So you decided to get into the note investing game via buying non performing notes or performing notes. Now let us look at 34 ways you can improve a note.
Improve Your Promissory Note – Early Payoff
1. Early Payoff
Many times a note is paid off in full in advance of the time that it is scheduled to. The average life of a 30 year loan tends to be 7 to 10 years.
2. Early Payoff with a Discount
Offering a small to large discount will many times entice a person to pay a note off early. Example, buy a $10,000.00 note for $6,000.00 and have the payor pay it off for $7,500.00.
3. Early Payoff Refinance (Them)
If the payor doesn't have the cash, show them how they can finance the property and even lower their payments by taking advantage of the discount that you are offering them.
4. Early Payoff Refinance (Investor)
If the payor of the note lacks the ability to finance the property, you or another investor could finance the property by co-signing for the payor or by taking title, financing and then re-selling to the payor on a wrap.
5. Early Payoff Discount Underlying
You may be able to negotiate a discount on underlying loans as an enticement for an early payoff on your note.
6. Early Payoff Over-finance
By financing more than the amount needed to pay off your note at a discount, the payor may be able to pocket some cash.
7. Early Payoff Over-finance – Invest the Difference
The payor could finance more than the amount needed to pay your note off at a discount and the difference can be invested in some paper. The net result to the payor is a discount on his note and a lower net payment as well as the ownership of some good paper. The result to you would be a profit on your note as well as a commission on the sale of another note to the payor.
8. Partial Payoff Partial Subordination
For a partial payoff on the note the investor could agree to subordinate to new financing. The investor's yield (rate of return) on the cash investment he has in the note would increase dramatically.
9. Partial Payoff Lower Interest
In exchange for a partial payoff the interest rate and payment could be lowered. The cash investment in the note would have a very good yield.
Improve Your Promissory Note – Restrucure Terms
1. Lower Interest Raise Payment
The payor raises his payment in exchange for a lower interest rate. The investor's yield increases substantially and the payor saves a great deal of interest charges.
2. Lower Interest Graduate Payment
In exchange for a payment that increases each year, the rate is lowered. The payor saves interest and the investor increases his yield and cash flow.
3. Graduate Payment – Eliminate Balloon
For a gradual yearly increase in the payment, the investor will eliminate a balloon payment, which will also increase his yield.
4. Graduate Payment – Shorten Amortization
The payor may agree to a gradual yearly increase in the payment just for the difference it would make in the length of the loan and the amount of interest it would save.
5. Raised Payment – Pop Balloon
A balloon payment could be eliminated in exchange for a raise in the monthly payment.
6. Raise Payment – Balloon Extension
In exchange for a raise in the payment, the balloon payment could be extended for a longer period of time.
7. Wrap Your Loan
The payor may be in need of cash or may be behind in payments and you can loan the money in exchange for increasing the rate slightly on the entire note.
8. Bad Note – Fix Terms or Clauses
There is a great deal of potential in changing bad terms or clauses of a note. Many undesirable notes can become very desirable with minor modification. Most of the time it is a win-win situation for all involved. If a note has a problem, don't look at it as a negative point. Could you buy the note and change the clause? Be sure to negotiate before the purchase.
Improve Your Promissory Note – Collaterizing/Financing
1. Collateralize – Financial Institution
Banks and other financial institutions will loan against paper. They may loan more than the cost of the note and at a lower interest rate. That means 100% financing and a positive cash flow.
2. Collateralize – Investor
Another source of financing is with private investors. One on one transactions and syndications are used to fund paper.
3. Collateralize – Partial Interests
Several investors can be sold partial interests in a note. This can amount to 100% financing of the cost of the note and an interest in the note left over for you.
4. Collateralize – Seller
If the note seller doesn't need all cash, you can give him part cash and a note secured by his own note or by another note or property. This way you can give him a higher price and still get the yield that you need.
Improve Your Promissory Note –Trading (Collateralizing)
1. Trade – Real Estate
By buying notes at a discount and then trading them or using them as collateral at their full face value, you can effectively buy real estate at very deep discounts (20 to 45% below market value).
2. Trade – Personal Property
You can also trade paper at face value for all kinds of personal property such as cars, boats, etc.
