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 mortgage.

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 understand ........

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 $126,987.

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 $91,028

The secret of the time value of money offers the note owner many ways 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.

BARCLAY ASSOCIATES