Before you present a purchase offer to the note seller, prepare him or her to expect a discounted price offer. Explain and educate the seller on the reasons the note is not worth face value to an investor. Point out actual deficiencies in the note, such as low interest rate or insufficient collateral. By doing this in advance, you remove the risk of losing the deal; you avoid having the seller go on the defensive to protect his ego and pride. Not preparing the seller for a discount is done at your own peril.
Shock and Anger
Shock and anger describes the initial feeling sellers have when they receive the first discounted purchase offer for their note if they have not been pre-warned and pre-educated by the note broker or investor. Often they lose trust and confidence in the note broker or investor. They feel they have been “set-up,” “taken advantage of,” “tricked.” They will not understand that the discount is based on facts that are reasonable, not on imagined reasons.
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Reasons for Discounts
The legitimate and customary reasons for the discount are many. Each note buyer has his or her own unique reasons. These factors play an important role in determining the price your seller will receive. As an example, note buyers want to know why the note was created, when it was created, who the debtor is, what the collateral security is and its value, what the term of the note is, what the interest rate is, and what the payment history is.
Risk
Explain to the seller that different investment products carry different degrees of risk, and it is vital that investors know what they are getting into prior to making an investment. Explain to the seller what parts of this note are risky. Explain that risk creates part of the discount. Help the seller understand the buyer’s point of view.
Market Conditions
Explain to the seller that a note’s market value changes over time with the economy. An investor is on the lookout for these changes and adjusts the discount to compensate for them. Remind the seller that what was a fair and reasonable interest rate and payment plan when the note was created may not apply now; remind the seller that the economy, employment, bank lending, etc. may have changed for the worse. Again, help the seller understand the buyer’s point of view. The buyer, when calculating the discount applied, evaluates all of these factors. A knowledgeable buyer will value a specific note based on its anticipated future cash flows over the life of the note.
Conclusion
Your success in the note business depends upon your understanding of the discounting process. Lawrence (Larry) Tepper specializes in appraising promissory notes nationally. He has more than 35 years experience in buying, selling, brokering, and appraising notes nationwide. He holds a law degree with an accounting minor from the University of Denver School of Law, is a licensed Colorado real estate broker and holds the prestigious Certified Commercial Investment Member (CCIM) from the National Association of Realtors. He is a member of many professional organizations including the American Society of Appraisers (affiliate), American Bar ssociation (associate) and the National Association of Certified Valuation Analysts.
www.promissorynoteappraisers.com
303-779-6996
e-mail:
Lawrence.Tepper@comcast.net
Questions are welcomed—no
charge for preliminary conversation.
