Old trumps young for trail book transactions

Nick Young Monday, 03 April 2017 Comments 0
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Trail Homes' Nick Young explains how to get the most from your trail book, and why the older a trail, the more valuable it is.

When it comes to trail book transactions, we’ve definitely noted some fundamental shifts over the last year. These include:

  • Brokers are increasingly viewing their trail book as an asset to actively help finance their business goals at different stages of their company’s life cycle, versus the previous misconception of solely aligning trail book sales with retirement, and therefore missing its true opportunity
  • The increasing number of partial are partial versus whole book transactions. This enables brokers to ‘have their cake and eat it too’, meaning they can use some of the trail as an asset to invest in business growth, while retaining the rest as a secure annuity stream

In both cases, however, the main reason for the uptake is that clients aren’t bundled into the transaction, which means that brokers can continue to write new loans, refinance old loans (and receive future upfront and trails from these new loans), with their client base intact and untouched.

What’s clear is that the market is unquestionably becoming more accustomed to utilising trail book transactions as a ‘self-funded’ revenue stream to grow their business, alleviate working capital or address debt. That said, what may not be commonly known is that with trails, the older the trail, the more valuable it is. 

Consider these below scenarios by way of example, with all components being exactly the same apart from the age of the trail book:

Two-year-old book

Trail book value:          $100,000 p.a.

Transaction:                 50%

Rate:                            x 1.5 of its annualised trail commission

Return:                         $75,000 upfront

 

Five-year-old book

Trail book value:          $100,000 p.a.

Transaction:                 50%

Rate:                            x 2 of its annualised trail commission

Return:                         $100,000 upfront 

The reason for the difference is that the market rate for purchasing a trail book is 1.5–2 times its annual value and is largely dependent on the maturity of the loan. Older loans are more stable and have no clawbacks – this makes them a more valuable asset. 

The upside of the sale, despite the age of the book, is that clients remain with the broker (i.e. they were not part of the sale), the brokers continued to receive ongoing commissions from the remaining portion of the book that was not part of the sale, and that ultimately the sale enabled business growth and/or the ability to generate working capital through a ‘self-funded’ structure.

The upshot: a trail book is a massive asset. We encourage brokers to make it perform in 2017.

Nick Young

Nick Young

Nick Young is a results-driven specialist who has more than 20 years’ experience in the mortgage broking industry, and now heads Trail Homes: Australia’s most established and longest serving trail book purchaser.  

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