3. Trade – Face Value for Discounted
It is also possible to trade good paper at face value for less desirable paper at a discounted value. Expertise in dealing with notes, collection procedures and solving problems can turn that note into a more desirable note.
4. Overtrading – Bank
Using the spread in the interest rates to make you a profit and solve a problem for your banker is what is involved in this technique. The banker makes you a loan secured by paper that you own or are acquiring and in exchange you buy some of his repossessed merchandise (which ends up free to you).
Improve Your Promissory Note – Underlying Loans
1. Wrap Underlying – Reinstate
If your loan of an underlying loan is behind in payments, that can be the opportunity to advance some money at a high rate of yield. It can occur by “wrapping” the underlying loan or loans at a higher rate of interest.
2. Wrap Underlying – Loan Money
If the payor is in need of cash, you can loan them money and use that as an opportunity to wrap the underlying loans and increase your yield.
3. Buy Underlying – Bank
The most ideal note for you to try and buy is the one that lies beneath any note that you already own. Even banks will occasionally sell notes at a discount. It is always worth asking about.
4. Buy Underlying – Private
Always contact any private note holders that own a note that is on a property that you have a note on.
5. Refinance Underlying – Discount
Negotiate a discount with underlying loans and then finance the property. You can then sell it back to the payor on a wrap-around. Possibly at better terms than he already had.
6. Refinance Underlying – 100%
In refinancing the underlying loan or loans, you may be able to finance out the cost of your note also, so that you have all of your cash out of the property and still have a profit coming in from the note (the wrap).
7. Refinance Underlying – Over-finance
You might also finance the note and underlying loans for more than the amount of your cost on the note. It could be possible to walk away with cash and even share some with the payor or lessen his terms in some way.
8. Refinance Underlying – Lower Rate
Many times it is possible to refinance one of the underlying loans at a lower interest rate and better terms than presently exists, especially in the case of second loans. Profits in cash flow or cash could be shared with the payor.
9. Refinance Underlying – Partial Pay – Lower Interest
In refinancing underlying loans, you might be able to get a lower interest rate and also some of your cost of the note back.
The chart that follows is what I call the P.A.M. chart, which stands for Paper Analysis Matrix. When I buy or an considering buying a note, I analyze it using the chart and what possible techniques are available to improve the note.
|EARLY PAYOFF EARLY PAYOFF WITH A DISCOUNT|
|EARLY PAYOFF REFINANCE (THEM)|
|EARLY PAYOFF REFINANCE (INVESTOR)|
|EARLY PAYOFF DISCOUNT UNDERLYING|
|EARLY PAYOFF OVER-FINANCE|
|EARLY PAYOFF OVER-FINANCE – INVEST THE DIFFERENCE|
|PARTIAL PAYOFF PARTIAL SUBORDINATION|
|PARTIAL PAYOFF LOWER INTEREST|
|LOWER INTEREST RAISE PAYMENT|
|LOWER INTEREST GRADUATE PAYMENT|
|GRADUATE PAYMENT – ELIMINATE BALLOON|
|GRADUATE PAYMENT – SHORTEN AMORTIZATION|
|RAISED PAYMENT – POP BALLOON|
|RAISE PAYMENT – BALLOON EXTENSION|
|WRAP YOUR LOAN|
|UGLY DUCKLING TURNS TO A SWAN|
|COLLATERALIZE – FINANCIAL INSTITUTION|
|COLLATERALIZE – INVESTOR|
|COLLATERALIZE – PARTIAL INTERESTS|
|COLLATERALIZE – SELLER|
|TRADE – REAL ESTATE|
|TRADE – PERSONAL PROPERTY|
|TRADE – FACE VALUE FOR DISCOUNTED|
|OVERTRADING – BANK|
|WRAP UNDERLYING – REINSTATE|
|WRAP UNDERLYING – LOAN MONEY|
|BUY UNDERLYING – BANK|
|BUY UNDERLYING – PRIVATE|
|REFINANCE UNDERLYING – DISCOUNT|
|REFINANCE UNDERLYING – 100%|
|REFINANCE UNDERLYING – OVER-FINANCE|
|REFINANCE UNDERLYING – LOWER RATE|
|REFINANCE UNDERLYING – PARTIAL PAY – LOWER INTEREST|