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Times Have Changed - Investors Face an Income Problem

February 21, 2012 | Comments: 0 | Views: 113

The investment outlook for traditional income producing assets is dismal. Savings accounts, Money Market accounts, Treasury Bills, and bonds are all generating very low yields. An alternative financial investment asset to consider is the promissory note.

Promissory notes generally yield significantly more than traditional assets do.

What is a promissory note? It is a legal document, a written promise to repay a sum of money. A negotiable promissory note states "Pay to the order of" and is transferable by endorsement similar to a check.

What people talk about "the mortgage" they are actually referring to two separate legal documents. A mortgage or trust deed is a lien or a claim on property. When a lien instrument (mortgage or deed of trust) is combined with a note, it is commonly refereed to as "the mortgage". The note is the promise to repay the debt, and the mortgage or deed of trust is the collateral security backing-up the repayment promise. The word "note" is commonly refers to the mortgage instrument and note and/or the deed of trust and note combined. A promissory note without a mortgage or other lien instrument is an "unsecured" promise" to repay.

Why do promissory notes have higher yields? There are two main reasons. First, each note is custom tailored to meet the requirements of the borrower and the lender. These parties mutually agree to the interest rate; the rate is negotiated to fit this one specific transaction. The interest rate is not dictated by a national market or by a governmental agency. Second, because there is no organized market for buying and selling notes, they are considered to be more or less "illiquid". The lack of liquidity requires a higher interest rate to compensate for this factor.

What key elements must a note have? There are three main features that every promissory note should have. They are enforceability (in a court of law), collectability, and marketability. Attorneys, and most other people, think only of the enforceability. But, when push comes to shove, getting a judgment against a debtor in a court of law does not repay the debt. In order to get repaid it is necessary to collect money on the judgment. Collecting money from the debtor may be impossible if the debtor is bankrupt, destitute, unemployed, or in the hospital.

Consider this situation: the note holder would like to sell the note; he needs to raise some cash for a personal or business purpose. If the note and the related documents have not been structured properly, there may be no buyers at any price. Or, there may be buyers at a substantial discount because of the flaws in the documentation.

What are the best ways to invest in promissory notes? Your general investment guidelines should be applied when investing in notes. 1) Don't put all of your eggs in one basket; 2) Understand what you are investing in; 3) Understand who you are investing with; 4) Stay current with your investments by getting monthly reports; 5) Don't hesitate to ask questions when you do not understand or agree with what is happening; 6) Get outside expert help quickly if you sense a problem or get a negative are surprise.

Lawrence Tepper specializes in:

Promissory Note Appraisal & Valuation--and LLC Valuation and Appraisal

Expert Consulting Services

EDUCATION AND TRAINING

Law Degree /Accounting Minor University of Denver Colorado Real Estate Broker-- Promissory Notes Specialization Certified Commercial Investment Member From National Assoc. Realtors (CCIM)

PRACTICAL EXPERIENCE 35 + years of appraisal and valuation for Attorneys, CPA's, Estates, Trusts, Administrators, and Financial-Investment Advisors.

http://promissorynoteappraisers.com/

Source: EzineArticles
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