The Gold in the Paper

Robert E YoungFounding Director

Texas Note Company

Agenda• Introduction• The Promissory Note• Payor Credit • Transaction Documentation • Professionals

Robert E Young• Founding Director of Texas Note Company• 10 years at Dell - Data Analytics / Freight Audit• 5 years at Citibank – B&P Loan Department

• Two wonderful Girls Katharine (9) & Caroline (5)• Hill Elementary Dillo Dad• Head Coach of the Porcupines (NWA Girls Kickball)

IntroductionIn order to turn paper into gold, you need to make a commitment to

accuracy.

”Bad notes” are a reality in the note business. If you make a commitment to avoid these errors, you will set yourself apart from other s because of the accuracy of your notes.

The Promissory NoteCreating a Note with Investors in mind

• Down Payment• Term (Amortization)• Interest Rate• Late Payment Clause• Accounting• The Details• Professionals • Payor Credit• Appraisal

Down PaymentOne of the biggest mistakes is to take a small down payment or none at all.

Investors look at this as a BIG ref flag. Why? Because the risk of default is to high that the buyer will walk away. When times get tough what is holding them from walking.

Get the largest Down Payment you can get! A 20% down payment decreases the chance of default, and increases the value of the note. 10% is usually acceptable to investors, but 20% makes a statement

Term (Amortization)Investors like short amortizations, shorter than 30 years. 10, 15

or 20 years is what investors like.

Balloons? Have a clear exit strategy if you are going to put a short term,

less than 5 years, balloon in place. Some investors think Balloons are to complex and will shy away.

WRAPS are a different story – I recommend the balloon be 5 years or less on a WRAP.

Interest RateThe Interest Rate ultimately sets the value of the note. Don’t create a note

with a 4% or 5% interest rate over 30 years then get upset when I offer you .55 or .60 cents on the dollar. Remember you are not a bank that can offer low rates.

Experienced investors want a minimum of 9% - 15% return on their money. If a note has a low interest rate the deeper the discount will be to get the return wanted.

A low interest rate only benefits the buyer.

9% - 10% is what is recommended

Investor wants a 15% Return

Note Amount - $100,000Term – 120 MonthMin Payment - $1,161.08Interest Rate – 7.0%

$ for Note - $71,967.34

Note Amount - $100,000Term – 120 MonthMin Payment - $1,321.51Interest Rate – 10.0%

$ for Note - $81,910.79

Late Payment ClauseWithout a Late Payment provision in the Promissory Note you have no way to

protect yourself (leverage) for financial loss when you have a payor that has a history of late payments.

Be sure to include a late payment provision that you feel will protect you. The standard 10% of the principle and interest payment does not always meat the creators goals. Take into consideration an actual dollar amount of $50 or $75 dollars.

WRAPS – Late Payment Clause

Accounting of the NoteWhen an investor buys a note the most important thing they

want to know is how likely it is the future payments will keep getting paid. One way to determine this is by the payment history.

Document when the payments come in, keep cancelled checks, open a separate bank account so the only activity in the account pertain to that of the note.

A note servicing company(like The Texas Note Company) can maintain all the accounting and provide monthly statements and end of the year IRS reporting.

WRAP Late Payment ClauseWith a WRAP there are other details to consider when putting a Late Payment

provision in the note, ESPECIALLY if a loan servicing company is involved.

• When does the 1st Lien become late and fee assessed?• Does the penalty cover the cost of the late payment assessed by the 1st

lien lender?Most lending intuitions (BOA, WF,CITI,GMAC) assess a late payment fee 15

days after the due date, which is at close of business on the 16th of each month.

Be cognizant of the timeline between your note and that of the 1st lien

The Details

Always Run the Numbers of the Note for Accuracy.After you have run them have someone else do it!

This is where the Gold Is. An inaccurate note could cost you thousands of dollars!

InsuranceBuyer retain an Insurance Policy

Professionals• Title Companies• Attorneys • Loan Servicers – The Texas Note Company is a Loan Servicer

• Insurance Agents• Real Estate Broker and AgentsProfessionals add an extra level of soundness to the Owner

Finance transaction but they make mistakes to. Preferably use a professional that has experience putting these transactions together

Payor Credit• The sweet spot for payor Credit to sell an Owner Financed

Note is 600• Don’t let the 600 intimidate you.• A good Story can go a long way• Common Since Questions to determine the Story

– Is the payor a husband and wife who both work?– How long have they worked there?– What age group is the payor? 20’s 30’s 40’s 50’s etc….– Are their taxes and insurance current?– What type of car does the payor drive?

Documentation

The secondary market trades ORIGINAL documents.The ORIGINAL Promissory Note needs to be put in a

SAFE, FINDABLE place. Without it you have nothing to sell.

The other ORIGINAL document that you will need at closing is the Mortgagee Title Policy

While you are at it put the Deed of Trust in that SAFE place as well.