Knowing the value of things is important—and real estate and mortgage notes are no different.
Whether you are exploring offering seller financing or looking into selling a note, understanding the value you are providing is paramount.
Not only for your financial safety but for reselling down the road as well.
What is LTV?
Loan to Value, or LTV, is an indicator of potential consistency. Shown as a percentage, LTV tells buyers how likely the payor will continue to pay.
To calculate, LTV is all of a payors’ loans divided by the property value, NOT the sale price. Additionally, it’s important to note that LTV includes all outstanding loans. If a payor has a first and second lien, both are added and then divided by the property value.
Let’s look at an example.
Say a property is worth $100,000.
The payor has loans totaling $65,000.
The LTV would be 65% derived from 65,000 / 100,000. This also means the equity in the property is 35%.
The lower the percentage, the better. A high LTV means the financer has more to lose than the payor.
If a payor has a loan obligation amounting to 95%, that means they owe the financer 95% of the property’s value (equity of the property is only 5%). It wouldn’t be a surprise to see this payor default and walk away from the property – they don’t have much in it.
What is ITV?
ITV in Note Investing stands for Investment to Value.
Also a percentage, ITV indicates the likelihood the investor will get their money back if the payor defaults. The only real protection a note investor has is collateral—the value of the property.
To calculate, take the amounted invested divided by the property value. Let’s look at the previous example.
Say the investor paid $55,000 on the $65,000 note, with the property value still at $100,000. The ITV is 55%, with an LTV of 65%.
It’s critical to consider senior liens when calculating ITV. They have priority over you in the event the payor defaults.
If you purchase a $30,000 second lien for $15,000 behind an existing $45,000 lien, the ITV would be 60% for a $100,000 property. How? Take your investment added to the original lien value divided by the property value.
Why do LTV and ITV Matter?
Both help indicate the security of your investment.
If offering seller financing, you do not have a bank backing your investments. Same for note investors—you want a profitable, yet smart and safe investment.