November 19, 2007
The incredible shrinking investment
Noteholders often ask me why they should sell their note. They are happy collecting a payment every month, they have few issues with the borrower, and it's nice to have that little extra showing up in the mailbox each month. I will almost always agree that it's a good investment for them, but is it the BEST investment for them?
There are several things to consider, and each noteholder's situation is different. First, I ask them what they do with the payment they receive each month. Is it invested in a mutual fund, put into a savings account, or does it get tossed into the checking account and spent without a second thought? Do they depend on the payment for assistance with their living expenses, or does it simply provide for some of life's guiltier pleasures, like a membership to the country club or a weekly trip to the spa?
Many times the fear of the unknown is reason enough for a noteholder to sell. What if the borrower defaults on the payments? Do they know what to do at that point? Better get an attorney. Whoops, that payment's not coming in anymore - how am I supposed to afford an attorney? What?! The borrower filed for bankruptcy? How am I supposed to foreclose now? How long is THAT going to take? Delinquencies and foreclosures are increasing at an alarming pace nationwide - are they equipped to handle the worst-case scenario?
Other noteholders look at the fact their investment grows smaller with every payment they receive. As the note amortizes, eventually the cashflow stops. Were all those payments put into savings to earn interest over that time? Or were they simply spent as they came in, with nothing to show for 10, 20, 30 years of receiving payments? Once noteholders realize they can sell their note and get a lump-sum payment to invest, they start to see the bigger picture. As interest capitalizes over time, they begin to see an investment that grows month after month, instead of the other way around.
Perhaps it's time to give some thought to how selling your note might benefit you. Why not put your money to work for you now? If you don't, where will you be financially when you collect that final payment and the balance on your note is zero? If you do, won't it be nice knowing your hardest decision each day will be whether to hit the links or the spa?
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