How to Calculate and Submit Bids on Mortgage Notes

Why Bid Calculation Is the Most Critical Skill in Note Investing

Every mortgage note investor eventually faces the same question: how much should I pay for this loan? The answer is not a single number. It is the output of a structured process that weighs risk, resolution probability, operational efficiency, and return targets against each other. Get the bid wrong in either direction and you either overpay for a loan that never returns your capital or submit offers so low that sellers stop sending you deals.

Josh Andrews, author of Paper Profits and manager of three note funds totaling close to $10 million in assets under management, shared his pricing framework in a FIXnotes Expert Session. Josh has been investing in mortgage notes since 2012 and focuses primarily on non-performing second liens -- the asset class where bid calculation is both most nuanced and most consequential. What follows is a distilled version of his approach, organized into the principles, formulas, and practical strategies that drive profitable bidding.

How Should You Think About Risk When Bidding?

Before you open a spreadsheet or calculate a single number, you need to establish the right mindset about risk. Josh puts it bluntly: nothing is a sure thing. When someone describes a deal as "guaranteed" or "can't lose," that is a red flag, not a buying signal.

Risk in note investing is a function of unknowns. Some unknowns you can identify through due diligence -- senior lien status, bankruptcy filings, property condition. Others you cannot see until after you own the loan -- a borrower who lawyers up, a servicer policy change, a state regulatory shift. The unknowns you are aware of should be reflected in your pricing. The unknowns you cannot foresee are why you need a margin of safety built into every bid.

What Is a Hurdle Rate and Why Does It Matter?

Your hurdle rate is the minimum return you need to earn on a deal for it to be worth doing. This is not an abstract concept -- it is a business-specific number driven by your cost of capital, your operating expenses, and your profit requirements.

Ask yourself:

• What is my cost of money? If you are using your own capital in a self-directed IRA, your hurdle rate can be lower. If you are paying investors a preferred return plus a profit split, your hurdle rate must cover those obligations and still leave margin.
• What are my operating costs? Legal fees, servicing fees, asset management overhead, and team compensation all reduce net returns. Your hurdle rate must account for these costs.
• What makes this worth my time? A 200% ROI on a $2,000 investment sounds impressive until you realize you spent three months and $1,500 in legal fees to earn $4,000. The dollars matter as much as the percentages.

This last point is critical. High ROI does not mean high dollars. You can achieve extraordinary percentage returns on small-balance loans and still not generate enough absolute profit to sustain a business. If you are running a fund or paying a team, prioritize deals that produce meaningful dollar returns at strong -- but not necessarily record-breaking -- ROI. Save the home-run percentage plays for your personal IRA.

What Should You Base Your Bid On?

Bid on UPB, Not on Arrears

One of the most common mistakes newer investors make is getting excited about the total amount receivable -- the unpaid principal balance (UPB) plus all accumulated arrears, late fees, and accrued interest. On a loan that has been non-performing for a decade, that arrears figure can be substantial. It looks like money sitting on the table.

It is not.

Bid on UPB. Treat arrears as upside, not as the basis for your pricing. Here is why:

• Servicers are restricting arrears collection. Several major servicers -- including FCI, SN Servicing Corporation, and increasingly others -- are assigning zero interest rates to loans that were transferred as charge-offs. If your servicer will not let you collect arrears, that portion of the receivable is worthless regardless of what the data tape shows.
• States are tightening enforcement. Regulatory pressure is moving in one direction: toward borrower protection. Requiring complete payment history back to origination, limiting collectibility windows on HELOCs, and increasing scrutiny on aged debt are all trends that reduce the practical value of arrears.
• Arrears collection requires proof. Even in states that currently allow full arrears collection, you may need to produce payment history going back to origination if the borrower disputes the balance. If your collateral file does not include that history, you have a documentation problem that could cost you the entire claim.

The exception: if you have strong evidence that arrears are fully collectible -- a clean payment history, a cooperative servicer, and a favorable state -- you can factor a portion of arrears into your pricing. But this should be the exception, not the rule. The safest approach is to bid on UPB and treat any collected arrears as a bonus that improves your actual return.

The Worst-Case Pricing Test

Before finalizing any bid, Josh runs what he calls the wipeout test: if we buy this loan and get completely wiped out, can we absorb the loss?

