Note holders, cash flow note questions

Let's start first by defining the term "cash flow note". A cash flow note is a written document that states a promise to pay, and the terms which include the amount, the interest rate and the length of time. A cash flow note may be a mortgage, a trust deed, a deed of trust, a business note, a court award (such as a structured settlement), lottery winnings, annuities, etc. Generally, a cash flow note provides a pre-determined payment at regular intervals (often monthly, quarterly or annually). A note holder, of course, is the person who holds a cash flow note and receives those payments.

As a note holder, you may not be aware that you can sell that note for cash. However, selling your cash flow note is a great way to raise a large sum of money quickly.

We are frequently asked why would I want to sell my cash flow note. The fact is there may be many reasons to sell your note. It's possible that you didn't even want the note to begin with. You may have settled for it in order to sell a property, or been awarded a settlement in court, but would have preferred a lump sum payment instead. By selling your cash flow note, you can receive that lump sum payment and be done with those small monthly payments. You'll have your money up-front and won't have to wait years to collect it.

Another reason for selling your cash flow note may be to raise money to cover the cost of a financial obligation, such as paying off credit card debts or medical bills. You may need cash to finance a college education or a retirement. You may simply want to purchase a new home or car, or even a new business. You might decide you want to take that dream vacation you never thought that you could afford. You might simply want to invest your money in a more profitable endeavor. Whatever the reason, as a note holder, you have the right to sell your note at any time you wish.

You're probably wondering what your note is worth. The truth is, you probably won't get the full face value of the note. Cash flow notes are almost always sold at a discount. There are many reasons for this. First of all, you'll be receiving your cash now, but the investor you sell your note to has to wait several years to collect all of the funds he/she purchased from you. It's a fairly well known fact that money now is worth more than money in the future. It's the same principle that makes a home that was purchased 30 years ago for $55,000 worth $250,000 now. Do you remember what you paid for a gallon of milk or a loaf of bread 10 years ago. What do you pay for the same item now? It's more, right? That's one of the reasons your note will likely be sold at a discount. The money is worth more to you today than it will be several years from now.

The other reason that notes are sold at a discount is the fact that each note has risk factors inherent in the note itself. There is always the possibility that the note could default and the person holding the note could get stuck. No investor wants to deal with foreclosure. Despite popular opinion that foreclosure is profitable, more often than not, foreclosure is an expensive process and the property may need extensive repairs before it can be sold. Under these circumstances, the note holder could lose quite a bit of money on the note.

Is there a standard discount on a note? No, even though it would make it much easier to price a note, it is impossible to apply a standard discount factor. Each note is different and has to be evaluated on the basis of it's own strengths and weaknesses. It's like asking what it costs to buy a house. How big is the house, where is it located, how many bedrooms, how many baths, is there a garage attached, how big is the yard, is there a swimming pool, hot tub, whirlpool bath, and on and on and on...You get the picture.

So what factors determine what a note is worth? That will vary depending on the type of note. The factors to consider in a real estate note are things like the term of the note, the interest rate, the payor's credit rating, the value of the property securing the note, the amount of equity in the property, the amount of the down-payment made, the payment history, and the seasoning on the note (in other words, how many payments have been made). Commercial notes deal with these issues, plus factors such as the income and the expenses of the property. Business notes will deal with the term of the note, the interest rate, the value of securing assets, the payor's credit rating, the value of the business, the amount of equity, the payment history, the seasoning, the experience of the payor, plus several other factors. Each note type has it's own parameters, but it basically comes down to how much risk is involved with the note and how long will it take to collect all the money from the note.

First Class Cash Flow Handlers will purchase any type of cash flow note. A typical note sale takes approximately 4-6 weeks to complete, assuming there are no complications with the note and all documents are supplied in a timely fashion. We offer a number of different plans to meet the needs of any note holder. You may sell all or part of your note. We will work with you to determine which plan is better suited to meet your individual needs. Click here to submit a note or call us at (401)-258-7158.

Another question we hear frequently is whether a note holder should sell their note or take out a loan instead. You can certainly take out a loan to cover any financial needs you may have, and may even be able to use your note as collateral. However, there are some disadvantages to this also. Firstly, it increases your debt load, while decreasing your net worth. Both of these factors combine to decrease your credit worthiness and credit score. By selling your existing note, rather than taking on additional financing, you increase your net worth without adding any additional debt load. In the event that you need to pursue financing in the future, this will increase your overall credit score and credit worthiness.

