newbie clarification about Paper - Posted by M. Jamal Green
Posted by M. Jamal Green on March 28, 2001 at 23:09:04:
I’m trying to grasp the concept of paper. From what I’ve been reading on this site for the past couple of months the theory of paper goes something like this…
You purchase a property for say 25K. You rehab it fully and now its worth 85K (just a hypothetical). I then find a buyer and sell it to them for 85K, of which I will carry back 35K. A 35K Promissary Note is created with terms like 12.75% interest for 30 years.
Now, if the payor of the note doesn’t miss a payment, that’s called “seasoning”. The more seasoned a note is, the more valuable. For my example, if the payor of the note didn’t miss a payment for 18 months, the note is well seasoned and I can sell the note at a discount.
The importance of seasoning relates to how much of a discount I can take on the note…right?
Lastly, all notes are sold at FACE VALUE as apposed to Future Value right? Even though my note has a face value of 35K, it’s FV is actually $136,924 over 30 years.
I guess notes are sold if you need quick cash, but if you’re trying to build long term wealth, wouldn’t you want to keep your notes? My thinking is this. If I keep 12 notes like this, then the FV of all my notes will potentially be over $1.6 Million.
Just need a little clarification
Thanks for taking time with a newbie like me. I really appreciate it