This is not pessimism. It is risk management. On a $3,000 second lien, a total loss is painful but survivable. On a $150,000 second lien -- or the $400,000 bid Josh described on an $800,000 balance loan -- a total loss could devastate a fund. The higher the out-of-pocket cost per asset, the more rigorous your due diligence needs to be and the more conservative your pricing should be.

Lower out-of-pocket per asset is one of the core appeals of second lien investing. You spread your capital across more loans, which means any single loss has a smaller impact on the portfolio. But large-balance seconds do exist, and when you bid on them, every data point in your due diligence needs to line up.

What Bid Ranges Are Realistic for Non-Performing Seconds?

Based on current market conditions, here are the general ranges for non-performing second lien bids as a percentage of UPB:

These are guidelines, not rules. Your specific bid on any individual loan depends on the data points you uncover during pre-bid research. The goal is to land in a range where you are competitive enough to win allocations but conservative enough to maintain profitability across the portfolio.

Josh notes that the days of bidding 20 cents on the dollar for California properties with hundreds of thousands in equity are over. The market is more competitive now, and pricing reflects that. But the business remains profitable for disciplined buyers who understand their numbers.

What Due Diligence Drives Your Bid Price?

Your bid is only as good as the information behind it. Before submitting an indicative bid, you need to gather enough data to form a reasonable picture of each loan's risk and resolution potential -- without spending significant money on vendor reports.

Pre-Bid Data Points

The Borrower Profile Factor

One of Josh's less conventional but highly practical data points is pride of ownership. Pull up Google Street View and look at the property. There is a meaningful difference between a home with flowers in the yard, a flag on the porch, and a maintained fence versus one with furniture on the lawn and visible neglect. These are two different borrower types, and they pay differently.

A borrower who takes pride in their home has emotional equity beyond the financial numbers. They are more likely to engage in a loan modification or discounted payoff because they want to keep the property. A borrower who has checked out -- physically or emotionally -- presents a longer, more expensive resolution path.

This does not mean you avoid loans on neglected properties. It means you price them differently. The maintained property with a cooperative borrower commands a higher bid. The neglected property with an absent borrower gets a lower one.

What Happens After Your Bid Is Accepted?

Getting a verbal agreement on price is not the finish line -- it is the starting line for comprehensive due diligence. Josh's process follows a clear sequence:

1. Verbal agreement on per-loan pricing. Even on pool purchases, price every loan individually. This gives you the ability to fade or remove specific loans later if due diligence reveals problems.
2. Full due diligence review. This is where you spend money. The key checks include:

3. Price adjustment or loan removal. Expect some loans to drop out of any pool. Due diligence will reveal issues -- title defects, statute of limitations problems, missing documentation -- that were not visible at the indicative bid stage. When you fade pricing or kick a loan from a trade, share your evidence with the seller. Send over the BPO, the title report, or whatever documentation supports your decision. This builds trust and helps the seller understand the adjustment.

The Statute of Limitations Problem

Statute of limitations has become one of the most significant risk factors in non-performing second lien investing. When a loan is accelerated, the clock starts ticking on the lender's ability to enforce the debt. In many states, once the statute expires, the loan is effectively worthless -- regardless of how much equity exists or how strong the borrower's credit is.

The challenge is that statute of limitations rules vary dramatically by state and are actively evolving. Illinois, for example, has recent rulings that reduced the collectibility window on equity lines from ten years to five. Georgia's CFPB office is aggressively enforcing consumer protection rules. North Carolina requires attorney management from the beginning of the servicing process.

Josh's approach is to maintain a state-by-state reference database for initial pricing guidance, then refer to attorneys for a full review on any loan that moves past the indicative bid stage. This two-step process saves time on the front end while catching the issues that matter before you fund.

How Should You Handle Pool Purchases?