The Cash Flow Clarion is the free e-zine published by First Class Cash Flow Handlers. It explores current topics within the cash flow field and answers frequently asked questions about cash flow notes and owner financing. You can subscribe to The Cash Flow Clarion and have current issues delivered directly to your e-mail inbox. The subscription is free and we will rush you our FREE report (Finding The Right Solution To Your Client's Cash Flow Needs) as a "thank you". Simply fill out the form below and click on "Get More Info". To view archived issues, click here. Or you may view and subscribe to our Cash Flow Clarion blog.

Abstract of Title: A written history of the transactions or conditions bearing on the title to a designated parcel of land. It covers the period from the original source of title to the present and summarizes all documents of public record.

Acceleration Clause: A clause requiring the purchaser to pay the entire principal balance due if certain conditions of the contract are violated. A few examples of these conditions are failure to make regular installment payments, non-payment of property taxes, and non-payment of hazard insurance premiums. This clause most often appears in land contracts under the heading “Enforcement on Default” or “Acceleration Clause.”

Add-Back Escrow: In a land contract that utilizes an Add-Back Escrow, the purchaser includes an extra amount with each month’s payment in order to cover future tax and/or insurance bills payable by the purchaser. The seller then pays property and/or insurance premiums and adds back the amounts paid to the current principal balance owed. Add-Back escrows in contract usually worded as follows: “The purchaser is to pay monthly, in addition to the monthly payment herin before stipulated, the sum of $___, which is an estimate of the monthly cost of the taxes, special assessments, and insurance premiums for the land, which shall be credited by the seller on the unpaid principal balance owed on the contract. If purchaser is not in default under the terms of this contract, seller shall pay for purchaser’s account the taxes, special assessments, and insurance premiums mentioned above when due and before any penalty attaches, and submit receipts therefore to purchaser upon demand. The amounts so paid shall be added to the principal balance of this contract.”

Agent: One who undertakes to transace business or to manage an affair for another, with the authority of the latter.

Amortization: The length of time it will take to pay off a debt at the mutually agreed upon interest rate and payment amount.

Appurtenance: Something outside the property itself but considered part of the property that adds to its greater enjoyment, such as the right to cross another’s land.

Assessments: The amount of tax or special payment due to a municipality or association.

Assignee: The person or corporation to whom an agreement or contract is assigned; one to whom real property or an interest in real property is transferred or set over.

Balloon: The final payment on a mortgage, trust deed or land contract when that payment is greater than the preceding installment payments and pays the loan in full.

Bankrupty: The financial inability to pay one’s debts when due. The debtor seeks relief through court action that may work out or erase debts.

Buyer: One who purchases property; also referred to as “Vendee” or “Purchaser”.

Certificate of Title: A written statement furnished by an abstract or title company or an attorney stating that the title to a piece of property is legally vested in the present owner.

Chain of Title: The history of all the documents transferring title to a parcel of real estate, starting with the earliest existing document and ending with the most recent.

Chattel: anything owned and tangible other than real estate, for example: furniture, automobiles, and jewelry.

Clear Title: Title not encumbered or burdened with defects such as mortgages, unpaid taxes, or underlying liens.

Cloud on title: Any condition revealed by a title search that adversely affects the title to a property. Usually cloud on title cannot be removed except by a quit claim deed, release or court action.

Commit Waste: To neglect property or allow it to be used in a way that lessens its value.

Consideration: A legal right or promise exchanged for the act, promise or property of another person. For example, in a contract for the purchase of a piece of property, the property itself and the money paid )or promised to be paid) are the considerations made by the property seller and the new property owner, respectively.

Conveyance: The document, such as deed, lease or mortgage, used to effect a transfer of property.

Covenant: A legally enforceable promise or restriction in a contract. For example, a purchaser on a mortgage, rust deed or land contact may covenant to keep the property in good repair and adequately insured against fire and other casualties. The breach of a covenant usually creates a default and can be the basis for foreclosure.

Deed: A written document that conveys or transfers title from one party to another. There are various types of deed; however, the two most commonly used are warranty and quit claim.

Deed of Trust: An instrument used in many states in place of a mortgage. Legal title to the property is vested in one or more trustees to secure the repayment of the loan.

Default: A failure to perform on one or more of the terms of a note or of the covenants of a mortgage or land contract.

