What is a Real Estate Note?

If you have owner financed the sale of your home you've created a contract which states the purchase price, length of loan, interest and other terms of the agreement. Also called a Deed, Deed of Trust, Mortgage Loan, Mortgage Note, Real Estate Note, Paper, Seller Carry Back Note, Promissory Note or IOU. Often used interchangeable but not always the same.
Whenever any person, partnership, trust, corporation or any other entity becomes a lender on a piece of real property, a promissory note is created. You became a lender when you sold your real estate and carried back a note.
The Promissory Note
A promissory note is a written promise to pay a certain amount of money, and its payment is secured by some type of security instrument that becomes a lien on the real property.
The note specifies:
(1) the amount of the loan (principal);
(2) the interest rate (interest);
(3) the amount and frequency of payments (debt service);
(4) when the borrower must repay the principal (due date); and
(5) the penalties imposed if the borrower fails to timely pay or tender a payment (late charge) or decides to pay a portion or all of the principal prior to the due date (prepayment penalty).
The promissory note identifies the person who makes the payments to you (the buyer of your property-the borrower) and the person who receives the payments (you).
The Security Instrument
The security instrument is the document that provides for the alternate repayment of the debt to you in the case of default by the borrower. The security instrument is recorded in the county recorder's office as a lien against the title of the property you sold.
There are three kinds of instruments used to make real estate security for a debt:
(1) mortgage, with or without the power of sale;
(2) deed of trust; and
(3) land contract.
In many states, deeds of trust are by far the most common. People often call them mortgages. They account for well over 99% of the security devices used for real estate. The land contract-known by many names such as installment contract, contract for deed, contract of sale, conditional sales contract, and the like-is used on occasion.
Mortgage
The mortgage gives the lender a lien on the real estate and hypothecates it as security for the note. The borrower, who is the buyer of the property, is called the mortgagor. The lender is called the mortgagee.
If the borrower does not pay, the lender may go to court through a procedure called a judicial foreclosure, that is, foreclosure through the courts. In this procedure, he has the court sell the property and, out of the money obtained from the sale, take enough to pay the expenses of the foreclosure and pay off the debt.
Deed of Trust
When a deed of trust is used, an additional party called a trustee is brought into the transaction. The borrower, called the trustor, transfers "bare legal title" but nothing more to the trustee. The trustee holds this title for the benefit of the lender, who is called the beneficiary.
If the borrower does not pay, the lender directs the trustee to start a foreclosure. This non-judicial foreclosure involves the process of selling the Property to a third-party bidder or, in the absence of a sufficient third-party bid, the beneficiary acquires title to the Property. The foreclosure sale, in most cases, satisfies the debt.
If you need to direct the trustee to start a non-judicial foreclosure, you may or may not be able to recover the entire loan balance. For example, if a third party bids at a non-judicial foreclosure sale an amount equal to or greater than the amount which you are owed (including fees, costs, and expenses of the foreclosure) you would be fully paid.
On the other hand, if you bid the full amount that is owed to you, including all foreclosure fees, costs, and expenses (full credit bid) and there are no third-party bids, you will generally be limited to the Property and its value as the source of repayment of the outstanding balance of the note.
Land Contract
A land contract comes about in a situation similar to the purchase money deed of trust. Instead of giving a deed and taking back a promissory note secured by a deed of trust, the seller enters into a land contract with the buyer in which the buyer promises to pay for the land. Ordinarily the buyer promises to pay in installments over a period of time. In the same contract, the seller promises to deed the property to the buyer when the purchase price is fully paid.

