Why Must I Discount My Promissory Note to Sell It?
The buyer of a note is parting with his or her hard-earned cash in exchange for something that they perceive as having the equivalent value.
Just as when you buy a car for $15,000 you expect to receive a car that has a fair market value of $15,000.
But, there are several difference between the note transaction and the car transaction: Cars are mass produced items (all very similar) that are made by specific manufactures according to specific publicly known specifications.
Most cars of the same year and the same model have relatively similar accessories, features, and appearances.
There is public advertising and a public market for the buying and selling of cars.
Promissory notes are custom designed by individual attorneys according to the needs of the parties doing a private transaction.
Seldom are two notes alike.
Since each note is custom made to fit the individual transaction, there is no public market for them and there are no publicly available specifications for individual notes.
Private-party notes are sold individually-one note at a time--privately.
Promissory notes are bought one at a time by individual buyers who each have their own guidelines, capital, hopes and fears.
What they will pay today for a note may not be the same amount as they will pay next month because "things change", markets change, bank practices change, and local and national economic conditions change.
In order to have a salable note the following must exist: The note must be executed according to the formalities required by the law.
If it has been properly created and executed it may have one or more of the following attributes.
The more of these attributes that it has the more value it has.
Enforceable: A right or obligation is enforceable if the borrower can be forced to comply through a legal process-a court order or a judgment.
Collectable: Can the borrower make the payments? Can the borrower repay the principal? A note owed by an unemployed, bankrupt borrower may be enforceable in a court of law but in reality it is uncollectable-worthless.
Marketable: Is the note fit to be offered for sale? Does anyone want to write a check for it? How does it compare to competing investments available? The basic reason that an investor buys a loan is all about getting cash flow.
A buyer, in real life, often negotiates for as low a price as possible, emphasizing the downside risk of not getting paid.
The specific value of an investment to a particular investor is based upon the investment requirements of that investor.
There is no public market value established.
There are only one-on-one negotiated values-private values, personal values as distinguished from public market values which are impersonal and detached in nature.
Value is in the eyes of the beholder.
A seller is a real, individual person and the buyer is a real, individual person.
Each has real guidelines, real capital limitations, and specific, real reasons for selling and for buying.
A deal usually comes with terms that allow the buyer (the one who is parting with the cash) to feel comfortable with the risk being assumed.
Just as when you buy a car for $15,000 you expect to receive a car that has a fair market value of $15,000.
But, there are several difference between the note transaction and the car transaction: Cars are mass produced items (all very similar) that are made by specific manufactures according to specific publicly known specifications.
Most cars of the same year and the same model have relatively similar accessories, features, and appearances.
There is public advertising and a public market for the buying and selling of cars.
Promissory notes are custom designed by individual attorneys according to the needs of the parties doing a private transaction.
Seldom are two notes alike.
Since each note is custom made to fit the individual transaction, there is no public market for them and there are no publicly available specifications for individual notes.
Private-party notes are sold individually-one note at a time--privately.
Promissory notes are bought one at a time by individual buyers who each have their own guidelines, capital, hopes and fears.
What they will pay today for a note may not be the same amount as they will pay next month because "things change", markets change, bank practices change, and local and national economic conditions change.
In order to have a salable note the following must exist: The note must be executed according to the formalities required by the law.
If it has been properly created and executed it may have one or more of the following attributes.
The more of these attributes that it has the more value it has.
Enforceable: A right or obligation is enforceable if the borrower can be forced to comply through a legal process-a court order or a judgment.
Collectable: Can the borrower make the payments? Can the borrower repay the principal? A note owed by an unemployed, bankrupt borrower may be enforceable in a court of law but in reality it is uncollectable-worthless.
Marketable: Is the note fit to be offered for sale? Does anyone want to write a check for it? How does it compare to competing investments available? The basic reason that an investor buys a loan is all about getting cash flow.
A buyer, in real life, often negotiates for as low a price as possible, emphasizing the downside risk of not getting paid.
The specific value of an investment to a particular investor is based upon the investment requirements of that investor.
There is no public market value established.
There are only one-on-one negotiated values-private values, personal values as distinguished from public market values which are impersonal and detached in nature.
Value is in the eyes of the beholder.
A seller is a real, individual person and the buyer is a real, individual person.
Each has real guidelines, real capital limitations, and specific, real reasons for selling and for buying.
A deal usually comes with terms that allow the buyer (the one who is parting with the cash) to feel comfortable with the risk being assumed.