Valuing NPLs: Market vs. Yield Approach with Bill Bymel

Two Frameworks for Pricing Non-Performing Loans

Every non-performing loan (NPL) buyer faces the same core question: how much should I pay? The answer depends on which valuation framework you apply. There are two dominant approaches in the secondary mortgage note market — the market approach and the yield approach — and understanding when and how to use each one is what separates disciplined investors from those who guess at pricing and hope for the best.

Bill Bymel, a principal at Spurs Capital who has been a signatory on close to a billion dollars of non-performing first-lien mortgage acquisitions since 2008, lays out both frameworks and demonstrates how they work in practice on a live trade. His perspective is rooted in first-lien investing, where collateral coverage and foreclosure timelines drive every pricing decision.

The Market Approach: Pricing as a Percentage of Property Value

The market approach values an NPL based on a percentage of the current fair market value (FMV) of the underlying real estate. This is the most widely referenced pricing convention in the industry, and it is how sellers, brokers, and institutional buyers typically communicate where loans "trade."

At a macro level, the market for non-performing first-lien mortgages has traded in the following ranges:

These percentages reference the current as-is value of the property, typically established by a broker price opinion (BPO), not the unpaid principal balance (UPB). Sellers will sometimes quote pricing in terms of UPB percentage, but experienced buyers anchor to collateral value because it represents the actual recoverable amount if the loan proceeds to foreclosure and REO liquidation.

Why Institutional Buyers Pay More

When you see institutional pools trading at 90% of BPO or higher, the natural reaction is to wonder how anyone makes money at those prices. The answer is leverage and scale. Large funds like Neuberger Berman or PRP use credit facilities at 4-5% cost of capital and bid to a 9-10% yield expectation. They profit on the spread between their cost of funds and their blended return across thousands of loans. They manage forests, not trees — individual loan outcomes matter far less when the portfolio is large enough for statistical averages to hold.

Individual and small-fund investors do not have access to that kind of leverage or diversification. If your capital costs are higher and your portfolio is smaller, you need a wider margin of safety on each loan. That is where the yield approach becomes essential.

Delinquent Taxes: A Critical Pricing Adjustment

One frequently overlooked detail in the market approach is whether quoted prices are gross or net of delinquent property taxes. Bymel prices all bids net of delinquent taxes — meaning if a seller quotes 63% of BPO, the expectation is that the seller brings property taxes current as of the closing date. If two years of taxes are outstanding, the effective purchase price might drop to 58% of BPO after netting out the tax balance. Always clarify this assumption with the seller before submitting a bid. Failing to account for delinquent taxes can erode your margin by thousands of dollars per loan.

The Yield Approach: Pricing to a Target Return

The yield approach works in the opposite direction from the market approach. Instead of asking "what percentage of property value should I pay?" you ask "what price produces my minimum acceptable annualized return given my projected resolution timeline and costs?"

Bymel's firm targets a minimum 15% annualized return on first-lien NPL investments. That is the hurdle rate. Every loan must clear it, or the bid goes lower until it does — or the loan is passed on entirely.

Building a Yield-Based Bid

The yield approach follows a specific sequence of inputs:

1. Determine the current value of the real estate. This is the same starting point as the market approach, but here it serves as a ceiling on your gross recovery rather than a pricing anchor. There are arbitrage opportunities in BPO accuracy — sellers sometimes provide stale or inaccurate valuations. Bymel describes a deal in his active trade where the seller's BPO was approximately a million dollars below actual market value, creating significant upside on a loan he appeared to be paying 90% of BPO for on paper.

2. Subtract the negative carry. Negative carry encompasses all costs you expect to incur while working the NPL to resolution: legal fees, property preservation, forced-placed insurance, servicer advances, and any other holding costs. These expenses accumulate from the day you close on the loan until the day you receive final proceeds.

3. Estimate the resolution timeline. The timeline is the single largest variable in annualized return calculations. A loan that resolves in 6 months at a 20% gross margin produces a far higher annualized return than a loan that resolves in 24 months at the same margin. Timeline estimation depends on:

• The current foreclosure status (pre-filing, filed, judgment obtained, sale scheduled)
• The state and county — judicial vs. non-judicial, and court congestion
• The specific resolution strategy (loan modification, short sale, deed-in-lieu, discounted payoff, or full foreclosure to REO)

4. Calculate your maximum bid. With projected gross recovery, estimated expenses, target annualized return, and expected timeline in hand, you discount the net proceeds back to present value at your hurdle rate. The result is the maximum price you can afford to pay.

Market Approach vs. Yield Approach: Side-by-Side

In practice, experienced buyers use both approaches together. The market approach provides a sanity check — if your yield model says you should pay 15% of BPO for a loan in a state where the market trades at 60%, either you have identified a genuinely distressed asset or your assumptions need revisiting. The yield approach provides the actual number you put on paper.

