This is very common question. Unfortunately, there isn't a short or simple answer. We could tell you the average of the contracts in our portfolio, but that's kind of like saying, "You can have one foot in boiling water and the other foot on a block of ice, and on average, be comfortable". In other words, an "average" is sometimes useless.
Basically, the value of any income stream depends on the risk factors and on the numbers. In this case, the risk factors include such variables as:
just to name the major factors. The numbers include:
First, we determine the yield requirements , which are a function of the risk factors. The higher the risk, the higher the yield, and vice-versa. Also, yield requirements are effected by outside economic factors, like outlook on inflation, general interest rate markets, cost/availability of funds, etc. We try to get a yield that will cover cost of funds, return for risk, overhead/operating expenses and finally, a little for profit. This process is really more art than science, and like many things in life, changes with the environment and with experience. If we had to rank the top five risk factors in order of importance, we'd say
An example of a very desirable contract would be one which is secured by a modern, well built, owner-occupied single family residence within a few minutes drive, with a payer who has A+ credit, who paid 40 percent down payment and who hasn't been late in the three years since the contract originated. On the other extreme is a contract secured by factory located 1500 miles from home, with a corporate owner who has been losing large amounts of money the past few years, and who hasn't been current on this debt for the past twelve months since buying the facility.
Most of our investments fall somewhere in between these two extremes.
After deciding upon the yield, based on risks and economics, the mathematics of what price to pay are simplified by use of a financial calculator. As an example let's compare a couple of opportunities.
Let's say the same customer has two contracts and will sell either for $20,000. We get to pick which contract to buy. Both have virtually identical risk factors, and the same balance of $25,000. One has a 10% interest rate, and 180 monthly remaining payments of $268.65. The other has a 9% interest rate, with 120 monthly payments of $316.69.
Some people calculate the total gross repayment potential, and find the 10% contract could generate up to $48,357 (180 x $268.65), while the 9% contract can't generate over $38,002.80 (120 x $316.69). So, wouldn't we want the 10% contract? By plugging the numbers into our trusty financial calculator, we find that the 10% contract yields only 14.17 %, while the 9% contract yields 14.51%.
How can this be? Basically, it's due to the extra $48.04/month on the 9% contract. We get our investment and the discount back sooner on the shorter term contract. So which is more important, interest rate or term? We have to use the financial calculator to determine. Generally, "more quicker is better", even though it may be bad grammar.
This is why we have to respond "it depends" when asked how much a contract is worth. But if you would like a quote for your contract, just fill out the form above and we will contact you.