TIPS - Treasury Inflation Protected Securities Fundamentals

Treasury Inflation Protected Securities (known as TIPS), are inflation indexed bonds issued by the US Government. But what do they really offer you as an investor and how exactly do they work???
First of all, there's a lot of investor angst regarding future inflationary expectations. After all - it's a normal concern with the government deficit exploding to unfathomable proportions on a minute by minute basis (not to mention interest rates overall are at historically low levels, and when rates revert to the statistical mean inflation is a likely counterpart to that occurrence).
TIPS can be purchased direct from the US government through the treasury, a bank, broker or dealer - or most preferably through a low cost index fund such as DFA Inflation Protected Securities (DIPSX). Individual TIPS are purchased according to an auction process, where you can either accept whatever yield is determined at the auction or set a minimum yield you're willing to accept. In the auction method, if your requested yield target isn't met - your purchase request will not be executed.
TIPS come in 5, 10, and 30 year maturities and are bought in increments of $100. The return of principal AND ongoing interest payments depend on the TIPS principal value adjustment for the consumer price index (the CPI which is the most commonly used measure of inflation). The coupon payment however, is a constant and stays the same for the life of the security. This is where TIPS get a little tricky - while the coupon payment remains the same, the TIP itself fluctuates meaning the actual yield you receive will vary.
With the underlying TIPS unit value fluctuating based on the CPI, each coupon payment interest rate fluctuates (fixed dollar payment divided by a fluctuating par value equals a floating interest rate). So while the principal value fluctuates, the interest rate is fixed. This is how the holder is protected from inflationary pressures. If inflation increases, the underlying TIPS par value increases along with it.
As with the majority of US Government debt obligations, TIPS pay their coupon semi-annually. The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS).
In what situations would TIPS be a viable option for your investment portfolio? Take for example an expectation of inflationary pressures over the next five years. If you were to invest in a portfolio of TIPS, as inflation occurs the principal value of the TIPS rises to compensate you for the inflationary pressure. Your coupon payment remains the same, but your TIPS principal investment is worth more.
Now let's look at the opposite of inflation - deflationary pressures. Should deflation occur, your principal value would drop. TIPS do have a backstop for deflation however. The TIPS maturity value payment is the greater of $100 per TIPS unit, or the adjusted current value at that time.
Treasury auctions vary by security type and date, and it's challenging to find relevant samples for different types of issue. However here's some real life examples of TIPS and regular 5 year treasury notes for comparison.
In a recent TIPS auction on April 26th, 2010, 5 year TIPS were priced at 99.767648 (or $99.77 per $100 par value TIPS security) with a rate of.50%. On the same day, the 5 year treasury note yield was sitting right at 2.6%. In this case, the regular 5 year treasury note is yielding roughly 5 times as much as the 5 year TIPS. Seems like a lot to give up for some inflation protection doesn't it? The wide disparity in yield is primarily due to investor expectations of inflationary pressure (investors are willing to accept a lower interest rate for the inflation protection).
There is an upside however. Let's look at a similar 5 year TIPS security issued last year on 4/15/2009. It was issued at $100.11 for each $100 TIPS and a rate of 1.25%. At the same time the normal 5 year treasury note yield was at 1.71% - not nearly the spread of the first noted TIPS example. That same treasury note issue today (June 5th, 2010) is indexed at 1.02858 or each TIPS is worth $102.86.
A 5 year treasury note issued on April 30, 2009 (as close as possible to the last TIPS example) priced at 99.691687 ($996.91 per $1,000 maturity par value) and yielded 1.875%. Today through TD Ameritrade where I custody client assets, that same 5 year note is priced at 101.188 ($1,011.88 per $1,000 maturity par value).
The roughly one year old 5 year treasury note has earned a return of the coupon payment (two payments at $9.375 each plus some accrued interest which we're discounting for this example), plus an increase in principal of $14.97 which equates to a 3.37% return. For comparison, the closest issued TIPS issue from April 15, 2009 has garnered a return of two coupon payments (I'm using 10 TIPS to bring this example to parity with the $1,000 par value treasury note) of $6.25, and experienced an increase in value of $27.48 for a comparative return of 3.99%. In this example the TIPS outperforms the treasury note by a reasonable margin.
Granted, these examples aren't perfect, but they're close for illustrative purposes on TIPS calculations and values compared to treasury note calculations and values.
There are downsides to TIPS however - one being taxes. Should the principal value rise with inflation in a given year you're taxed on the growth (which is NOT distributed, it's only on paper) as if it were income. This creates somewhat of a phantom income tax - you don't actually receive the money, but you're taxed as if you did! The upside of this is you establish a new basis in the security and won't be taxed on it again, and in fact if deflation occurs may have a loss to put on your tax return. Of course, don't take my word for it - please consult your tax advisor.
In addition to the tax issue, there's also political risk associated with the US Government (the rules can change - after all the rules change all the time!) in addition to the fact that the government calculates the CPI (who's to say they've got their calculations right, and are they manipulated for other political or economic reasons?).
While TIPS are great for some investors, they're not right for everyone, and certainly not right for an entire (or even a majority of) portfolio. However, should inflation pick up from these historically low levels over the next five years, the TIPS should comparatively do just fine compared to the regular 5 year treasury notes.
With all of the TIPS calculations noted above, still one of the best ways to hedge inflation is with a diversified portfolio of passive investment assets such as Dimensional Fund Advisors (DFA Funds), and other exchange traded funds (ETF's). At Red Rock Wealth Management, our portfolios provide a substantial amount of NON-dollar denominated assets (a great way to hedge against a weak dollar). Client portfolios consist of over 13,000 equity (stock) securities across 41 countries. In addition, many US based companies hold non-dollar assets as well, and the Red Rock Wealth Management portfolio philosophy also holds other tangible assets the government can't "print" - such as gold, oil, and timber.