Inside a Live Trade: Bridging the Gap

Bymel walked through an active acquisition from Carrington Mortgage Services to illustrate how both frameworks apply to a real deal. The key parameters of the trade:

Several details of this trade are instructive:

Selective bidding within a large pool. Bymel bid on $25 million out of a $130 million tape. The seller countered with a 23-loan subset at $9 million. The ability to cherry-pick from a large pool — rather than bidding on the entire tape — is a significant advantage that smaller buyers can leverage. Large institutional funds often must take entire pools, tails and all. Targeted buyers can focus on the loans with the highest conviction.

Mixed resolution strategies. Not every loan in the pool follows the same exit path. Bymel mapped each loan to a specific projected outcome:

Each loan received a manually assigned resolution timeline ranging from 6 months to 24 months, with the longer timelines reserved for loans headed to full foreclosure or REO liquidation.

Information advantage as a pricing edge. The gap between the 51% of BPO that this trade appears to represent and the 15-19% annualized return it actually produces comes partly from informational edge. Bymel's firm does third-party asset management for Carrington on some of these same loans, meaning they had direct knowledge of the legal status, borrower behavior, and resolution progress on specific files before bidding. This insider knowledge allowed a higher bid than a blind buyer would submit — which in turn won the allocation — while still clearing the hurdle rate because the risk was better understood.

Not every investor will have this level of access, but the principle is universal: the more you know about a loan before you bid, the more precisely you can price it and the less margin of safety you need to build into your offer.

The Role of State and Jurisdiction

Geography is a first-order pricing variable, not a footnote. New York is the most frequently cited example of how jurisdiction impacts both pricing and returns. Judicial foreclosure states require court proceedings at every step, and some New York courts are notorious for pro-debtor rulings and prolonged timelines. This risk is reflected in market pricing — first-lien NPLs in New York trade in the 40s and 50s of BPO, well below the national average in the 60s.

But lower pricing does not automatically mean higher returns. The extended timelines, elevated legal costs, and risk of litigious borrowers in judicial states can consume the discount you received at purchase. Bymel is candid about this: if he were an individual investor without specialized legal infrastructure in New York, he would not buy a high-balance New York loan from a seller who likely knows more about the file than he does.

The takeaway is that state-level foreclosure dynamics should be baked into your pricing model at the outset, not treated as an afterthought. A loan priced at 50% of BPO in a 36-month judicial state may produce a worse annualized return than a loan priced at 65% of BPO in a 6-month non-judicial state.

Mitigating Risk on Large-Balance Loans

Higher-balance NPLs carry concentrated risk. A $30,000 loan that goes sideways is a manageable loss. An $800,000 loan against a borrower who has been in litigation with the previous lender for a decade is a potential portfolio-killer.

Bymel identifies several risk mitigation strategies for large-balance first liens:

• Deep legal due diligence before bidding. On his 23-loan trade, he immediately sent 8-10 loans to outside counsel for pre-purchase review of the legal files.
• Boots-on-the-ground asset management. Having local agents who can physically inspect properties and knock on doors provides information that no tape or data file can capture.
• Buying "tails" that other buyers have kicked. When a loan has been rejected by prior bidders, it may carry additional risk — but it also creates negotiating leverage with the seller, who may be willing to reprice aggressively.
• Litigious borrower screening. Third-party services (such as those offered by collection agencies) can scrub a portfolio for borrowers with a history of filing countersuits or aggressive legal tactics.

Practical Takeaways for Individual Investors

Institutional pricing conventions exist, but they do not apply to individual note investors. You are not competing head-to-head with billion-dollar funds on the same pools. The opportunities for smaller buyers exist in the spaces that institutions overlook: lower-value properties, small pool sizes, complex legal situations, and geographic niches where scale players do not operate.

When building your pricing workflow:

1. Start with the market approach to screen. Know the going rate for NPLs in the states and property types you target. If a seller is asking well above market, either they have a reason or they are testing you.
2. Use the yield approach to set your actual bid. Your target annualized return is your non-negotiable constraint. Work backward from projected resolution proceeds, subtract all costs, discount by your hurdle rate and timeline, and arrive at a maximum purchase price.
3. Verify the BPO independently. Seller-provided property values are frequently inaccurate — sometimes intentionally inflated, sometimes outdated. Always run your own valuation using multiple sources before finalizing a bid.
4. Price net of delinquent taxes. Confirm with the seller whether outstanding property taxes are being brought current at closing or whether you are inheriting the balance.
5. Model multiple resolution outcomes. Assign each loan a primary and secondary exit strategy, and price to the more conservative scenario unless you have high-confidence information that supports the optimistic outcome.
6. Factor in jurisdiction. Judicial states demand deeper discounts to compensate for longer timelines and higher legal costs. Do not apply a blanket pricing percentage across states with fundamentally different foreclosure regimes.
7. Know your counterparty. Who is selling the loan and why matters as much as the data on the tape. A seller dumping tails from a portfolio they have already profited on is in a different negotiating position than a bank shedding balance sheet risk.

The goal is never to win every bid. It is to build a repeatable process that produces offers clearing your return threshold — and to have the discipline to walk away when the numbers do not work, no matter how attractive the deal looks on the surface.