First, the definition of a Promissory Note:
A promissory note is defined as ‘A promise to pay a certain amount of money in a periodic or future lump sum, defined by the terms and conditions contained in the Promissory Note Document.’ Typically, a promissory note is constructed during a tangible property sale event in which the seller of the property recovers a promise to pay (promissory note) in lieu of cash.
Owning a promissory note, rather than requiring cash, sounded like a good idea at the time you sold your real estate or business or accepted your Structured Settlement because you would have a guaranteed steady stream of monthly payments at a reasonable interest rate. . Good?
So, he soon discovered that:
1. The interest rate you charged now is too low,
2. The payer of the promissory note does not always make payments on time so you have to call and demand payments,
3. You have to pay income taxes,
4. You realized that the value of your ticket decreases every day and,
5. Could put the lump sum of the note money to a better use or now needed.
So, you decide to sell your IOU.
1. First you went to your bank and they did not buy it from you nor did they have information on how to sell it.
2. Next, he asked his friends and one told him Find a Note Broker. So, he searched the internet and found a million websites claiming to be able to buy his note. You talked to some but did not get any satisfaction or some calls were returned. Now comes the frustration.
This is how the note buying business works:
1. Notes are purchased by reputable and experienced investors seeking long-term returns on an investment using their own money. Investors can be individuals, groups, companies, pension funds or specialized funds.
2. A note is valued according to its long-term return to the investor. It’s called, Time Value of Money. However, a dollar today is worth more than a dollar tomorrow. Therefore, your note can be purchased at a discount to or less than its current principal amount to provide the long-term return the investor needs.
3. The yield and value of the note is determined by the interest rate of the note, the credit score of the payer of the note, the term of the note, the repayment schedule, the loan-to-value ratio (LTV), the equity of the payor on the property, the security of the promissory note, and the terms of the promissory note.
4. An investor may purchase your note based on the type of note required, the note criteria, and the required yield.
5. Note investors specialize in different types of notes. Some buy only First Deed of Trust Real Estate Notes or Mortgages, some buy only Business Notes or Annuities, etc. To cut a long story… You don’t know if the person you are talking to is a broker or an investor or both or what type of rating, criteria and performance is required. Frustrating. Now you think all the note investors and brokers and the whole note buying industry is sleazy, unethical, unprofessional and worthless. Well I admit some of that is true for many non-professional brokers, but REAL Investors and REAL Brokers are here, they are honest, professional and provide a valuable service. How do you know? Just ask if they are a broker or direct investor, what type of notes they want, and what their criteria and process are. More on this in another article.
Here’s what to know and do about your promissory note:
A. The value of your ticket is determined by when and how you build it. When you build your note, assume that you will want to sell it within the first year. If built properly and professionally, it will have a high value. Professionally means using the services of an experienced real estate or business attorney to construct your Note. Never use one of the simplified note forms available anywhere. Think about it…why do you think real estate lenders use exquisite, complex, and comprehensive loan documents that are constructed to their own lending criteria? Notes secured by real property are then valued at the appraised value or sale price of the property less the payer’s equity and the payer’s creditworthiness. Trade notes are valued based on the creditworthiness of the payer of the note and historical business performance.
b. Higher value notes are those in which the current principal amount of the note does not exceed:
Yo. 80% of the sale price of the Real Estate if it is a 1st Deed of Trust Note/Mortgage, or 20% if it is a 2nd Deed of Trust and the total of a 1st and 2nd does not exceed 80% of the sale price or,
ii. If it is a commercial note, 67% of the commercial sale price.
against The payor responsible for the performance (payments) of the Note’s credit score must be above 640 (national average credit score is 678) when you construct the Note (the lower the credit score, the lesser the value of the note). Always obtain a current credit report on the payer before concluding a note transaction. You have the legal right (under the federal Fair Credit Act) to request or obtain one because you are going to be your creditor. Go to any of the three credit reporting agencies and get a Tri-Merge credit report (it will provide you with a payment score and report from each of the three credit reporting agencies). You will need the payer’s full name, address, social security number, and date of birth. You do not need your payor’s approval to get your credit report because you will be the payer’s creditor.
d. Bond payments must be monthly.
my. The terms of the Note must be:
Yo. For Real Estate Promissory Notes: ‘Monthly Amortized, Late Payments’. Or, Monthly late payments amortized over 15 to 30 years with a full balloon payment over 5 years. Try not to agree to the ‘Interest only, full balloon at the end’ Terms.
ii. For Trade Notes: ‘Amortized Monthly, Payments in arrears for no more than 5 years’.
F. Your note must have an interest rate tied to Prime + 2%. The premium for this date is 8.25%.
gram. Your business note must have a personal guaranteed guarantee from the payer equal to the original principal amount of your note. This Collateral must be tangible, such as Real Estate, which is owned by the payer outside of the business transaction and note. Your note must have at least one personal guarantee.
H. The above are the basic ones. Your knowledgeable lawyer should know how to write your note correctly and know who we are so you can contact us from our website for information and instructions.
Now, selling your note:
1. Your first goal is to receive a cash purchase quote. Only direct investors can provide this. A broker will take the information from him, find an investor, get a quote, and then present you with that quote minus his fee. Sometimes brokers have investors that will pay you more cash than professional investors, but there is usually a catch. Do not misunderstand. Note brokers serve a valuable purpose.
2. Gather all the facts about your promissory note and property.
3. Find a reputable Note Broker or Direct Investor. Search the net with the keywords ‘sell note’, ‘note buyer’, ‘mortgage buyer’, ‘annuity buyer’, ‘structured settlement buyer’. Get in touch with the ones you like and ask questions. Just remember, there are very few REAL direct investors. Just ask.
4. If you wish to use a Broker, (A reputable Title Broker will request specific information about your title, package the information, and communicate with us and other Title Buyers with whom you have brokerage agreements). Some will broadcast your note to everyone on the network. The transmission will devalue your bill to almost $0.00. So if you want to use a broker, ask them to provide you with the list of their contracted buyers they’re sending it to, and agree in writing that they’ll only present your note to those they’ve agreed to.
5. If you want to list your note for sale on the Internet yourself, there are many Note Listing sites where you can list your note and investors will find your note and contact you. This is called ‘Transmission’. See #4 above.
6. An investor/note buyer will request detailed information about your note before providing you with a cash purchase quote. Logical, right?
7. You should receive numerous phone and email communications from your selected broker or investor prior to providing a cash purchase quote.
8. The cash purchase price of your Bond is usually a Net-Cash-To-You price. Sometimes it will be “$XXXXX.XX with your Appraisal and Title provided. You should always know what your Net Cash will be after selling and financing. Just ask.
9. After accepting the cash purchase quote:
A. You will be required to accept the purchase quote for the note and provide certain agreements and documents related to the note. (You already have most of the documents).
b. The promissory note funds processing service will perform ‘due diligence’ on the promissory note, property, documents, credit and history.
vs. Assuming all components of the Note pass due diligence, your note will enter “Transaction Processing and Funding” and you will receive your funds in cash. Normally this process takes up to 30 days.
Bottom line:
1. Your Note is your serious financial asset. Treat it with respect.
2. Build your promissory note to be salable for as much cash as possible.
3. Have all the logical note, property and payer credit information handy if you want to sell it for the most cash.
4. Select a note buyer/investor/broker/quoting service that you believe provides the best service.
5. Inform your existing Note Payer that you intend to sell your Note of which he is the payor. It will NOT have negative effects. The only change you will experience is who you make your existing payments to.
6. Don’t get caught up in the excitement of the deal.