Seller Financing - How to Create a Secure and Saleable Note or Mortgage

Seller Financing is a topic I am always asked about. Questions like, "How do I create a secure carry-back note or mortgage that will provide the return I need, perform as written and is saleable at a high dollar if I want to sell it?" First, why carry back part of the sale price of my real estate or business sale? Here are some reasons:

1. The buyer of your real estate or business can't or won't deal with a lender for the purchase financing.
2. You have figured out that you can sell your property or business for more if you carry-back some of the sales price.
3. You don't need the cash right now and you want the long-term income, in the form of payments with interest.
4. The only way you can sell your property or business is if you carry-back some of the sales price.
5. Banks usually won't lend on the purchase of a business.

Here are some statistics:

1. About a third of all real estate transactions in the US involve seller financing.
2. About 80% of all small to medium sized business sales involve seller financing.

Following are the basics, in outline form, of the most secure, saleable (at the lowest discount) seller financed mortgages and notes:First a Real Estate Sale with seller financing:

1. Sell the property to a buyer who will occupy it (called owner occupied).
2. Sell the property to a buyer whose mid credit score is at least 625. The higher the better. It's your federal legal right to know all three of their credit scores.
3. Sell the property to a buyer who you don't know and isn't related to you. (Called an arm's length transaction).
4. Sell the property using a third party processor like an escrow or title company.
5. Make sure to buy and receive a valid Title Policy with insurance in the amount of the sales price.
6. Take back a mortgage in the first position (the most senior lien) for no more than 85% of the sales price.
7. Secure the mortgage or note with a valid Mortgage Deed or Trust Deed on the property.
8. Accept no less than 15% cash down payment.
9. If the buyer doesn't have 15-20% cash down payment and the sales price is more than you expected, you can carry-back two notes. One in the 1st position for 80% of the sales price and another one, a 2nd position note for no more than 10% of the sales price. These deals are called 80-10-10 (80% 1st position note, 10% 2nd position note and 10% cash). Now you can sell the 1st position note (the most valuable one) and keep the 2nd position note.
10. The terms of the 1st position note should include: an interest rate of at least Prime (currently 8.25%); Amortized equally, monthly for up to 30 years; Pre-payment penalty for the first five years; Significant and detailed late and default payment stipulations.
11. Keep detailed records, like a Note Owner's Manual, of the note and each payment (preferably a copy of the front and back of the payment check showing the bank cancellation stamp). Preferably a separate checking or savings account for the note.

Next, a Business Sale with seller financing:

