Recently I've been getting questions on Promissory notes or better known as "Cash Notes" or simply "Notes".
So here's a run down about them and what can be done with them to generate more cash flow.
PART 1 "Whats a Note?"
A note is basically an IOU given to a "beneficiary" (one who will benefit with profits) from a "payor" (the one who pays the beneficiary according to a contract they signed). The terms of a note typically include the principal amount, the interest rate if any, the parties, the date, the terms of repayment and the maturity date. Sometimes provisions are included concerning the payee's rights in the event of a default, which may include foreclosure of the person's assets.
Also what are referred to as "Negotiable promissory notes" are used quite a bit in combination with mortgages in the financing of real estate transactions. Promissory notes, or commercial papers are also issued to provide capital to businesses.
PART 2 "How Notes make money"
Similar to people facing pre-foreclosure and banks having REO's on their hands for long periods of time, an extensive amount of Note holders are in the same position. Where they would rather have a lump sum of the value of the note and take a slight discount to have an investor pay them off and take it off their hands.
For example, let's say someone sold their home and a note was offered to make it possible for the sale to close. That person holding the note may not trust the buyer, wants cash up front or does not want to deal with legal hassles should the home end in foreclosure. These are reasons one would sell their notes for less than its face value to an investor. And how some make their money is by connecting the investor and the note holder to make the deal possible.
PART 3 "How the Math of it works"
The actual Note value depends on the overall interest of the property for the time it is good. If you had a note that had an original value of $150,000 that paid you $1500 a month for 100 months with an interest of 5% per month, that sounds great in the beginning. About a year passes and either you are not getting regular payments on it or you have a deal going on that requires a large sum of money. After a year, you have already been paid $18,900. Over the rest of the 88 months, you could stand to get steady checks for $1550 meaning you could expect $132000 (136400 with interest) for the rest of that note term. The older the note, the lesser the value. If the note is too new, the value becomes questionable. A broker or investor may contact you asking if you would consider selling the terms of your note plus a discount to them. You would get immediate cash up front, but for less than the value of the note itself.