I’m Going to Carry, How Do I Create a Good Note?
Notes are often created in the image and likeness of their Creator . . . sometimes we can look and call that good. Sometimes the note isn’t worth the paper it’s printed on. When you decide to take back a note, you want an investment you can feel good about holding or selling.
There are many aspects to creating a good real estate note, and this is a topic that will need to be flushed out over several posts, but we’ll start with a few of the bare bones basics. For starters, here’s a flaming example of what we would consider a bad note:
So please don’t call trying to sell me this note. I only like straight paper . . . but alas, that’s not true . . . I swing both ways. I’d buy a straight note, or an installment note, it just depends on how the transaction and the note itself was structured.
Here are a few simple core components that should be included in every note:
- Origination date – this is the date the note was made. It should correlate with the date on the Deed of Trust.
- Specify the date that interest begins – usually a note is created in advance of the close of escrow (when interest normally begins), and even then, occasionally the seller will postpone the start of interest until some point after the close of escrow, so this date needs to be clearly documented.
- The date the first payment is due – the date the first payment due is usually one month after the date that interest begins; however, there are lots of ways to set up a payment schedule: quarterly, semi-annual, annual.
- The date of any balloon payment due – not all notes call for a balloon payment, but many sellers/note holders will ask for a 5 year balloon to preserve the value of the note.
- The principal amount of the note (face value) – this is the loan amount. Ideally this number represents less than 90% of the sales price or market value. This means the seller got a 10% or better down payment.
- The name of the borrower(s) – the people buying the property and paying on the note.
- The name of the person/entity receiving payments on the note (beneficiary) – if you sell your property and carry paper, then you become the bank.
- Location where payments are to be sent - the borrower needs to know where to send the check. In most cases, I would recommend using a note servicing company.
- Interest rate – this is usually stated as an annual rate, even though payments are received on a monthly basis. The yield on the note must be spelled out clearly for both buyer and seller.
- Payment amount – the monthly payment amount should be clearly identified: two thousand five hundred and seventy-three dollars and twenty-one cents ($2,573.21).
The above elements don’t talk about overall aspects of the transaction, but it’s a good place to start. Now you know a little bit more about how to create a good note, like this one I recently bought: