What is a Bank Note?
Let's address one looming question that you have right off the bat--What IS a note?
To put it in plain terms, a note is a promise of payment, a sophisticated IOU. The person who makesI10-001 the promise is the payor and the promise is between them and the beneficiary for agreed upon terms. Because we deal directly with the FDIC and banks, the beneficiary in our case is the banking institution, and the note is secured by collateral. This collateral can be anything from a retail center, to a boat, a car, to someone's personal residence. Because the notes are loans made to individuals, companies or trusts, the collateral is typically real estate, although business equipment usually gets thrown into the deal because it is tied to the asset. When you purchase the note, the collateralized debt is assigned to you.
Compared to a hard asset, such as a 256-unit apartment building, a note is fairly liquid. Of course it's not cash, which is why the bank is willing to sell the asset for cash, as it frees up capital and reduces the bank's liabilities. This allows the bank to improve its' liquidity, reducing the liability side of the bank's balance sheet. These balance sheet clean-up notes are sold directly to a buyer without the involvement of the FDIC, and are done to improve the bank's rating score and avoid government intervention.
Notes are quantifiable based upon the amount of risk involved and the collateral attached to it, therefore they can be negotiated in a fairly intelligent manner. Looking at these factors, the note can be purchased at a discount of its original unpaid principle balance (UPB). Liquidating the note is the name of the game, so neither the bank nor the FDIC provides financing towards the purchase of the note. This is why it notes can only be purchased with cash. Remember, the bank and the FDIC are trying to clean up their balance sheet and not add to the liability side of the balance sheet. Although the FDIC is interested in receiving the highest possible price for the note, there is a large backlog of notes for sale so the note sales must be moved through the system quickly. On the other hand, hard assets' values are determined by a myriad of factors such as current appraisals and its current NOI. Assessing the value of the property is vital in determining your break-even point, because hard assets can be purchased with available financing terms. This being theI10-003 case, there is a lot of number crunching involved to insure that you are getting a good deal on the asset.
Unlike hard assets, finding good deals are frequent because there is less competition in the note world. Because the pool of potential investors is rather slim, note buyers have the advantage of bidding with firm maximum bids. With hard assets, the opposite is true--the better the deal, the more competition for the property, and the greater the likelihood that a bidding frenzy occurs.
Here's something200-500 else to think about: when you buy a note, you become the bank. When you buy a hard asset, you have tenants, toilets and management to contend with.
To put it in plain terms, a note is a promise of payment, a sophisticated IOU. The person who makesI10-001 the promise is the payor and the promise is between them and the beneficiary for agreed upon terms. Because we deal directly with the FDIC and banks, the beneficiary in our case is the banking institution, and the note is secured by collateral. This collateral can be anything from a retail center, to a boat, a car, to someone's personal residence. Because the notes are loans made to individuals, companies or trusts, the collateral is typically real estate, although business equipment usually gets thrown into the deal because it is tied to the asset. When you purchase the note, the collateralized debt is assigned to you.
Compared to a hard asset, such as a 256-unit apartment building, a note is fairly liquid. Of course it's not cash, which is why the bank is willing to sell the asset for cash, as it frees up capital and reduces the bank's liabilities. This allows the bank to improve its' liquidity, reducing the liability side of the bank's balance sheet. These balance sheet clean-up notes are sold directly to a buyer without the involvement of the FDIC, and are done to improve the bank's rating score and avoid government intervention.
Notes are quantifiable based upon the amount of risk involved and the collateral attached to it, therefore they can be negotiated in a fairly intelligent manner. Looking at these factors, the note can be purchased at a discount of its original unpaid principle balance (UPB). Liquidating the note is the name of the game, so neither the bank nor the FDIC provides financing towards the purchase of the note. This is why it notes can only be purchased with cash. Remember, the bank and the FDIC are trying to clean up their balance sheet and not add to the liability side of the balance sheet. Although the FDIC is interested in receiving the highest possible price for the note, there is a large backlog of notes for sale so the note sales must be moved through the system quickly. On the other hand, hard assets' values are determined by a myriad of factors such as current appraisals and its current NOI. Assessing the value of the property is vital in determining your break-even point, because hard assets can be purchased with available financing terms. This being theI10-003 case, there is a lot of number crunching involved to insure that you are getting a good deal on the asset.
Unlike hard assets, finding good deals are frequent because there is less competition in the note world. Because the pool of potential investors is rather slim, note buyers have the advantage of bidding with firm maximum bids. With hard assets, the opposite is true--the better the deal, the more competition for the property, and the greater the likelihood that a bidding frenzy occurs.
Here's something200-500 else to think about: when you buy a note, you become the bank. When you buy a hard asset, you have tenants, toilets and management to contend with.
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