WE ENCOURAGE YOU TO PRINT
OUT THIS REPORT AND READ IT AT YOUR
- THE BIG QUESTION
- VALUE FACTORS
- TERM OF THE LOAN
- INTEREST RATE
- POSITION OF THE LOAN
- BALLOON AMOUNT DUE
- CLAUSES IN THE CONTRACT
- VALUE OF THE PROPERTY
- LOAN-TO-VALUE RATIO
- FIRST-TO-SECOND RATIO
- CREDIT OF THE PAYOR
- TIME VALUE OF MONEY
- THE REAL DISCOUNT
- SELLING A PORTION OF THE REMAINING PAYMENTS
(Known as selling a "Partial")
- RISK VERSUS REWARD
Mortgage and Trust Deed Secrets for Super Profits $$$
Copyright 1999 by Diversified Resources Inc.
Do I Have to Sell My Note at A Discount? ..... What is the
"Time Value of Money?"..... What Determines How Much I
Receive For My Note? .... please read on for the straight
answers to these questions and many others concerning the
valuation of Mortgages and Trust Deeds
THE BIG QUESTION
The most frequent question we receive from people interested
in selling their note goes something like this ......"I've got a $35,000
note paying $270 a month. What's my note worth?" Since
most people understand that notes are sold at a discount, a
common variation of the above question is "Is it true that in
order to sell my note I'll have to take a 30% discount?" By way
of explanation, assuming a person had a $100,000 note, a
30% discount would be $30,000. This would mean they would
be selling their note for $70,000.
Whichever way they ask the question, we always feel bad
because we can't give a quick answer. Actually, the selling price
depends on many factors. And....... no, there is no such thing as a
magic 30% discount. Actual discounts range both above and
below that figure. We then tell them that if we can look at the
particulars of the note, we can make a quote. Boiled down, we
make a quote that takes into consideration the value factors of
the loan. One of these factors that bears special explanation
concerns the "time value of money." Understanding these
factors, you will have a tremendous advantage when you sell
your note. Just as with automobiles, people who understand the
rules of the game do get better deals.
THE VALUE FACTORS
The major factors that determine the value of a note involve the
term of the loan, the interest rate, the position of the loan, the
balloon amount (if any), the amount of the payment, clauses in
the contract, the value of the property, the loan-to-value and the
first-to-second ratios, the credit of the payor, and the time factor. The
value of a note is affected by all these factors simultaneously.
They are interdependent -- that is, each one affects and is
affected by all the others. These factors all involve either risk or
time, the two primary concerns of Mortgage or Trust Deed
investors. If some of these terms sound confusing right now,
don't worry. You'll be an expert after reading this report. Also,
regardless of the value of the note you now hold, if you ever
write another one, you can write it in such a manner so that its value is
THE TERM OF THE LOAN
Because of the time value of money, one of the first questions
we ask is how long your note runs. If you utilize our services in
selling your contract, you will be receiving all or some of your cash
immediately. We, on the other hand, will have to wait for
payments during the remaining term of the original contract.
The longer we wait, the less value (buying power) the money
has for us. Immediate cash is more valuable than money in the
future. The section on "The Time Value of Money" covers this in
depth. As illustrated in the following examples, it will take a lot
more money in the future to buy exactly the same thing you
are buying at today's prices.
THE INTEREST RATE
All things being equal, the higher the interest rate, the higher
the value of the note. Many sellers have made the mistake of
offering more liberal (lower) terms than the bank. The reasoning is that
since they have no overhead, a lower rate is justified. However,
the more competitive or higher the interest rate is, the greater the value of the
THE POSITION OF THE LOAN
Though there are notes written in third, fourth, and fifth position,
most individuals who sold a home either carried back a first or
second position lien. If you hold the entire purchase money
loan, you hold a "first position." For example, you sold your home
for $129,000, the buyer put down $29,000, and you took back a
"first position" note for $100,000.
A second position lien is behind the first, or "senior" lien. Using
the same example, let's say the buyer was able to get a
$100,000 loan from Any Name Savings & Loan Association,
but only had $9,000 to put down. You might then carry a second
behind the first. This would look like:
financed with Any Name S&L (First Position)...... $ 20,000
amount financed with you, the Seller (Second Position).......
Less $ 9,000 amount of cash down payment....... equals
$129,000 sales price of home. A first position note / Trust Deed
has significantly more value. This is the reason why the bank
is holding the first, and the seller is holding the second.
