Welcome back. This is the third article in a series of educational articles that focus on ?Promissory Note Valuation and Appraisal Essentials?.
Review of previous articles
In the previous two articles we did an overview examination of the following important basic concepts:
? what is a promissory note
? what is Fair Market Value
? what is a note discount
? what causes a note to be discounted
? legal concerns impacting the drafting of the note document
? understanding the borrower?s financial condition
? what is collateral security
As stated above, in the title to this article, Profitable Promissory Notes Don?t Happen by Accident. Now, in Part Three, we will do an in-depth exploration of collateral security, how it is created, valued, and its impact on the Fair Market Value of the promissory note.
Collateral security review
As a quick review, let?s remember that collateral security is some additional asset that is pledged by the borrower to support or guarantee the repayment of the debt. The asset can be real property, personal property, or an additional signature on the note. Our goal here is to identify and understand what ?good and valuable collateral? is and what is not ?good and valuable?. There is a direct correlation between the quality of the collateral security and the Fair Market Value of the note. Bad or inadequate collateral equals big note discounts.
Mortgage or Deed of Trust
We will focus our discussion here on the most common collateral security being used today?a lien on real property?a mortgage or a deed of trust. Commonly, but inaccurately, the general public refers to a ?mortgage? when they actually mean a promissory note secured by a mortgage; most people say I have a mortgage on my home when, in fact, they owe a debt that is secured by a mortgage on their house.
This technical distinction is very important if you are originating or buying a promissory note. In order to protect your investment, or your savings, or your retirement account the investment should be secured and collateralized by a first mortgage lien, or deed of trust, on a valuable parcel of real property.
Key Collateral Security Considerations
Understand the asset securing your note
The most fundamental consideration applicable to selection of the collateral security is your understanding of what it is. Not understanding the collateral weakens your ability to protect your investment.
If you are the decision maker for a promissory note investment, it is your responsibility to understand the collateral. If you personally are unfamiliar with it, you should engage a trusted expert to guide you and to help you decide if it is the right fit for your particular situation.
As an example, if the collateral is an apartment building, or a mechanic?s garage building, or a warehouse building, or a farm property and you not familiar with the specific asset class, engage an expert appraiser that specializes in that asset class to guide your decision. Don?t assume that you know and understand what you don?t.
Loan to value ratio
Loan to value ratio is a technical term that is widely used in the promissory note investing world. Specifically, it is a measure of the relationship between the amount of money invested in the note and the market value of the collateral backing-up the promise to pay. An example will clarify: Note amount = $75,000.00
Collateral value = $100,000.00
Loan to Value Ratio = 75%
In this example the collateral value exceeds the loan value by 25%; stated differently, there is a 25% margin of safety protecting the note. The collateral security value should always exceed the value of the note?the more the better. Remember, if the borrower defaults, it will be the collateral security that saves your investment.
Summary
Always understand the collateral security backing-up the promissory note.
If you need expert help in order to fully understand the asset and to fill-in the blanks in your knowledge of the asset, hire a specialized expert to guide and advise you. The amount you pay for high quality, specialized valuation services is equivalent to paying an insurance premium; essentially, you are buying protection against a loss.
Always have a margin of safety protecting your investment; be certain that the value of the collateral security exceeds the value of the note by at least 25%.
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/
Article Source: http://EzineArticles.com/?expert=Lawrence_Tepper
http://EzineArticles.com/?Promissory-Note-Valuation-and-Appraisal-Essentials?Profitable-Notes-Dont-Happen-by-Accident&id=7106321
steven tyler national anthem paterno newt gingrich joe paterno dead joe pa joe pa marist
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.