1. Sell the business to someone experienced in and who will operate it.
2. Sell the business to a buyer whose mid credit score is at least 675.
3. Sell the business to a buyer you don't know and isn't related to you.
4. Sell the business as an 'Asset Sale' instead of a Corp Stock or Equity sale if possible.
5. Always use legal professionals (business attorney, escrow, Title company, etc.) to construct and execute the sale and documents.
6. File and record a UCC-1 following the close of sale.
7. Sell to a buyer with at least 30% cash down payment.
8. Make sure the business can afford to support (pay) the note payments from its cash flow because you will be depending on the business to perform on the note.
9. Carry-back only a 1st position promissory note.
10. If real estate is involved in the sale, create two notes. One on the business and one on the real estate. (A business note is far more valuable without real estate).
11. Receive a Personal Guarantee from the buyer even if the buyer is a corporation. It is added value if the Personal Guarantee is secured with defined, tangible collateral outside the business and equal to the amount of the note.
12. Receive a Security Agreement.
13. Receive proof of exactly the cash down payment paid.
14. Make sure you have a signed Bill of Sale.
15. The terms of the carry-back note should include: Interest Rate of Prime plus 1%; Balance Amortized equally and monthly for no more than 72 months; Significant and detailed late and default payment stipulations including reversion of the business and assets to you; Non-assignment clause; Full Balance payoff at time of and in case of business subsequent sale.
16. Keep detailed records on the business sale transaction; keep your last two years of signed business tax returns; demand that the buyer, now your note payor, provide you periodic (quarterly) Profit and Loss business statements (it's your legal right); keep detailed note payment records (a separate checking account is best).

Promissory Note Frauds and Tricks

I have been actively engaged in the promissory note business for over 40 years. My and my wife's self-directed IRA accounts have been invested in notes for the same length of time. My note investments have been the foundation of my estate building. Because I believe that promissory notes can be an excellent investment vehicle for the average investor, I try will try explain what they are and how they work. But, I will also point out that notes can be misused and abused by dishonest people and by ignorant people. This article is the first of several articles in which I will attempt to inform the average investor about the benefits and warn the average investor about the detriments of investing in notes. Obviously, there is no perfect investment.
Just as cars do not injure and kill people (bad drivers do), promissory notes do not trick and harm people (dishonest or ignorant sellers of promissory notes do).
What Promissory Notes Are: Generally, promissory notes are a form of debt similar to a loan. Companies and individuals issue these notes to finance a wide variety of endeavors. Bona fide notes are an important means by which companies and individuals raise capital. However, not all notes are legitimate and investors must be mindful of potentially tricks, deception, and exaggerations. Not all notes are created equal.
Promissory Notes Often Are Securities: In many instances, these investments are promoted as not involving the sale of securities, either by the issuers of the notes or by salespersons. The Securities Act of 1933 and the Securities Exchange Act of 1934, however, include "any note" in the definition of a security. From these definitions, a legal presumption has been developed that a note is considered to be a security, although this presumption may be overcome if, based on all facts and circumstances, the instrument is deemed to be a commercial-type loan. In many cases, notes are construed to be securities. In some cases they are not. Fraudulent Note Programs: In recent years, securities regulators have uncovered a number of fraudulent schemes involving notes. Increasingly, promissory note investments are one of the vehicles of choice when unscrupulous promoters go after investors' funds. Promissory notes can be a legitimate investment, yet sales of notes to individuals may involve a scam. And, some notes are intended to be legitimate, but are so poorly constructed that they are in fact worthless. I want to give you the tools to evaluate these investments and questions to ask.
• High interest rate or above-market returns. This should always raise questions. Ask how can this note investment pay such high rates or returns and does it make sense. Listen very carefully to the answer.
• "Guaranteed returns," "risk free" or any word that signals low risk. Can anyone promise a return on your money without risk? Is there any investment that comes without risk? Ask these questions and be sure you understand how this is possible. Listen very carefully to the answer. RED FLAGS:
Too-good-to-be-true testimonials.The note seller may say that a "well-established" company is looking to expand its business and needs to raise capital. Instead of borrowing money from a traditional lender, such as a bank, it is offering investors an opportunity to purchase "promissory notes," typically with a maturity of nine months and an annual interest rate between 12% - 18%, far more than you could get elsewhere The seller's representation is that the notes are very secure while offering interest rates that are extremely attractive. What more could any investor want? But, just remember, promises are only as good as the person making them. Be very careful about who you deal with. Investigate and ask questions. As former president Regan said, "trust but verify!"
Fancy words and gold lettering are no substitute for real, honest financial information. Investors often receive fabricated note certificates complete with fiscal and legal-sounding terminology and gold embossed seals. These notes are often established as window-dressing for a ponzi scheme.
Words that wave a red flag. Use of the following words: perfect offer, confidential, sure-fire, removes doubts, secret, cinch, always, lazy way, anyone can make a killing, removes risk, easy money, easily determine market value, air-tight, take the fear out, risk-free, judgment proof, insider, painless, fool-proof, safe, win/win, removes guesswork, easy, magic, bulletproof, gold mine, complete, riches, This is not a get-rich-quick scheme, automatic, dream stealer, no-brainer, wealth, nothing down, cookie cutter, global, pro creative, money machine, wiz program, Hawaii, success, quick, offshore, foreign, boot camp, course, discount, fortune. Company names that sound like non-profit or government organizations. national, institute, education, bureau, association, co-op or cooperative, club, land bank, extension, U.S. or United States or American, university, college, trust, network, acronyms that end in MAE or MAC and which are therefore designed to sound like the federally-related mortgage organizations FNMA (called "Fannie Mae'~ or FHLMC called "Freddie Mac's.

Promissory Notes For Building Wealth Gradually - Part Two - What Are The Risks?

In the first article of this series we examined the concept and the mathematics that support and explain the wealth building process. We learned who the players are and what roles they play in the promissory note industry. Additionally, we reviewed the types of promissory notes available to private party investors.
RISKS
To be a winning investor, you must know the risks. Now, moving forward, this article will focus on examining and explaining the risks related to promissory note investing. Essentially, the fundamental characteristics of the risks are universal and could apply to other types of investments in varying degrees and in varying ways. In the real world of investing, all investments carry risk of some type. To the uniformed person, many of the risks that actually exist are not obvious-they tend to be overlooked. But, whether they are recognized or not, they still exist and they will impact investor decisions over time.
RISKS OF A GENERAL TYPE
Let's start by reviewing some of the less obvious risks that are often overlooked by the beginning investor or by the uninformed investor.
Purchasing power risk is the possibility that we experience inflation that reduces the purchasing power of the dollar. Often, people refuse to invest because they fear loosing money. In many instances they keep their savings in low yielding bank accounts that are insured by the FDIC. These accounts presently are paying about.8 % to 1.8% interest annually. If the inflation rate, which has historically averaged about 2.5%, continues in the future as it has in the past, these bank deposit savers/investors will loose an average of about 1% of their investment annually. The loss of purchasing power over time is actually a hidden tax on the investor.
Interest rate risk is the possibility that by chasing the highest interest rates available, the investor takes on higher and higher risks of loss--unknowingly. In the world of investing it is usually true that a high interest rate paying investment also will carry a high risk of loss. Ignoring, or being unaware, of this proven fact can cause the untrained investor to venture into a "mine field" of risk and not realize it until the investment "blows up".
Shortfall risk is the possibility that the investor, because of poor planning and/or poor execution, discovers that they do not have the funds necessary to accomplish their planned objective. That objective may have been to provide funds for their children's education, to provide funds for some special event, or to provide funds for their own retirement at a specified standard of living level. Planning and monitoring progress over time are necessary steps that will avoid investor disappointment in the future.
RISKS SPECIFICALLY RELATED TO PROMISSORY NOTES
Now that we have reviewed some of the general risks that impact all types of investing, let's shift are focus to some of the risks that are specific to promissory note investing.
Unenforceability risk is the possibility that the promissory note and the loan documents have not been drafted properly and cannot be enforced in court to collect what is owed. An experienced, properly trained attorney should draft all loan documents. But, the problem facing the promissory note investor is that the attorney's skill with promissory notes is unknown. Many attorneys think they understand how to properly draft loan documents, but, in fact they do not know all of the recent laws and regulations-they do not know what they do not know. To avoid this risk, locate an attorney through references from an experienced, successful investor. Don't expect the ordinary attorney to volunteer to you that they are not qualified to do your legal work.
Borrower default risk is always a possibility. The borrower may have been of good character, had a good job, and was in good health when the promissory note was created. Subsequently, the borrower may have suffered a set-back. Examples of typical set-backs include loss of employment, reduction of hours worked, personal illness, family illness, a bad investment decision, etc. Any of these set-backs can cause your note payments to not arrive on time, or not to arrive at all. This risk is in integral part of promissory note investing. When this happens it is your collateral security that becomes your next line of defense. Your collateral security can avoid the risk of loss upon default.
Collateral security risk Normally, the borrower repays the amount borrowed. But, if the borrower cannot repay, then the collateral security must be sold to repay the debt.
The risk of loss is created if the value of the collateral security is inadequate to cover the amount owed on the note. To avoid this risk, have a qualified, experienced real estate appraiser value the collateral security and provide a written repost. The appraiser should be familiar with the real estate market (activity, typical values, financing available) in the subject neighborhood. Ideally, the amount loaned should not exceed 75% of the value of the collateral security.
Priority of the lien risk Normally, the promissory note should be secured by a first position lien-mortgage or deed of trust-on the collateral security. In order to know for certain that the mortgage line is in first position, a Lender's Title Insurance Policy should be purchased from a reputable title insurance company. Without a Lender's Title Insurance Policy in your file that states that your collateral security is a first position lien, you have a risk of loss; at the time of enforcing your mortgage lien you may discover that you actually have a "junior" position mortgage; your mortgage may actually be in second or third position. There may not be enough collateral security available to you to repay what is owed. The rule: Don't assume that you have a first mortgage-buy a Lender's Title Insurance policy to avoid the risk of loss.