THE BALLOON AMOUNT DUE
If a balloon payment is due, when is it due? Again, if it is far in
the future its value is diminished. Likewise, however, if the balloon
rapidly approaching, and it looks like the payor may have a
difficult time coming up with the money, its value is diminished.
CLAUSES IN THE CONTRACT
Certain clauses a note may have or not have can also influence the
value of the note. For instance, is the note due on sale? Is it
assumable? A note with a due on sale clause is more valuable,
because, even if the present payor has perfect credit, the next
purchaser of the house may be a deadbeat. This is a risk that
every note holder of an assumable note faces. If the note is
nonassumable, however, the purchaser of the note knows that
they will be able to accept or reject the next purchaser of the
property. Then they are only relying on a quality payor.
THE VALUE OF THE PROPERTY
What type of property is security for the note? Single family
residences are the most secure. During hard times people
walk away from farm, commercial, and investment property.
Much of the fault, for instance, of the savings and loan
crisis of the 1980's stemmed from over investment in commercial properties.
The location is important, also. Is the property in a decaying neighborhood,
a stable neighborhood, or a developing neighborhood?
THE LOAN-TO-VALUE RATIO
Two other important points are at issue here, both of which,
may be familiar to you. Any investor in Mortgages or Trust
Deeds wants to know the value of the property in relation to the
amount of loans on it. When we make an accepted agreement to
purchase your contract, we will have an appraisal done. The
lower the "loan to value ratio," the higher the value of the note.
For instance, assume a property is appraised at $100,000.
Loan "A" is for $90,000, with $10,000 equity, for a Loan
-to-Value ratio of 90%.
Loan "B" is for $40,000, with $60,000 equity, for a Loan
-to-Value ratio of 40%.
The person who makes a substantial down payment or who
has $60,000 equity (Loan "B") is more likely to continue to
make the payments than a person who has $10,000 in equity
at risk (Loan "A"). Therefore, the contract with a lower
loan-to-value rating is worth more. Foreclosure is not the answer.
Would you like to foreclose on someone? A greater investment
in the property makes this ugly worst case scenario less likely.
THE FIRST-TO-SECOND RATIO
The other ratio that investors look at is the ratio of the
first-to-the second. This ratio only applies if the note is in
second position. If, for instance, the note is for $4,000 behind a
$126,000 note, the first-to-second ratio is an extremely high
31.5-to-1. Unfortunately, this note is unsalable to an investor.
Were the payor to quit making payments, the investor in the
second would have to make massive payments on the first
note in order to protect the security. It is seldom profitable.
On the other hand, assume there is a $93,000 first and a
$65,000 second. Here the first-to-second ratio is a workable
1.43-to-1. An investor would be interested in this second
THE CREDIT OF THE PAYOR
The payor is also a determining factor of the value of the note.
The note buyer will ask where the payor works and how long
he or she has worked there. What is the payment history on
the particular note you are holding? Do you have bank receipts
or deposit slips that verify that the payments have come in
consistently on time? If so, the future series of payments that
you have for sale is worth more. Is the note current now? What
does the payor's credit bureau file look like? All these things
affect the value of the note. So you now understand why we
can't offer the outstanding balance due. However, get ready to
THE BIGGEST SECRET: "THE TIME VALUE OF MONEY"
What we, the note buyer, do when we look at the value of a
series of payments (also called an income stream), is to
calculate the present value of the receipt of money in the
future. We do this because dollars today will buy more than
dollars in the future.
For a simple example, suppose I have $10 in my left hand and
$5 in my right. Which one do you want? Of course, the $10,
right? But wait a minute. Suppose I say that, though you can
have the $5 now, if you want the $10, you have to wait 10 years.
Which one would you rather have now? Of course, you would
want the $5. Some of us can remember when gasoline was 31
cents a gallon? People were horrified when it shot above
$1.00? Now, if we can get a gallon of gas for less than $1.00 we
feel fortunate. Put another way, twenty years ago the value of a
dollar was a good three gallons of gas. Today it is less than
one. If someone had been buying the future value of gasoline
then, he or she would have had to take into account changing
values over time.
Remember. The value of money
drops with time. For instance, we recently worked with a
property owner who had purchased a house in 1963 for
$10,000. Thirty years later, though the house was no longer
new, and was in fact in serious need of repair, the property sold
for $100,000. Thirty years in the future the amount once
sufficient to purchase the entire property, $10,000, is only
enough for a down payment. The time value of money is
really easy to understand. Due to ever present inflation, a dollar
today will buy less in the future. Therefore, the Note Buyer
discounts the note in an amount which will keep pace with
an estimated amount of inflation over the period of the note.
