The Cash Flow Clarion

The Cash Flow Clarion

March 19, 2006

Maintaining And Protecting Your Cash Flow Note

If you are holding a mortgage or trust deed, or are thinking about creating a privately-held (owner-financed) mortgage or trust deed, you need to know what to do in order to keep that investment safe and sound.

Firstly, you will need to make certain that your mortgage or trust deed is properly recorded with your local courthouse. The mortgage or trust deed is a written contract between you and the person who bought the property. You will want to make certain you have a copy of the mortgage as well as the promissory note and that these are kept in a safe location. (The promissory note is the buyer’s promise to pay the seller a specified amount of money over a given time period at a specified interest. It will contain all the details of the loan, including the monthly payment amount, any balloon payments due and any penalties or clauses.)

It is important that as each payment is received, it is recorded properly in your ledger or payment record keeper. You will need to record the total amount of each payment made, and the date it is received. You should also calculate and record how much of each payment is applied toward interest on the note and how much is applied toward the principal. These calculations will allow you to determine what the balance due on the note is. These calculations are important for tax reporting purposes as well.

In addition, you need to ascertain who is responsible for paying the property taxes. This should be clearly specified in the mortgage or trust deed. Even if the payor is responsible for paying the taxes, it is advisable for you to make certain the payments are made in a timely fashion. In the event of a default, forcing you to foreclose on the note, you will be held responsible for any unpaid back taxes.

You also need to make sure that there is a home owner’s insurance policy in place and that the policy is issued for an amount that represents at least the full value of the amount still owed to you. You should also be listed as the mortgagee or trustee on the policy. It is recommended to have the insurance company contact you directly and immediately in the event that the policy is cancelled or unpaid.

A title insurance policy and settlement is a form of insurance that protects you against any losses or defects in the title of a particular piece of property. Title defects and losses can be costly and even catastrophic, so title insurance is an important aspect of protecting your investment. You should make certain you have a title policy and that it is kept in a safe location.

These are a few of the most important things you need to attend to in order to keep your investment secure. If these items are neglected, you could potentially lose your entire investment.

First Class Cash Flow Handlers offers several products which detail everything you need to know in order to keep your mortgage or trust deed secure. Check out our Note Owner's Manual and our Cash For Paper audio course. We also buy cash flow notes of any type. For more information, visit us at our home page or call us at 401-258-7158.

Selling A Cash Flow Note Secured By Commercial Real Estate

Commercial real estate is a broad term which can apply to many different types of properties. The real estate in question may be a multi-family home with more than 3 units or an apartment complex. It may house any other type of business as well. It is important to understand that these notes are secured by the real estate alone, not by the occupying business. Notes secured by businesses (business notes) are an entirely different type of cash flow note.

Cash flow notes (both mortgages and trust deeds) secured by commercial real estate can be sold for cash. Their value will be determined by factors such as the value of the securing property, the payor's credit rating, and the individual terms of the note. Other factors, such as the amount of seasoning, the amount of equity in the property and the payment history will also affect the value of the note.

In general, a down-payment of 25% on a commercial property is preferred, although notes with down-payments of 10-15% may be considered under some circumstances. Credit scores above 640 are preferred as well, although scores of 600 or more will definitely be marketable. Although simultaneous closings (selling the note directly after the sale of the property) are sometimes done, seasoning the note for 4-6 months is more common. Seasoning for 12 months or longer will make the note even more valuable and help offset other weaknesses, such as a low down-payment.

Additionally, other information about the property will be necessary in determining the note value as well. Whether the property is owner-occupied or tenant-occupied will be a factor. Owner-occupied properties will be more secure and thus more valuable. If the property boasts multiple tenants, the vacancy factor can affect the value of the note also. The annual gross rental income for the property, as well as the annual operating expenses must also be taken into account. Likewise, the net operating expense (NOI) will need to be calculated and accounted for. (The NOI is the net revenue of the property after all expenses except the debt service on any mortgages have been subtracted.) The debt coverage ratio will factor into the note's value as well.

Other factors which need to be evaluated are items such as the zoning of the property, the current usage of the property, and the allowable uses in the classification of the property. For some properties, whether the zoning is "grandfathered" and whether the current usage is taking advantage of some kind of variance will have an effect on the value of the note as well.

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