How to structure your seller-carry note for maximum value.
Every flaw in your note will come back to haunt you when you try to sell it! I have been actively engaged in the promissory note business for over 45 years.
During that time I have bought, sold, exchanged, brokered, appraised, and structured hundreds of notes.
The lessons that I have learned, through my own mistakes and through the mistakes of others are numerous.
I want to help you avoid "learning the hard way"! If I were to expand and explain every lesson that I have learned the hard way, it would probably amount to writing a book-or two.
I will give it to you here "short and sweet".
In outline form, I will share with you key concepts that will make your seller-carry loan more valuable, more salable, and more collectable.
The following guidelines represent over 45 years learning the hard way, and I have the scar tissue to prove it! Six critical elements needed to structure the note for maximum market value: 1.
Get the highest interest rate on the note that you can 2.
Get the largest down payment on the transaction that you can a.
Get additional collateral security-other real estate, co-signer, etc.
3.
Get an independent third-party appraisal of the collateral assets before the closing 4.
Get an agreement from the borrower that you can have permission to get independent third-party appraisals of the collateral assets after the closing, if and when you need them 5.
Get all of the borrower's personal and business credit and financial information before the closing 6.
Get an agreement from the borrower to provide updated credit and financial information after the closing, annually, or when you need them Selling your Note If you ever sell a private party/seller-carry loan, even if it is paying perfectly, you will be asked for all, or most of the above items.
The more of these items you have and the more complete each item is, the higher the price you will receive when you sell the note.
Most private party notes sell at some discount from the unpaid balance owned.
There are several legitimate reasons why a discount is demanded by the note buyer.
Some of these reasons are outlined below: 1.
INTEREST RATE: The interest rate on your note is below the current market rate.
Example: your note calls for 6.
0% and the current market rate for your type of note is 7.
5%.
The buyer discounts what he will pay for your 6.
0% note to give him the 7.
5% current rate he could get elsewhere.
2.
DOWN PAYMENT: Your note was originated based on a 10.
0% down payment.
The current market expectation for a down payment of notes similar to yours is 20.
0%.
The buyer discounts what he will pay you for your note to bring it closer to the 20.
0% down payment he expects.
3.
APPRAISAL: You forgot to get an appraisal of the collateral asset at the time of closing.
The note buyer does not know if your note is well secured.
He discounts your note to the price that gives him comfort that the note he is buyer in well collateralized.
4.
CREDIT INFORMATION: You forgot to get a FICO Credit Score and a Credit Report on the borrowers that executed your note.
The note buyer now does not know if he is buying a note signed by a deadbeat or by a credit-worthy borrower.
The note buyer discounts your note to the price that gives him comfort with the unknown credit history of the borrower.
5.
TERM OF THE LOAN: Your loan is written for a 30 year amortization schedule with a ten year balloon.
The current market for your type of note is a 30 year amortization schedule with a five year balloon.
The note buyer will discount the price of your note to compensate for this difference in time.
MAXIMIZING MARKET VALUE OF YOUR NOTE: I hope that you are starting to realize the many variables that interact in determining the market value of a private part owner-financed note.
You do not want to learn how to structure a note as "on the job training"; your training and education will be very costly.
Get some profession guidance from an experienced promissory note expert.
Don't be penny wise and pound foolish.
You pay for fire insurance on your house to avoid paying for a catastrophic loss.
Pay for some promissory note insurance to avoid a catastrophic loss on your note.
Most attorneys have no training or experience in structuring a note for maximum market value.
Their training is strictly in making the note enforceable in a court of law.
Every flaw in your note will come back to haunt you when you try to sell it! I have been actively engaged in the promissory note business for over 45 years.
During that time I have bought, sold, exchanged, brokered, appraised, and structured hundreds of notes.
The lessons that I have learned, through my own mistakes and through the mistakes of others are numerous.
I want to help you avoid "learning the hard way"! If I were to expand and explain every lesson that I have learned the hard way, it would probably amount to writing a book-or two.
I will give it to you here "short and sweet".
In outline form, I will share with you key concepts that will make your seller-carry loan more valuable, more salable, and more collectable.
The following guidelines represent over 45 years learning the hard way, and I have the scar tissue to prove it! Six critical elements needed to structure the note for maximum market value: 1.
Get the highest interest rate on the note that you can 2.
Get the largest down payment on the transaction that you can a.
Get additional collateral security-other real estate, co-signer, etc.
3.
Get an independent third-party appraisal of the collateral assets before the closing 4.
Get an agreement from the borrower that you can have permission to get independent third-party appraisals of the collateral assets after the closing, if and when you need them 5.
Get all of the borrower's personal and business credit and financial information before the closing 6.
Get an agreement from the borrower to provide updated credit and financial information after the closing, annually, or when you need them Selling your Note If you ever sell a private party/seller-carry loan, even if it is paying perfectly, you will be asked for all, or most of the above items.
The more of these items you have and the more complete each item is, the higher the price you will receive when you sell the note.
Most private party notes sell at some discount from the unpaid balance owned.
There are several legitimate reasons why a discount is demanded by the note buyer.
Some of these reasons are outlined below: 1.
INTEREST RATE: The interest rate on your note is below the current market rate.
Example: your note calls for 6.
0% and the current market rate for your type of note is 7.
5%.
The buyer discounts what he will pay for your 6.
0% note to give him the 7.
5% current rate he could get elsewhere.
2.
DOWN PAYMENT: Your note was originated based on a 10.
0% down payment.
The current market expectation for a down payment of notes similar to yours is 20.
0%.
The buyer discounts what he will pay you for your note to bring it closer to the 20.
0% down payment he expects.
3.
APPRAISAL: You forgot to get an appraisal of the collateral asset at the time of closing.
The note buyer does not know if your note is well secured.
He discounts your note to the price that gives him comfort that the note he is buyer in well collateralized.
4.
CREDIT INFORMATION: You forgot to get a FICO Credit Score and a Credit Report on the borrowers that executed your note.
The note buyer now does not know if he is buying a note signed by a deadbeat or by a credit-worthy borrower.
The note buyer discounts your note to the price that gives him comfort with the unknown credit history of the borrower.
5.
TERM OF THE LOAN: Your loan is written for a 30 year amortization schedule with a ten year balloon.
The current market for your type of note is a 30 year amortization schedule with a five year balloon.
The note buyer will discount the price of your note to compensate for this difference in time.
MAXIMIZING MARKET VALUE OF YOUR NOTE: I hope that you are starting to realize the many variables that interact in determining the market value of a private part owner-financed note.
You do not want to learn how to structure a note as "on the job training"; your training and education will be very costly.
Get some profession guidance from an experienced promissory note expert.
Don't be penny wise and pound foolish.
You pay for fire insurance on your house to avoid paying for a catastrophic loss.
Pay for some promissory note insurance to avoid a catastrophic loss on your note.
Most attorneys have no training or experience in structuring a note for maximum market value.
Their training is strictly in making the note enforceable in a court of law.
Source...