How To Create A Business Note That Is More Attractive To A Note Investor

You are selling your small business (business value under $1 million for this article).
You would like the buyer of your business to come in with an all-cash offer, or be
able to qualify for an SBA guaranteed loan. However, in many cases the owner of the
business ends up taking back the financing because the buyer is not able to make
an all-cash offer or does not qualify for an SBA guaranteed loan. So you create a
"business note" and you now become the "bank". At first that may seem okay, but
after a couple of years of receiving payments you may decide you want to get back
into business and you need the cash that is tied up in your business note on which
you are receiving payments. So now you want to sell your business note to raise
cash for your next business venture. What is it worth? That will depend a lot on how
you structured the note.
The objective of this article is to help you structure the
note so that it is more attractive to a prospective business note buyer.
Assumption: This article discusses the structure of a note that includes only the
business assets of a business. If a business also includes real estate that is being
sold at the same time as the business, that real estate should be sold in a
transaction that is financed separately from the business assets. This allows each to
be valued and financed in the most optimum manner. For example, it may be
possible to finance the real estate with a lower down payment, for a longer term,
with a lower interest rate, and without a personal guarantee.
The objective of a business note buyer or investor when buying future business note
payments is to minimize the risk of a default on the note. Therefore, they look for
specific things when evaluating the purchase of future payments from your business
note. Those include the following:
buyer's down payment
number of payments made on the note (also known as "seasoning")
buyer's credit history
personal guarantee of the buyer
total amount of payments being sold
cash flow of the business and past profitability
length of term of the note
payment amount
offsets
lien position of the note
amortization of the note
experience of the buyer with the type of business purchased
interest rate on the business note
documentation of the business sale
Unlike the purchase of a piece of real estate, the tangible assets of a small business
may not be adequate to cover the amount due on the business note if the buyer of
the business defaults. Therefore, the business note buyer is looking for ways to
lessen the likelihood of a default. If there is a default on the note, the business note
buyer will require that the business buyer follow through on their personal
guarantee which secures the business note.
A cash down payment of at least 33 percent should be made by the business buyer.
This down payment should not come from borrowed funds. The reason for requiring
such a large down payment is to make it less attractive for the buyer to "walk away"
from the business if they encounter problems. If they have a significant amount of
their own money invested in the business, they may think twice about walking away
from the business when things get tough.
If the down payment was less than 33 percent, then the business note buyer will
require that the difference be made up by additional payments on the business
note. The business note buyer wants to see that the new owner of the business has
at least a one-third equity investment in the business between the combination of
cash down payment and payments made on the business note while operating the
business.
Business note buyers want to see that at least two monthly payments have been
made on the note by the new owner of the business. For new owners of professional
practices such as doctors or dentists, a larger number of paid monthly payments
will be required. This serves a couple of purposes. It should show that the new
owner is generating cash flow from the business. It also allows the new owner to see
if the business is meeting their expectations. As part of the "due diligence"
performed by the business note buyer, they will interview the new owner to see if
any problems exist that might lead to future problems making payments on the
business note. They will want to know if the new owner was "mislead" by the seller
of the business.
The buyer of the business should have a credit score of at least 600. A higher score
is required by the business note buyer when the value of future business note
payments being purchased reaches a certain level. Any "clouds" on the business
buyer's credit history should not be current. These should have been resolved
before purchase of the business.
The business note must be personally guaranteed by the buyer. It cannot be
guaranteed by the company buying your business. Specifically, it cannot be
guaranteed by a person signing on behalf of the company. If there is a default, the
business note buyer will be coming after the personal assets of the individual(s)
making the personal guarantee. A personal financial statement for the buyer should
be obtained to verify that they have the necessary assets should it be necessary to
fulfill the personal guarantee.
The maximum amount a business note buyer will buy in a single transaction is
between $300,000 and $450,000. You can create a business note for more than this
maximum amount, but the business note buyer won't buy more than their
maximum at one time. This means when the period is completed for which
payments have been sold any remaining payments will once again come to you. At
this point you will have the option of selling future payments again, if you want to.
The cash flow of the business must be adequate to service the note and provide
additional cash for the new owner to live on. The cash flow should be at least 1.25
times the amount required to service the note. The business should have been in
the same location for at least 3 years (4 years for restaurants and bars), and it
should have been profitable over that time.
The term of the note should not be longer than 72 months with 36 to 60 months
being preferred. You can create a business note for longer than the recommended
period, but a business note buyer will only buy the number of payments with which
they are comfortable. The objective is to minimize the risk to the note buyer. The
longer the term, the greater the likelihood that something will go wrong. The note
buyer is looking to minimize their risk because the note is not fully secured by the
assets of the business.
A key item related to the term of the note is the term of the lease of the space in
which the business operates. In order to avoid a major disruption to the business
