How to Price & Submit Bids

Pricing is the most consequential skill in note investing. Price too high and you wipe out your profit margin before the workout even starts. Price too low and sellers stop sending you deals. The right price is the output of a structured process that weighs risk, resolution probability, and return targets against each other.

Three Pricing Approaches

Different asset types call for different pricing methods. The approach you use depends on whether the loan is performing, non-performing, or somewhere in between.

1. Percentage of UPB

The simplest and most common method. You express your bid as a percentage of the unpaid principal balance. A bid of 45% on a loan with a $60,000 UPB means you are offering $27,000.

This approach works as a quick screening tool and a common language between buyers and sellers. The percentages vary by asset class:

These ranges are guidelines, not rules. Market conditions, competition, and loan-specific factors shift them constantly.

Bid on UPB, not on arrears. One of the most common mistakes is getting excited about the total amount receivable -- UPB plus all accumulated late fees and accrued interest. Treat arrears as upside, not as the basis for your pricing. Several major servicers assign zero interest rates to loans transferred as charge-offs, and regulatory trends are moving toward stricter limits on arrears collection. If your pricing depends on collecting arrears and the servicer will not let you, your model falls apart.

2. Cash-on-Cash Return

For performing and re-performing loans, cash-on-cash return is the primary pricing tool. It works backward from the monthly payment to determine the maximum price you can pay at a given yield target.

The formula:

Maximum Purchase Price = ((Monthly Payment - Servicing Fee) x 12) / Target Cash-on-Cash Return

For example, a re-performing loan with a $681 monthly payment and a $20 servicing fee produces $7,932 in net annual income. At a 12% target return, the maximum price is $66,100. At 16%, it drops to $49,575.

Critical guardrail: Never pay more than UPB. If the cash-on-cash formula produces a price above the remaining balance owed, cap your bid at UPB. On small-balance, high-coupon loans, the formula can produce unrealistic prices without this cap.

For a detailed walkthrough with worked examples, read the blog post on pricing notes using cash-on-cash return.

3. Outcome-Based Pricing

For non-performing loans, outcome-based pricing models the actual financial result of your two primary resolution strategies: a loan modification or a foreclosure and REO sale. Instead of pricing from a percentage of UPB, you work backward from projected cash flows and exit values.

Modification scenario: Estimate a conservative monthly payment the borrower might accept, factor in a potential down payment, model the cash flow, and back into your maximum purchase price at your target ROI.

Foreclosure scenario: Determine the as-is property value from a BPO or AVM, estimate the foreclosure timeline for the state, calculate total expenses (legal fees, taxes, insurance, preservation, commission, holding costs), and subtract everything from the projected sale price discounted by your target return.

With both prices calculated, you choose your approach:

Most experienced investors default to the conservative approach on individual loans and use probability weighting only on larger pools where diversification reduces single-loan risk.

For the full framework with expense breakdowns, see the blog post on how to value NPLs to make an offer.

The Indicative Bid vs. the Final Offer

Understanding the difference between these two is essential. They are not the same thing, and confusing them will cost you either money or credibility.

The Indicative Bid

Your indicative bid is your initial offer based on the seller's tape data, before you have spent money on due diligence. With professional sellers, this is typically a spreadsheet with loan-level prices alongside terms in the body of an email. With lenders who have never sold on the secondary market, it might take the form of a complimentary portfolio analysis presenting a range of values.

The Letter of Intent (LOI)

When your indicative bid is accepted, the next step is formalizing it in a letter of intent. The LOI includes:

• The price -- your loan-level or pool-level offer
• Contingencies -- your right to adjust or withdraw based on due diligence findings
• Timeline -- typically 30 days for exclusive due diligence
• Exclusivity -- confirmation that the seller will not market the loans to other buyers during your due diligence period
• Proof of funds -- especially important with new sellers who have not worked with you before

The LOI is non-binding in the sense that you are not obligated to close if due diligence reveals problems. But it is a commitment of intent, and backing out without a valid, documented reason damages your reputation.

The Final Offer

After completing due diligence -- title searches, BPOs, credit reports, collateral file review -- you either confirm your original price or adjust it based on what you found.

Reasons to adjust (called "fading" your bid):

When you provide fades, send the evidence. Share the BPO, the title report, or the credit data that supports your adjustment. This transparency builds trust with the seller and supports their internal approval process.

Move fast. If your 30-day due diligence period yields clean results, submit your final offer immediately. Sellers appreciate speed, and a buyer who closes quickly earns preferential access to future deal flow. If delays arise -- title reports taking longer than expected, for example -- communicate proactively.

When to Renegotiate

Renegotiation is appropriate when due diligence reveals material differences from what was represented -- property value significantly lower, senior lien status changed, collateral documents missing, or occupancy different from what was disclosed. It is not appropriate as a general negotiating tactic after a price has been agreed, and it is never appropriate for "I changed my mind" or minor discrepancies.

Every renegotiation carries a relationship cost. Balance the dollars you save on this trade against the deal flow you might lose in the future.

Common Pricing Mistakes

• Forgetting the servicing fee. The monthly payment on the tape is gross; your cash flow is that minus the servicer's $20 to $50 fee. On a $300 payment, a $20 fee changes your price by $2,000+.
• Using a single target return for all loans. A first lien with 50% equity is not the same as a recently modified second with minimal equity. Adjust for risk.
• Chasing high ROI on low-dollar deals. A 200% return on a $2,000 investment is $4,000. Prioritize meaningful absolute dollar returns, not just percentages.
• Bidding on every tape. Passing with a prompt, professional response preserves the relationship. Low-ball bids on every tape damages your reputation.

The Bid Checklist

Before submitting your next offer: (1) establish your hurdle rate, (2) base your bid on UPB, (3) run the wipeout test, (4) assess equity, senior lien status, borrower profile, bankruptcy, and statute of limitations, (5) price to the risk, (6) consider the seller relationship, (7) price pools loan-by-loan, and (8) plan for fallout -- not every loan will survive due diligence.

The investors who build sustainable businesses are the ones who apply a disciplined, repeatable process to every tape and maintain the seller relationships that keep deal flow coming.