Investing In Promissory Notes

Some Important Facts To Know About Investing In Promissory Notes

For the most part, when a person begins to consider different financing options, their first reaction is to head to the nearest bank to secure a loan. It seems that for years, banks have held a monopoly on lending, and it is their final say as to who will get their money. You may be surprised to learn that while banks have been very strong in the field of lending, they have never completely cornered the market on financing loans. For the person that is willing to try a little creative financing, there are other avenues to try, and one of those creative options is the Promissory Note Buyer. There are many different types of these notes and understanding how they work can be very beneficial for those who may be interested in this type of lending.

What is a Promissory Note?

Remember the good old days when all a person needed to do to secure a loan was hand over a paper that said “I.O.U” to the lender? On it was written the amount owed, to whom it was to be paid, and the signature that sealed the deal. It was a simple but legal document that could easily be agreed to. A promissory note buyer works in a similar fashion. Similar to a bank agreement, in these notes would include more detail than that traditional I.O.U. With todays Note Buyers, in addition to the amount owed, there will be a payment schedule, the rate of interest to be paid, late fees, and any penalties to be expected if the borrower were to default on the payment in any way.

Who Can Buy a Promissory Note?

Throughout history, promissory notes have been used for many purposes. There was a time when it was used as a legal currency other than cash because it was an agreement made between two private parties; it was free of government control. However, today they have become very popular for mortgage note buyers in obtaining real estate.

With the change in the banking industry’s lending structure, many people are not getting their mortgage loans the traditional way. The requirements for qualifications have become very stringent and difficult to meet, and in light of today’s difficult economic times, getting a bank loan could be an insurmountable obstacle to try to overcome. People are turning to corporate investors and private lenders to help them secure that all important piece of the American dream.

Alternative Credit Option when Investing in Promissory Notes

Another avenue that promissory notes have found a use for is for issuing credit for those who may have no other option. Here is where creative financing can help a struggling individual attain their dream after the banks have closed their doors. The buyer is free to charge a higher interest rate than a bank would, because the Real Estate Note Buyer is taking a greater risk in their investments, but on the positive side, there is also a much higher potential for a larger return.

For the savvy investor who is not afraid to take on a bigger risk, the profit potential of a private note buyer is quite high. If they have the money on hand, there is no limit to the amount they could lend any individual or corporation. There is also a wide range of collection options that a bank would not offer as well. You can sell the note to a third party or you can collect and pocket the money yourself.

Who Can Benefit From a Investing in Promissory Notes?

There are many people that would love to take advantage of an alternative mortgage option. Those who don’t have a steady income or an income that fluctuates from one month to another would have a very difficult time getting a mortgage note from a banker. Those who are currently unemployed or are relocating to a new area are also considered a high risk for banks. It doesn’t matter if they have enough cash to put up a sizable down payment on a purchase or even if they had a very high income on their last job, they won’t get a second look. Banks only want to see a steady, regular income that can be verified before they will give a loan. Unemployed or self-employed individuals rarely get a chance at the American Dream.

How Does it Work?

You’ve probably seen for sale signs that have the added words, “seller financing available.” These are promissory note buyers that are looking to sell their property and don’t want or need the hassles that may come with dealing with a bank. The seller and the buyer will design their own deal; the seller will maintain the mortgage and the buyer will agree to meet the seller’s price plus the agreed upon interest rate. The total amount of the payments should be sufficient to cover the mortgage payments plus enough to give the seller a workable cash flow.

The Risks of Investing in Notes

There is a certain level of risk involved for note buyers; without the heavily regulated safety nets that most banks have in place, there is always a risk of default in payment for any number of reasons. To lower the chances of risk, it is advisable that the note be registered with the local and state government or with the Securities and Exchange Commission. These agencies are able to analyze the parties to determine if they are capable of meeting the obligations set out in the note. Without registration, it is entirely up to you to determine the viability of the loan.

Another means of protecting your financial position would be to take out an insurance policy on the issuer. This could prove a major lifesaver for both parties if one of them were to suddenly and unexpectedly die; the Mortgage Note Buyer, such as the Texas Note Buyer, could retain the ownership of the property and any related expenses that may come up.
Real Estate Note Buyers can bypass the traditional forms of lending in the same manner as banks can, but without having to manage a large corporation. They can do this again and again, as many times as they choose building their financial portfolio as they go. This could be the ideal solution for both buyer and seller as long as they are prepared for the higher risks involved. But remember, higher risks also mean higher returns on your investment.