay in the home, and that dramatically improves your odds of a borrower resolution. Those loans can trade at 60% or more of the unpaid principal balance. On the other hand, if the first lien is also in default or approaching foreclosure, pricing drops sharply because the risk profile has changed entirely. Occupancy is another factor that feeds directly into your bid. Owner-occupied properties carry more emotional equity. The borrower lives there. Their kids go to school in that neighborhood. That investment in the home produces better resolution outcomes, even in negative equity situations. Vacant properties are a different story. The borrower has likely moved on, and resolution is more likely to run through the property rather than through a workout. Once you understand these variables, property value, equity, first lien status, and occupancy, you can start building a composite picture of each loan. Some investors use a matrix that assigns a likelihood of resolution type to each combination. A loan that is owner occupied has full equity and sits behind a current first lien might carry a 90% probability of a borrower exit, meaning a payoff, modification, or reinstatement. That loan commands a higher price. A loan that is vacant, underwater, and behind a delinquent first lien might be close to zero on the borrower exit side and require a property-based resolution. That commands a much lower price. Your max bid is ultimately anchored to the worst case scenario, not the best case. If the deal goes sideways, what does it cost you to work through it and still come out ahead? Build that floor into your number before you ever submit an offer. Next time, we are going to talk about the difference between equity plays and cash flow plays and why knowing which one you are pursuing changes everything about how you underwrite and manage a loan. Thanks for sticking around to the end, and thank you to my trusty Robot and the Fixed Notes team for putting together another episode. If you want to learn more and hang out with the real not AI version of me, join our free school community at school.com slash fixnotes. That's s ko-o-l.com slash f I x no t e s. In the meantime, we'll see you in the next episode.