What Makes a Good Real Estate Note ?
By W . J . Mencarow , President of The Paper Source , Inc .
The value of a note ultimately depends upon the economic conditions that support the value of the property . An owneroccupied single family house in a good neighborhood located in an area with a longterm stable economy is the best collateral possible . It is further enhanced by a payor who has an excellent credit record and unblemished payment history .
Less desirable collateral , in descending order : owneroccupied ( owner lives in one unit ) duplexes / triplexes ; nonowneroccupied single family houses ; nonowneroccupied duplexes / triplexes ; other nonowneroccupied multifamily units ; improved land ; commercial ( nonindustrial ) properties ; resort properties ; subdivided but unimproved lots ; raw land ( some buyers would use a slightly different hierarchy ).
Due to the current regulatory environment in the U . S ., industrial
properties , gasoline stations , even properties with underground oil tanks have many hidden liabilities . Notes secured by such properties should be avoided . Cooperatives , timeshares , mobile homes and personal property are not real estate and by themselves are not adequate security for notes .
The higher the investmenttovalue ratio , the riskier the note ( ITV = amount paid for the note + senior lien balance / market value of property ).
If there is little or no appreciation in the property , the loantovalue ratio is a barometer of the likelihood of default . Notes on property purchased for $ 1,000 down or less often default . The higher the downpayment , the better .
An amortized note is more valuable than one with a balloon , since the payor may not be able to make the balloon payment .
The single most powerful financial aspect determining the value of a note is the amount of the monthly payment . For example , all else equal , a 10year note with a large monthly payment and no balloon is worth more than a 10 year note with a smaller monthly payment and a balloon .
A note in the first lien position is more valuable than one in the second lien position . Third lien or lower notes are worth very little .
A second lien note with a huge balance first lien should be avoided . In case of foreclosure , the owner of the second lien would have to make the payments on the first .
A seasoned note ( one with a payment history of several years or more ) is better than a green note ( little or no payment history ).
The payor ' s credit history is important to help determine the character of the payor and likelihood of default , but it is not infallible . Everyone , even those with the best credit , can lose their incomes , have medical emergencies or suffer other unforeseen catastrophies . The best use of a credit report is to identify a potential bankruptcy candidate .
Again : The value of a note ultimately depends upon the economic conditions that support the value of the property .
For additional information about The Paper Source , Inc and W . J . Mencarow , visit : www . papersourceonline . com /
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