The Ugly Truth.
Promissory note investing is not as easy as stock market investing. When investing in stocks you can read recommendations from gurus while sitting in your easy chair, make your decisions, place your orders, and then sit back and hope for the best. You are a very passive investor. You are not driving the bus, you are a passenger.
But, investing in promissory notes is demanding; your role becomes that of an active investor. More of your time is required. Your personal investigation, evaluation and decision making is required.
Since being an active investor is demanding, you are now probably thinking, "why should I elect to do the extra work, spend extra time, and do the extra learning? What's in it for me-is there a payoff for me?
The short answer is yes, there is a reward for you. The benefits are:
• more control over your own money
• fewer people will be paid fees and commissions from your investment income
• you will have more money to reinvest as you see fit
• fewer outside events (uncontrollable events) will impact your investments
In short, you will be "driving the bus", not a passenger being taken for a ride.
Investing Guidelines that Avoid Four Key Mistakes.
If you are still reading you obviously now understand that investing in promissory notes can be an outstanding investment opportunity. Further, you want to learn exactly what promissory note investing guidelines are vital to your investing safety and success. We will focus on those that will keep you out of trouble, and enhance your investing income. It is important to remember that just one investment mistake can wipe-out years of savings. By not following these rules you risk your lifetime savings.
Guideline #1-Personally Inspect The Property.
Would you buy a car without inspecting it? Would you buy a house that you planned living in without inspecting it? If you commit your money to a promissory note investment without inspecting the collateral security (usually real estate) it is just like buying a car without inspecting it.
Why is a personal inspecting important you ask? Because, if you have to foreclose on the property, and thereby become the owner, you have just bought the property that you did not inspect! You have put yourself into a risky investment situation unnecessarily.
Going further, when you inspect the property you will observe the condition of the exterior, interior, basement, garage, yard, and any out buildings. It will be clear just how functional the property is, its condition, and its age.
Additionally, you will observe the neighboring properties and their condition. A bad neighboring property can devalue your collateral security. Also, be alert while driving to and from the property; pay attention to the following: transportation and highway service, shopping facilities, parks and recreation facilities, and the general appearance and impression of the neighborhood.
Remember, when you buy or originate a promissory note you may be buying the collateral security--whether you really want to buy it or not, you may become the proud owner.
Guideline #2---Verify the Legal Description of the Collateral Security Property.
It is a major mistake to take the property owner's word for the legal description of the property, and what liens are against it. False or inaccurate information can be the result of an innocent mistake, or an intentional lie; but, either way, you the note holder are put at risk. You need to know the legal condition of the title to the property. Always get a fresh Title Insurance policy. This process should be a mandatory, routine step. Yet, often, this simple procedure goes wrong. Be alert to doing it right.
Guideline #3-Insist on Getting a Lender's Title Insurance Policy.
The Homeowner's policy, or a Fire Insurance policy, insures the property against loss caused by fire and other hazards. The Owner's Title Insurance policy insures the property owner against loss caused by title defects. For a modest additional premium to the Owner's Title Insurance Policy, a Lender's Title Insurance policy can be obtained. It insures you, the lender, against losses caused by title defects and by senior liens or encumbrances on the property that were unknown to you when the loan was originated. It guarantees that your first mortgage is legally in first position.
Guideline #4---Insist on Getting Flood Insurance, if Appropriate.
Homeowner's insurance policies do not cover surface water damage-floods.
Require a flood insurance investigation done before closing. As we all know, there were many people that had invested in private promissory note mortgages in New Orleans or Biloxi, in 2005. We know now, after Hurricane Katrina, how many of these investors did not have flood insurance? There were huge uninsured losses. These losses were unnecessary; they could have been avoided by having flood insurance policies.
Another aspect of the flood problem is that sometimes, the property is at the edge of a flood zone; only a professional survey can determine the actual risk of flood damage. Getting a survey with an elevation certificate issued by a professional surveyor may save the homeowner some money on federal flood insurance and also protect your investment. The elevation certificate helps to measure the exact risk within a particular flood zone. If the property is in a federal flood zone make sure the property is covered by federal flood insurance.
If the property requires flood insurance, be certain that it is obtained, and that your note is insured as the Loss Payee; you should also be named on the Homeowner's policy as the Loss Payee.
Conclusion
• If you don't understand it, don't invest in it!
• Risk comes from not knowing what you are doing.
• Investing risk comes from what you don't know.
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/