due to a problem renewing the lease, the term of the lease should be at least as
long as the term of the business note.
The business note must be in first lien position. The business note cannot be a
second position lien behind a bank loan. If there is a default, the second position
lien holder may have a difficult time recovering their investment.
The business note should be fully amortized over its term. There cannot be a
balloon at the end because there is probably no way to refinance the balloon at the
end of the note term. If a bank was not willing to finance the original transaction, it
is unlikely that they would be willing to finance the balloon at a later date.(Notes:
Some business note buyers may accept a balloon if it can be amortized within 24
months using the same monthly payment used to pay the note. Other business note
buyers may buy payments up to a few months before the end of the note term, but
leave the balloon for the business note holder.)
The business note buyer wants to see that the new owner of the business has prior
experience running the type of business being purchased. This is especially
important for the purchase of a "high-tech" business or a professional practice. The
assumption is that someone with experience in the type of business has a better
chance of succeeding than someone without prior experience.
One of the biggest factors contributing to the discount that the seller will have to
take when selling the future payments is the difference between interest rate on the
original business note, and the yield required on their investment by the business
note buyer when they buy the future note payments. Therefore, the interest rate on
the business note should be set as high as possible while still allowing a monthly
payment that can be covered by the cash flow of the business for the term of the
note.
The deal is not done until the paper work is done. There are stories where people
documented the sale of a business on a napkin or restaurant place mat. That will
not be adequate if you have any thought of selling your business note in the future.
There are four main documents that should be produced. It is recommended that a
lawyer be used to help properly prepare these documents. The documents are listed
below.
UCC-1
chattel security agreement or chattel mortgage
promissory note
purchase agreement
The UCC-1 documents that the seller is holding a "perfected" lien on the business.
This document is filed with county government and is part of the public record. If
there is a default, this document indicates that the business seller will be first (after
tax liens) to receive proceeds from the sale of any business assets.
The "chattel security agreement" is a list of the tangible assets of the business. This
will usually be the furniture, fixtures, and equipment that are the tangible assets of
the business. The intangible assets are things like a loyal customer base that can be
lost if the new ownership does not provide the service received from the previous
ownership. The chattel security agreement does not become part of the public
record, but is necessary to document what the tangible assets were at the time of
the business sale.
If any vehicles are part of the security for the business, the title of the vehicles
should indicate that you are the owner of the vehicles so that the new business
owner cannot sell these vehicles without your knowledge.
The promissory note documents the details of the sale like value of the note at the
time of sale, the term of the note, the monthly payment, the interest rate, and any
other special terms such as late payment fees.
The purchase agreement ties the whole transaction together. It may contain
information that is not specifically contained on the other documents such as
provisions to provide periodic financial statements to the seller which could then be
made available to a prospective note buyer for evaluation.
The promissory note or the purchase agreement should not contain any "offset"
statements which would allow the business buyer to deduct from payments made
on the note due to problems running the business or problems with equipment
purchased as part of the business. If the promissory note or purchase agreement
does contain "offsets", then the business note buyer will require at least 6 months
of seasoning to see if there have been any events that would activate the "offset"
provisions.
The following table summarizes the factors contributing to a business note that will
be more attractive to a prospective note investor.
Note Factor
Preferred Value for Note Factor
Buyer's Down Payment
At least 33% in cash that was not borrowed
Minimum Number of Payments Already Made (Seasoning)
2 monthly payments (more are preferred and more are required for professional
practices) by the new owner
Buyer's Credit History
Buyer must have a credit score of at least 600 with no recent "clouds" on credit
history
Personal Guarantee
Personal guarantee required (cannot be a person signing on behalf of corporation or
partnership)
Total Amount of Payments Being Sold
Maximum is $300,000 to $450,000 in a single transaction (note can be created for
more than this amount, but the maximum that can be sold at one time is $300,000
to $450,000)
Cash Flow of the Business
Cash flow should be at least 1.25 times the amount of the monthly payment on the
business note.
Length of Term of the Note
72 months maximum but 36 to 60 months is preferred (Note can be created for a
longer term but business note buyer won't buy the payments beyond a certain
point.)
Lien Position of the Note
First lien position only
Amortization of the Note
Note must be fully amortized within the note term
Experience of the Buyer
The buyer should have prior experience in the type of business being purchased.
Interest Rate
As high as possible such that cash flow can support the required payment for the
term of the note.
Documentation For Sale
UCC-1
Chattel Security Agreement
Promissory Note
Purchase Agreement
Real Estate
Real estate that is part of the business should be sold in a separate transaction from
the business assets
Of course, a business note can be structured other than recommended above,
especially if the seller does not anticipate selling future note payments. However, if
the seller has any thought that they might want to sell future note payments, then
the seller should follow the above recommendations as much as possible.
If you have an existing business note or are in the process of creating one as part of
the sale of a business, and you are thinking about selling some or all of your future
payments on that note, then we can help you determine what an investor would be
willing to pay for those payments. Please contact us today for a free, no obligation
quote on the sale of your future business note payments.

The Importance of Network Security

In the process of home network setup, one thing that you may not have considered is network security. Wireless network installation can be very complicated, and as such, you might believe that the security part of it can wait till a later date, but you could not be more wrong. This is something that needs to be done as SOON as possible.
You might think that you should be that one person on the block setting up a home network that anyone can use, and that's a great dream to have. The only problem with this is that anyone could park in your immediate area and use your internet to download illegal materials. This could include music, games, movies, or even inappropriate forms of pornography. In the end, this can all be traced back to you, which is why you need to make sure you have the best wireless network security system set up.
When it comes to wireless security, there are two major types of firewall. The first type is the software firewall. This type of firewall is one that you install on your computer and it keeps you protected. The second type of course is the hardware firewall. Technically it is still software, but it is a box that sits on your network keeping hackers and other malicious users out of your private life. The question is what type of hardware firewall you are going to purchase.
Since a hardware firewall is essentially a router, you need to figure out what brand you want. There are quite a few different major brands such as Cisco, D-Link and Netgear, but in the end the level of security and quality you want will determine the price you pay. For instance we could first start out by talking about the standard D-Link and Netgear.
The lower end routers do their job, and can even be customized with Linux based firmware. They will cost you somewhere in the neighborhood of $40 - $50. Not a huge price to pay, but you have to remember that their security isn't always top notch, and in many cases can be easily broken. Though you may not be able to afford it as a home user, a Cisco router would be a great choice if you are big on security.
Note that Cisco is normally used for large scale companies or even corporations, and their routers can easily run from $500 - $15,000. It's a lot of money, but if you can afford it, then this would definitely be the best wireless network security option for you.
In the end it all comes down to how much security you need, and what you need it for. All wireless routers offer some measure of security, and if you are not happy with the items on the market, then you could always create your own router. That however, is something best left to those with experience, and you'll be there soon enough.