Paper has value...just like money

Promissory notes or "Paper", as some people refer to it, is a term used to identify the financial agreements within a business transaction. Paper can be used as vehicle to creatively financing a purchase, such as a business or a piece of property. For the real estate industry the negotiable properties of paper can provide both the sellers and buyers alternative solutions to the time-consuming and frustrating hassles of conventional financing. Once paper has been created it has value just like money and can be restructured, traded or sold through secondary markets such as The Note and Paper Trader. Two popular forms of "Paper"are promissory notes and annuities.

Structured Settlement Annuities

General synopsis

In some cases of negligence settlements, a plaintiff or injured party is awarded compensation. Sometimes the plaintiff is compelled to accept these awards in the form of periodic payments instead of a lump-sum settlement. The liable party's insurer usually obtains an life insurance annuitant to make the payments of the award. This hereby provides relief from paying out large sums of money at one time. The contract or "paper" has present day value on the secondary market and can be converted into cash in whole or part.

Promissory notes

General synopsis

A promissory note is a signed agreement to pay off a debt. Just like banks and other lending institutions, a note is created when money is borrowed. The same stands true when a property seller or business seller elects to participate in the sale of their commodity by financing all or part of the sale themselves. This results in a note being created for the buyer. A note states the terms and conditions, which include the principle amount, term, interest rate, and the payment amount the seller is entitled to receive from which the buyer.

The note's principle amount is the total amount of money the seller is willing to finance or "carry back". The term is the time frame in which the buyer is obligated to pay off the debt. The interest rate in a seller financed note is negotiated between the two parties. Since the seller is providing a unique service by postponing the full collection of the sale price and permitting the buyer to avoid unnecessary points and underwriting fees normally associated with conventional financing, the interest rate is often higher than the present market rate in order to help offset the added risk involved. Structured payments are "amortized" over the term stated in the note. Some notes maybe fully or partially amortized. Partial amortization means there will be a remaining balance due at the end of the payment term in the form of a "balloon payment". Fully amortized notes are paid in full by the end of the payment schedule with no balance remaining.

Creating a note, through seller financing, can be beneficial to both the buyer and seller.(Link to benefits of seller and buyer)

Note security

General synopsis

A party who is the beneficiary of a note can protect their right to collect the debt owed to them by establishing one of two security instruments. One being a deed of trust, the other a mortgage.

A deed of trust, and there are many forms, is a legal binding document that transfers the "title interest" in a particular piece of property from one party to another. A trust deed, one form of a deed of trust, uses a trustee (a third party) to hold the legal title to the property in question. If the payor on the note (the party owing the debt) defaults on the payments or fails to comply with the conditions of the note, the beneficiary of the note / trust deed ( the party to which the debt is owed to) may instruct the trustee to proceed with the necessary steps, usually involves selling the property, to collect the balance due on the debt. This recovery process has many steps and differs from state to state.

A mortgage is some what like a deed of trust but one difference is that there is no third party or trustee involved. The legal title of the property in question is transferred directly to the mortgagor ( the party who is the beneficiary of the note). If the mortgagee (the party who owes the debt) defaults on the payments or fails to comply with the conditions of the note, the mortgagor may foreclose on the property in order to recover the debt. The foreclosure process has many steps and differs from state to state.

Both deeds of trust and mortgages go hand in hand with the promissory note. When you choose to sell a portion of a deed of trust or mortgage the underlying note will be sold along with it.