First, the definition of a Promissory Note:
A promissory note is defined as ‘A promise to pay a certain amount of money on a periodic or future lump sum basis, defined by the terms and conditions contained in the Note Document’. Usually, a Promissory Note is constructed during a tangible property sale event where the property seller Takes Back a promise-to-pay (Promissory Note) instead of Cash.
Owning a promissory note, instead of 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. Right?
Then, you soon found out that:
1. The interest rate you charged is now too low,
2. The payor of the note does not always make the payments on time so you have to call and demand the payments,
3. You have to pay taxes on the income,
4. You figured out that the value of your note diminishes everyday, and,
5. You could put the lump sum of the note money to better or now-needed use.
So, you decide to sell your promissory note.
1. First you went to your bank and they would not buy it nor did they have any information about how to sell it.
2. Next, you asked your friends and one said Find a Note Broker. So, you searched on the Internet and found a million web sites all purporting to be able to buy your note. You talked with a few but did not get any satisfaction or few return calls. Now the frustration sets in.
Here’s how the Note Buying business works:
1. Notes are purchased by seasoned, reputable investors seeking long term returns on an investment using their own money. Investors can be individuals, groups, companies, pension funds or specialty funds.
2. A note is valued according to the long term yield to the investor. It’s named, Time Value of Money. Or, a dollar today is worth more than a dollar tomorrow. Therefore, your note can be purchased at a discount or less than its current principal amount in order to provide the investor’s needed long-term-yield.
3. The note yield and value is determined by the Note Interest Rate, the credit score of the note payor, the term of the note, the payment schedule, the Loan To Value Ratio (LTV), the payor’s equity in the property, the security for the note and the terms of the note.
4. Your note can be purchased by an investor based on his/her required note type, note criteria and required yield.
5. Note investors specialize in different types of notes. Some buy only 1st Deed of Trust Real Estate Notes or Mortgages, some buy only Business Notes or Annuities, etc. To make a long story short… you do not know if the person you are talking to is a Broker or an Investor or both or what note type, criteria and yield he/she requires. Frustrating. Now you think all note investors and brokers and the whole note buying industry is sleazy, unethical, unprofessional and worthless. Well, I admit that part of that is true for many unprofessional brokers but REAL Investors and REAL Brokers are here, honest, professional and provide a valuable service. How do you know? Just ask him or her if he/she is a Broker or Direct Investor, what types of notes they desire and what is their criteria and process. More on this in another article.
This is what you need to know and do regarding your promissory note:
a. The value of your note is determined by when and how you construct it. When constructing your note, assume you will want to sell it within the first year. If constructed properly and professionally, it will have high value. Professionally means using the services of an experienced Business or Real Estate 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, complete Loan Documents that are constructed for their own lending criteria? Next, Real Estate secured notes are valued on the appraised value or sale price of the property minus the payor equity and the credit worthiness of the payor. Business Notes are valued on the note payor credit worthiness and historic business performance.
b. The highest valued notes are those that the current Note principal amount is not more than:
i. 80% of the sales price of the Real Estate if it’s a 1st Deed of Trust Note/Mortgage, or 20% if a 2nd Deed of Trust and the total of a 1st and 2nd doesn’t exceed 80% of the sales price or,
ii. If a business note, 67% of business sale price.
c. The payor responsible for the performance (payments) of the Note credit score must be above 640 (the national average credit score is 678) when you construct the Note (The lower the credit score, the less your note is worth). Always obtain a current Credit Report on the payor before concluding a note transaction. You have the legal right (by virtue of the Federal Fair Credit Act) to request or obtain one because you are going to be their creditor. Go to any of the three credit reporting agencies and obtain a Tri-Merge credit report (it will provide you a payor score and report from each of the three credit reporting agencies). You will need the payor full name, address, SS# and birth date. You do not need your payor’s approval to obtain their credit report because you are going to be the payor’s creditor.
d. The Note payments should be monthly.
e. The Note terms should be:
i. For Real Estate Notes: ‘Amortized Monthly, Payments in Arrears’. Or, Amortized Monthly, Payments in Arrears for 15-30 years with a full Balloon payment due in 5 years. Try not to accept an ‘Interest Only, Full Balloon at the end’ Terms.
ii. For Business Notes: ‘Amortized Monthly, Payments in Arrears for no more than 5 years’.
f. Your Note should carry an Interest Rate tied to Prime + 2%. Prime of this date is 8.25%.
g. Your Business-Promissory-Note should have a Collateralized Personal Guarantee from the payor equal to the Original Principal Amount of your Note. This Collateral should be tangible, like Real Estate, that is owned by the payor outside the business and note transaction. Your note must have at least a Perssonal Gurantee.
h. The above are the basics. Your accomplished attorney should know how to construct your note correctly and know who we are so he can contact us from our web site for knowledge and instruction.
Now, Selling your Note:
1. Your first goal is to receive a cash-purchase-quotation. Only Direct Investors can provide this. A broker will take your information, find an investor, obtain a quote then present you with that quote less his fee. Sometimes Brokers have investors that will pay you more cash than professional investors, but there is usually a catch. Don’t get me wrong. Note Brokers serve a valuable purpose.
2. Gather all the facts about your note and property..
3. Find a reputable Note Broker or Direct Investor. Search on the Net with keywords ‘sell note’, ‘note buyer’, ‘mortgage buyer’, ‘annuity buyer’, ‘structured settlement buyer’. Contact the ones you like and ask questions. Just remember, there are very few REAL direct Investors. Just ask.
4. If you want to use a Broker, (a reputable Note Broker will request specific information about your note; he will package the information and contact us and other Note Buyers he has brokering agreements with). Some will broadcast your note to everyone on the Net. Broadcasting will devalue your note to almost $0.00. So, if you want to use a broker, ask him to provide you with the list of his contracted buyers he is sending it to and agree in writing that he only present your note to those you have agreed.
5. If you want to list your note for sale on the Internet yourself, there are many Note Listing sites where you can list your note and investors will find your note and contact you. This is named ‘Broadcasting’. See #4 above.
6. A Note Investor/Buyer will request detailed information about your note before providing you with a cash-purchase-quotation. Logical, right?
7. You should receive numerous phone and email communications from your selected Broker or Investor prior to providing a cash-purchase-quotation.
8. Your Note cash-purchase-quotation is usually a Net-Cash-To-You quotation. Sometimes it will be “$XXXXX.XX with your provided Appraisal and Title. You should always know what your Net-Cash will be after selling and funding. Just ask.
9. After you accept the cash-purchase-quotation:
a. You will be requested to agree to the note-purchase-quotation and provide certain note related agreements and documents. (You already have the majority of the documents.)
b. The note-funding-processing-service will conduct ‘due diligence’ on the note, property, documents, credit and history.
c. Assuming all the Note components pass the due diligence, your note will enter into “Transaction Processing and Funding” and you will receive your cash funds. Normally this process takes up to 30 days.
1. Your Promissory Note is your serious financial asset. Treat it with respect.
2. Construct your note so that it is salable at the highest possible Cash.
3. Have all the logical Note, property and payor credit information readily available if you want to sell it for the most cash.
4. Select a note buyer/investor/broker/listing service you feel provides you the best service.
5. Inform your existing Note Payor that you intend to sell your Promissory Note for which he is the payor. He will have NO negative effects. The only change he will experience is to whom he makes his existing payments.
6. Don’t get caught up in the excitement of the deal.