FAQ (Seller Financing)
What is a Promissory Note?
In it simplest terms, a promissory note is a written promise to repay a loan or debt under specific terms – usually at a stated time, through a specified series of payments, or upon demand. A promissory note will identify the parties, the amount of the obligation, some form of recitation of the consideration for the obligation (that is, what the debtor received in return for signing the note) and will usually include the terms of repayment, the interest rate that will apply (if any). It may also include an “acceleration clause” which will make the entire amount of the note due if a payment is missed.
Be careful when drafting a promissory note to consider state “usury” laws, the laws defining the maximum interest rate you are allowed to charge. The term “usury” refers to an unlawfully high interest rate. There can be significant consequences for entering into a “usurious” contract. For example, in some states any interest payment made on a usurious loan is applied to the principal balance of the loan – that is, the law transforms the loan into a “zero interest” loan. Most jurisdictions make usury a criminal offense if the rate is particularly high. There can be serious civil, and sometimes criminal, consequences for violating usury laws.
What is a cash flow note?
Investors in cash flows find them to be high-yielding investments. Notes, also called cash flows, income streams, debt instruments or paper, are thought by many to be limited to discounted seller carryback mortgages. Today, however, the terms mean much more. Not only are smart money managers investing in and brokering discounted seller carryback mortgages, trust deeds and contracts for deed, but they buy and broker almost any other debt that is paid over time, not necessarily secured by real estate, that can be a marketable cash flow. This includes annuities, leases, insurance benefits paid in installments (called structured settlements), retirement accounts and royalties, even lottery winnings — and much more. Even such esoteric financial instruments like tax lien certificates, contractor´s liens, medical receivables and commercial accounts receivable (factoring) can provide multiple streams of income. In other words, today the term cash flows or cash flow notes can mean any marketable I.O.U. that represents a promise to pay over time. They are secured by something of value that can be foreclosed on or otherwise claimed by the note owner if the payments are not made.
Why are cash flow notes discounted?
Because of THE TIME VALUE OF MONEY: dollars in the future are worth less than dollars today.
YIELD vs. INTEREST = DISCOUNT
Here is the critical point: the amount of the discounted offer that a seller gets from a prospective buyer is usually a direct result of the difference between the interest rate and the buyer’s yield. A note with a lower interest rate forces the buyer to make up his yield from the discount instead of the interest that accrues each month. So, as the difference between the note’s interest rate and the buyer’s desired yield grows the offer to the seller decreases.
What is a partial note sale?
Actually, there are multiple ways for you to sell a mortgage note, though most note holders initially think only about selling the full note. The other most common way to sell a note is with what we call a partial. For example, let’s assume that you have a mediocre note with 14 more years of payments due. If an investor were to buy the full note, the discount on the note might be too severe. You could have a $100,000 note on which the investor will only pay $65,000 due to risk considerations. Instead, the note buyer could offer you $30,000 for just the next 5 years’ worth of payments, with you receiving everything after that terms ends. That way, the investor feels more protected and, because you are sharing some of the risk, you won’t get hit with such a big discount. There are other advantages to partials including different treatment of capital gains and the option to sell another piece of the note at a later date.
What if you only needed $30,000 to put your child through a year of college, pay off bills, or make another investment? It would not make sense to sell the entire mortgage note. You could sell the next six years of payments to the note buyer instead to get that $30,000. After the six years, the note would revert back to you. For you as the note holder, this solves your cash flow problem while allowing you to keep most of the note and taking a smaller discount than you would have if selling the whole note. You could also sell additional payments in the future if you needed more cash. Another great advantage of selling part of the note is during the term the Note Buyer is receiving payments, your note is strengthening in the sense that your property is building equity, the payor’s credit score is possibly improving, etc. These and other factors that strengthen may allow you to sell the entire note, once it reverts back to you, at a lower discount then you would have originally received, if you tried to initially sell the entire note.
How much is a cash flow note worth?
When deciding to liquidate a seller financed note the first step is uncovering how much the note is worth. To do that, it is best to get inside the head of the Note Buyer. Note Buyers always want a good deal, so most of them will usually begin by conducting a quantitative evaluation of the numbers on a cash flow. The two factors that buyers look at first are the note term and interest rate. The equity in a property, the Note’s Seasoning, the Payor’s Credit Score, and the Note’s Payment History are other critical factors that Note Buyers consider when offering a price to purchase.
How soon will I receive my money?
Our company works diligently to get you your cash as fast as possible for your Seller Financed Note. Once all documents are received and you accept an offer, you can expect your cash in as little as 10 to 14 business days.
As a Note Broker, what are your fees?
One of the questions I ask a Note Seller is, “How much do you want for your Note?” The typical answer is, “As much as possible,” or they will give me a specific price point such as $0.xx on the dollar. A Note Seller’s expectations may or may not be realistic because he/ she may not know how a Note is discounted and the factors used to determine the discount. In the majority of cases, a Note Seller’s expectations are not inline with the Note’s current Market Value. In these situations, I explain, to the Note Seller, how much the Note is worth, why the Note is only worth that amount as well as his/ her options. I do not have a set fee as the company’s ultimate goal is to have the the Note Seller receive as close as possible to their price point assuming their expectations are realistic with the current Market Value, or they are willing to be flexible with their price point. My fees are flexible with the ultimate objective is to create a “WIN-WIN” Situation so buyer and seller are satisfied and the transaction successfully closes.
Why use a Note Broker?
Note Brokers have a unique understanding of buying parameters in the note industry and can locate buyers for secured cash flows. They can also assist professionals to build a positive rapport with their clients by helping to solve their cash flow needs, thereby providing a valuable service for them. In addition, a qualified Note Broker will be able to analyze the note to determine its current Market Value. This helps to hedge against Note Buyers “low balling” that aids the Note Holder in achieving the note’s fair Market Value. When professionals network with qualified Note Brokers, they can receive additional business referrals from two new sources: directly from the Note Broker, and from their own satisfied clients who appreciate being given an option for liquidating their notes for cash.
Our company understands what Note Holders want. We specialize in helping them obtain the most cash possible for their secured payments. Also, property sellers and investors who work with our company, when creating a note, can optimize their situation and maximize the value of the note.
Note Brokers serve to inform Note Holders of their options. They also help to streamline the process of selling a cash flow by helping Note Holders to understand the process. Note Brokers know what types of note terms, interest rates, down payments, and payment schedules Note Buyers prefer, and are familiar with typical yield notes. Therefore, an experienced Note Broker can give homeowners pertinent information to structure a new note so that it sells quickly and lessens the discount to maximize their return.
