Non-Performing Asset Value

Thu. May. 30, 2024

How to Value a Non-Performing Asset

The information on this page is a subjective narration that we hope will help you identify some of the variables that should be considered when seeking to establish the value of an ;asset, at some point in time. This is by no means complete, and is not intended to be relied upon as a definitive guide.

What is the Real Estate Worth?

There are many, many ways to conduct this research, and it is beyond the scope of any one web site to answer this Question, much less provide all the resources available on the Internet. But as a service, and for your amusement, we offer these:

Zillow estimates (programmatically) the value of real estate in many parts of the country. It's only an estimate, and not consistent, but is one source of basic information, which is sometimes very useful, especially when photos are included.

NETR (Nationwide Environmental Title Research) has a web site with links to a great many sources of public records and research on real estate and property information, deeds & mortgages, tax records, parcel maps, assessment records, and public records nationwide. State and County government records may be accessed through their Public Records Online portal (just click on the state and go from there).

As you can see, establishing the value of a nonperforming asset, which is not necessarily the same as establishing the price, is not a trivial matter, although it can be readily described.

One of the reasons that sellers and buyers often enter into an agreement by which the price is contingent upon the ultimate recovery is because there are so many variables, and the parties often disagree on the value of one or more of the variables. Each party is taking a risk, and sometimes everyone is best served, and most comfortable, by sharing that risk.

If you would like more information, or help further researching the valuation of your non-performing assets, or if you would like Cherokee to review them, please contact Jay Wolfkind at (732) 741-2000.

To see an overview of what Cherokee buys, and some of the criteria we utilize, please see An Overview of What We Buy.

What is the Asset Worth?

This is obviously the million dollar question.

There is never one correct answer. It's like asking the worth of an admission ticket to a sporting event. It depends ... on who's buying it, when, where the game is versus the location of the buyer and seller, how hot one or both of the teams is at that moment, the motivation of the respective buyer and seller, resale regulations, and the relative supply and demand. What was the original price? Has the weather forecast changed? And on and on. All of these factors can change over time.

Without being facetious, there can be just as many variables that affect the net present value of a non-performing distressed asset, whether that asset is a tax lien, a mortgage, a piece of property, or something else.

For example ... What was the original face value amount? What is the value of any collateral, such as the real estate? What is the status of the borrower(s), in terms of net worth, other assets, bankruptcy, legal? How long has the mortgage or tax lien been delinquent? What will it cost to prosecute the claim? Are there any hard assets securing the mortgage or tax lien? Is there any cash flow associated with the asset, such as rental income from the property that can be impounded by a plaintiff debtor? What will it cost to seize and sell the assets? How long will all of this take? What is the cost of money, and the opportunity cost, to the respective buyer and seller? Is the asset being sold as part of a large pool, or has the buyer been permitted to cherry pick? Is the seller getting all cash, or taking back on note?

Is there any prospective liability associated with the transaction? For example, is there a likelihood of lender liability associated with a mortgage, or liability associated with entering the chain of title to a property that may have environmental, structural or other problems. In some situations these liabilities can exceed the investment, and can not readily be abandoned by the present holder.

Is the seller getting a reliable indemnity for any future liability from the buyer? Can the buyer backed up any indemnity, financially as well as reputationally? Do the buyer and seller know each other, or know of each other?

How much of a discount is the seller ready, willing and able to accept? How many discrete approvals are necessary to authorize a sale? How little prospective profit is the buyer prepared to accept? How much contingency risk does the buyer perceive? Is either party particularly flush with cash, or in particular need?

Some distressed asset buyers and sellers have models, some of which are very sophisticated, by which they establish a Net Present Value of a pool of non-performing assets, based on these and other variables. Many of these inputs are themselves subjective, but at least there is a somewhat consistent methodology.

Getting more specific, after establishing the par value of a mortgage or tax lien, which is the full amount necessary to satisfy the obligation, including permitted interest and costs, you then begin the process of determining the likelihood of receiving this amount, and how much time, risk, resources and effort will be associated with that attempt.

Is the debt secured, and if so, is it fully secured, partially secured, or is this yet another unknown? Often mortgages are secured by real estate, and the full faith and credit of the borrower. Tax liens, on the other hand, usually wrong with the land which means the only security is the true net present value of the real estate, the owner is usually not obligated to pay the taxes except if they want the lien released from the property. In both of these situations, support if the asset is the property itself, it's the first Question is: how much is the property worth?

To read more regarding the valuation of a Mortgage Asset, please see Priority of Liens .

To read more regarding the valuation of a Tax Lien Asset, see What is a Tax Lien Worth?