As the market has become more competitive, sellers increasingly prefer buyers who take entire pools rather than cherry-picking individual assets. This changes your bidding strategy in several ways:

• Be prepared to accept mixed pools. Not every loan in a pool will fit your investment criteria. Some will be low-balance, some will have weak fundamentals, and some will be in asset classes you do not typically pursue. The willingness to take the entire pool makes your offer more attractive to the seller.
• Line up redistribution partners. Before you bid on a pool, identify buyers in your network who want the assets you do not. Low-UPB seconds, certain geographic markets, or specific asset types may not fit your fund but could be exactly what another investor is looking for. Buy the whole pool at a favorable price, keep what fits, and parcel out the rest.
• Price every loan individually. Even though you are buying a pool, your internal pricing should be loan-by-loan. This gives you a clear picture of which assets are driving the portfolio economics and which are along for the ride. It also gives you the ability to negotiate intelligently if specific loans need to drop out during due diligence.

What Role Does Seller Relationship Play in Bidding?

Price is not the only variable that determines whether you win a trade. In a market where sellers may receive dozens of bids on the same pool, your reputation, reliability, and professionalism can be the deciding factors.

Put Yourself in the Seller's Shoes

If you were selling a portfolio and had fifty buyers contacting you, which ones would you prioritize? The answer is straightforward:

• Buyers who respond quickly. If a seller sends you a tape and you go silent for six days, they move on. Even if you are not interested, communicate that promptly. A quick "thanks for sending -- this one doesn't fit our criteria" preserves the relationship for the next trade.
• Buyers who are easy to work with. Grinding a seller on every line item, making unreasonable demands, or changing terms after a verbal agreement destroys Goodwill. Be firm on your numbers but professional in your approach.
• Buyers who are transparent. When due diligence reveals a problem, share the evidence. If you ordered a BPO that came in lower than expected, send it to the seller. If title shows an issue, share the report. This transparency supports the seller's internal process and builds the trust that leads to preferred access on future deals.
• Buyers who close. Nothing damages a reputation faster than failing to fund a trade you committed to. If you say you are going to buy, buy. If circumstances change, communicate early and honestly.

Build Goodwill Through Small Gestures

Sometimes making a seller relationship work means accepting a small concession on your side. Taking a hit on a borderline loan to keep the overall trade moving, absorbing a minor documentation issue rather than renegotiating, or simply being the buyer who always responds and always follows through -- these gestures compound over time into preferential deal flow that more than compensates for any individual concession.

Josh summarizes the philosophy simply: how would you want to be treated if you were the seller? You do not need to roll over on pricing. You do need to be honest, responsive, and dependable.

What Are the Key Metrics for Measuring Deal Performance?

Once you have acquired loans and begun working resolutions, tracking performance against your original pricing assumptions is essential for refining your future bids.

Track these metrics at the portfolio level and at the individual-loan level. Over time, the data will tell you which types of loans, which price points, and which borrower profiles produce the best risk-adjusted returns -- and that feedback loop is what turns a bidding framework into a competitive advantage.

Putting It All Together: A Bid Calculation Checklist

Before you submit your next indicative bid, run through this checklist:

1. Establish your hurdle rate. Know the minimum return that makes a deal worthwhile given your cost of capital, operating expenses, and profit targets.
2. Base your bid on UPB. Treat arrears and late fees as upside, not as pricing basis.
3. Run the wipeout test. Ask whether a total loss on this loan would be catastrophic. If yes, your due diligence must be proportionally rigorous.
4. Assess the key data points. Senior lien status, equity, borrower profile, bankruptcy, statute of limitations, payment history, charge-off status, and occupancy.
5. Price to the risk. Strong assets with multiple favorable factors command higher bids. Weak or uncertain assets get lower bids or a pass.
6. Factor in your resolution efficiency. If you are faster or more effective at workouts than the average buyer, you can bid slightly more aggressively -- but know your limits.
7. Consider the seller relationship. Your bid is part of a broader relationship. Be competitive, professional, and transparent.
8. Price pools loan-by-loan. Even on bulk purchases, know what each asset is worth individually.
9. Plan for fallout. Not every loan will survive due diligence. Build your portfolio assumptions around the loans you expect to keep, not the full tape.
10. Track and iterate. Use completed deal data to refine your pricing models over time.

The investors who build sustainable note businesses are not the ones who find a secret formula for pricing. They are the ones who apply a disciplined, repeatable process to every tape, learn from every resolution, and maintain the seller relationships that keep deal flow coming. The bid is where all of that discipline shows up in a single number.