Delinquent Payment: A payment not paid on a specified payment date. For example, if a payment is due on the first day of every month and it is not received until the fith day of the month, that payment is delinquent. If a mortgage, trust deed or land contract has a 10-day grace period, then a payment would not be considered “delinquent” until the 11^th day after the due date.

Dower: Under common law, the legal right of a wife or child to a part of a deceased husband’s or father’s estate, regardless of the provisions in his will.

Down Payment: The amount of money paid at the execution of a mortgage or a land contract. This lump sum of money is subtracted directly from the original sales price. The remaining principal balance then begins to accrue interest at the specified interest rate.

Due-On-Sale Clause: A clause set forth in some mortgages and land contract whereby the lender or seller has the right to “ call in” the balance upon the sale or transfer of the property by the borrower or purchaser to a third party.

Earnest Money: A deposit made by a purchaser to demonstrate good faith; a down payment.

Easement: A right created by grant, reservation, agreement, prescription, or necessary implication, which one has in the land of another. For example, the right of public utility companies to lay their line across another’s property is a utility easement.

Encumbrance: Any right to or interest in land that effects its value, including outstanding mortgage loans, unpaid taxes, easements, or deed restrictions; a cloud on title.

Equity: The difference between fair market value and current indebtedness (balance due). For example, if a person owes $10,000 on his home and the market value is now $50,000, he now has 80% equity in his home ($40,000 out of $50,000).

Escrow: An agreement between two or more parties providing that certain instruments or property be placed with a third party for safekeeping, pending the fulfillment or performance of a specified act or condition.

Escrow Account; An account in which a prescribed amount of money s deposited each time a payment is collected to be used for paying real estate taxes and/or insurance. For example, a mortgage, trust deed or land contract may require a monthly payment of $260 with an additional $40 to pay taxes and insurance. This $40 goes into an escrow account which, technically, belongs to the purchase.

Fee Simple: The highest and best form of ownership recognized by law. Owner is entitled to the entire property with unconditional power to sell it.

First Mortgage: A real estate loan that creates a primary lien against real property.

Fixtures: Improvements or personal property so attached to the land as to become part of the real estate. For example, a porch would be considered a fixture, whereas a ceiling fan may just be personal property.

Foreclosure: A termination of all rights of a mortgagor in the property covered by a mortgage. Statutory foreclosure is effected without recourse to courts but must conform to applicable laws.

Forfeiture: The loss of money or anything else of value because of failure to perform under contract. For example, because the prospective purchaser failed to keep up payments under the land contract, he or she forfeited all of his or her right to the property.

Free and Clear Title: Title to a property without encumbrances. It is generally used to refer to a property free of mortgage debt.

Grace Period: The period during which one party may fail to perform without being considered in default.

Grantee: The person to whom an interest in property is conveyed. For example, in a land contract sale the Grantee is most often referred to as the purchaser.

Grantor: The person conveying an interest in property. For example, in a land contract sale the grantor is most often referred to as the seller.

Guaranty: A written promise by one party to pay a debt or perform an obligation contracted by another in the event that the original obligor fails to pay or perform as contracted. For example, a parent may guarantee payments owed by a son or daughter.

Hazard Insurance: A type of insurance bought to insure property against losses due to fire, theft, vandalism, etc. Most land contracts require the purchaser to carry hazard insurance at all times to protect the seller from insurable losses.

Hereditaments: Any property, whether real or personal, tangible or intangible, that may be inherited.

Homeowner’s Policy: An insurance policy designed especially for homeowners. Usually protects an owner from losses by common disasters, theft, etc.

Improvements: Those additions to undeveloped land such as buildings, streets, sewers, etc., that tends to increase its value.

Installments: Parts of the same debt, payable at successive periods as agreed; payments made to reduce a mortgage.

Interest Rate: The percentage of money charged for its use. For example, a seller may charge a purchaser 10% interest on the unpaid balance of a mortgage, trust deed or land contract.

Judgment: A decree of a court stating that one individual is indebted to another for a certain fixed amount.

Judgment Lien: A lien upon the property of a debtor resulting from the decree of a court.

Judicial Foreclosure: Having a defaulted debtor’s property sold at a price the court approves.

Land Contract: A real estate installment sale arrangement whereby the buyer may use, occupy, and enjoy land, but no deed is given by the seller (so no title passes) until all or a specified part of the sale price has been paid.