Remember that the further into the future a cash payment is
received, the less it is worth today. For example, an investor
would pay you $300 for $300 to be received today but might
only pay $254.30 for $300 to be received in twelve months. If,
however , you have a $300 payment due in 60 months, the
investor might only offer $131.30. The total cash value for a
payment stream is determined by simply adding up the
individual "cash value" of every payment. Economic realities
and financial prudence dictate that one who must wait for
the money must take a discount for that future diminished amount.
What we do is calculate the effects of time and inflation on the
present value of money that will be received at a future date.
THE REAL DISCOUNT
One thing you need to remember when selling a carryback
note is the value of the real discount. For instance, a $14,000
price for a $20,000 note looks like a 30% discount. However,
assuming a $100,000 home sale, the real discount is not 30%,
but 6%. Like a realtor's commission, this discount is the price of
the sale. Probably 99% of sellers want all cash. It is the reality
of the market place that forces us to carryback real estate
notes. Taking this small discount in fact allowed you to secure the
sale of the property.
SELLING A PORTION OF THE REMAINING
PAYMENTS (Known as selling "A Partial")
Sellers, such as yourself, who understand the time value of
money, can see the big advantage in selling a part of the
note. This part is commonly referred to as a "partial."
Assuming you don't need a total cashout at the moment, this
arrangement gives you the very best of both worlds. The
powerful advantage to this type of arrangement is that, due to
the minimal effects of the time value of money, the required
discount is minimal.
The value of a 30 year note diminishes rapidly as you
move further out in time. However, if you only sell 3 years
worth of payments, you've sold the valuable part, the part that an
investor will pay most dearly for. To illustrate this principle, let's
say there's a $100,000, 30 year note at 11% interest, with
monthly payments of $952.32. An investor might offer $75,300
for this note. This is approximately a 27% discount. As the
seller, you end up with $75,300 cash today.
However, if you don't need that entire amount, you can strike a
much more favorable deal. Let's say that you only need
$25,000, because you have a business opportunity. You can
sell only the next three years of your note for $28,500. Then you
have the money you need, plus $3,500 to spare. However,
because you sold the payments that are most valuable to an
investor, he paid a premium for them. At the end of the three
years, the payments revert back to you. Get this! You still have
a note with a principal balance of $98,487.33!! If the buyer paid
you off that very day you would receive $98,487.33!
What happened is that you received the $28,500 that allowed
you to take advantage of the business opportunity (earning you
even more money), plus you still receive the remaining value of
your note: You received $28,500 income from the partial sale,
leaving a $98,487 remaining balance, for a total value of
Needless to say, because interest is included in the monthly
payments, your total dollar return would be much greater. You
would receive: $28,500 income from the sale of the partial
payments, which is $308,552 ($952.32/mo x 27 years), for
a total of $337,052.
Wait! It can get better! Let's say that you absolutely wanted to
maximize your income over the next three years. Instead of
selling off the front three years, since that is almost $1,000 a
month, you could sell off the back end 27 years of payments.
In that case you
might receive $56,745. Now look at it: $56,745 income from
partial sale + $34,283 ($952.32/mo x 3 years) for a total of
The secret of the time value of money offers the note owner
to satisfy his or her particular needs. Presented with these
choices, note holders seldom have too many difficulties
deciding which way to go. Every situation is unique.
If your note had one, you could also sell off or retain a balloon
payment. If there was ever a way to have your cake and eat it
too, this has got to be it. You don't have to be victimized by
what you don't know any longer. You can put the time value of
money to work on your side. When selling your note, be sure
to ask for a full purchase quote, and also a quote on a "partial" purchase.
RISK VERSUS REWARD
We've mentioned many things that affect the value of a note.
Though the time value of money is the greatest, it is purely a
mathematical calculation related to "reward," or "profit," if you
will. Most of the other issues deal with "risk."
The position of the loan, the balloon amount (if any), the
amount of the payment, clauses in the contract, the value of
the property, the loan-to-value, the first-to-second ratios,
and the credit of the payor are all primarily risk considerations.
It's sad, but, for various reasons, numerous people do not pay
promptly or at all on their notes. You may have had some
experience with this.
We at Barclay Associates hope this report will help you to
understand the inner workings of the buying and selling of
private seller carry back Mortgage Notes and Trust Deeds.
We hope you will ask us to give you a quote when you are
thinking of selling your note.
How to Contact Us
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Alternate Phone: 856-429-4951
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