Late Charge: An additional fee charged to a person for a payment that is delinquent. The most common methods of charging late fees are to charge a fixed dollar amount or a percentage of the payment.

Lease: A contract in which, for a payment called rent, the one entitle to the possession of real property transfers those rights to another for a specified period.

Legal Description: A property description recognized by law which is sufficient to locate and identify the property. A typical legal description will identify the county, township, and section of the township where the land is located.

Liable: Responsible le or obligated. For example, one who borrowed on a mortgage generally becomes personally liable for its repayment.

Lien: A charge against poperty making it security for the payment of a debt, judgment, mortgage or taxes. A lien is a type of encumbrance. A specified lien is against certain property only. A general lien is against all of the property owned by the debtor.

Maturity: The date on which an instrument of indebtedness, such as a mortgage or land contract, becomes due and payable.

Mortgage: A pledge of real property as security for the payment of a debt. With a mortgage, the borrower retains possession and use of the property. A mortgage is typically signed simultaneously with a note.

Mortgagor: The party borrowing money secured by real estate and giving a mortgage.

Notary Public: One who is authorized by the state or federal government to administer oaths and attest to the authenticity of signatures.

Notice of Default: A letter sent to a defaulting party as a reminder of the default. Such a notice may state a grace period and the penalties for tailing to cure the default.

Opinion of Title: A certificate, generally from an attorney, as to the validity of the title of property being sold.

Parcel Number: A number given to a piece of property by the county for tax purposes.

Payment: An agreed upon dollar amount paid in regular installments by a purchaser. The most common installment method for land contract payments is monthly payments.

Personal Property: Any property that is not real property. For example, personal property is appliances, cash, securities, furniture, and mobile home not permanently affixed to a site.

Plat Book: A public record containing maps of land and showing the division of the land into streets, blocks, and lots and indicating the measurements of the individual parcels.

Power Of Attorney: An instrument authorizing a person to act as the agent of the person granting it.

Principal: The original amount of the total due on a mortgage, trust deed or land contract; the principal portion of a payment is that portion which is not interest.

Principal and Interest Payment: A periodic payment, usually paid monthly, that includes the interest charges for the period puls an amount applied to the amortization of the principal balance.

Purchase Money Mortgage: A mortgage given by the purchaser of real property to the seller as part of the consideration in the sales transaction.

Purchaser: One who purchases property; also referred to as “Vendee” or “Buyer”.

Quit Claim Deed: A deed that transfers only such interest, title or right as a grantor may have at the time the conveyance is executed; a deed without representations or warranties as to the nature of the rights conveyed.

Representations: Descriptions as to the quality of character of something. For example, a building may be represented as being free from structural defects.

Sales Price: The mutually agreed upon dollar amount to be paid for a particular piece of property.

Section: One square mile in a government rectangular survey. There are 36 sections in a mix-mile-square township.

Subordinate: One who moves to a lower priority, as a lien would if it changes from a first mortgage to a second mortgage.

Tenements: Possessions that are permanent and fixed; structures attached to land.

Term: The amount of time (usually computed in months) until the balance of a mortgage or land contract is due and payable. For example, a land contract may fully amortize over a 10-year period (120 months). However, the contract may also call for a balloon payment to made at the end of the fifth year (60^th month). In this case, the term of the land contract would be 60 months or five years.

Title Insurance: A form of insurance purchased to protect against any losses or defects in the title of a particular piece of property.

Title Search: An examination of public records, law and court decisions to disclose the past and current facts regarding ownership of real estate.

Township: A six-mile-square tract delineated by a government rectangular survey.

Trust Deed: A claim against real estate similar to a mortgage but title is held by a third part called a Trustee for the Beneficiary.

Trustee: One who holds property in trust for another to secure performance of an obligation.

Underlying Debt: An original loan that is still in existence. This loan may be owed on a mortgage, trust deed or land contract.

Use Restrictions: A clause in a deed which places limitations or restrictions on the property’s use. For example, “this property can never be used to sell liquor” or “this property can never be used to raise farm animals.” These limitations “run with the land” and are therefore binding on subsequent owners.

Warranties: Promises contained in a contract. For example, a seller may warranty that a property sold is structurally sound.

Warranty Deed: A deed that conveys or transfers title from one part to another with covenants assuring that the title transferred is free from all encumbrances.

Yield: The rate of return on an investment. For example, if one invests $100 and receives $15 after the first year, one’s yield is 15% on the invested cash for the first year.