Definitions You Need To Know When Dealing In Cash Flow Notes

Equity – the dollar value of an owner’s interest in a capital asset. 

In real estate, equity is obtained in four ways:
 
1)  Cash down payment or value of goods traded 
2)  Debt reduction as any loans against the property are paid down  
3)  Capital improvements, occurring when a property owner makes
     structural improvements, which adds measurable dollar value to
     the property

4) Appreciation, or value that accrues when the market value of a
    property increases due to inflation
 
If someone owns a property “free & clear,” he or she has 100% equity in the

property. The higher the percentage of equity in a note, the more secure the

investment is.

Equity is also the inverse ratio of Loan-To-Value (i.e., 80%

LTV = 20% equity). 

Credit Score – a three-digit number that indicates an individual’s history of debt payment and fiscal responsibility. Note investors and finders always take into account the credit score of the payor, because it serves as an objective way to predict how likely they will default on their note payments. FICO (Fair Isaac Corporation) credit scores range from 300-850, and a higher score is better.

 
Payment History – describes if the payor has been responsible with making their note payments on time in the past. The more payments that have been made on time, the better.

Seasoning – seasoning refers to the total number of payments made. The more, the better, because the investor can see that the payor has been able to make their monthly payments for a long period of time.

Investment-To-Value (ITV) – the percentage of total dollars invested by a note buyer, when purchasing a note secured by a capital asset, as measured against the value of the property.

Remember, ITV measures dollars invested by a note buyer. For example, let’s say a property is valued at $100,000, and the seller is holding a note against if for $85,000. If a note buyer pays $70,000 to purchase that $85,000 note, the note buyer's ITV (investment-to-value) is only $70,000 / $100,000, or 70% of property value. 

Here are the definitions for “Type of  Note”:
 
O/O – Owner-Occupied property

SFR – Single Family Residence (includes residential properties containing up to four sub-units, such as duplexes)

NOO – Non Owner-Occupied property (pure rental or income property)

 
Condo – short for "condominium," which is a residence within a complex of attached units in a multi-unit dweeling environment (similar to apartments) where the unit is individually owned, but the common areas like all unit owners in te building jointly own hallways and recreational facilities.

MH – Manufactured Housing. Commonly known as mobile homes. MH can be attached to real estate, in which case they are considered real estate.

If these homes are situated on leased ground, or located in mobile home parks, they are referred to as "freestanding" MH, and are titled as personal property, according to the laws of the states in which they are located.

Multi-units – apartments or residential housing with five or more units.

Wholesale Yields – the correct “wholesale yield” will give you the approximate amount institutional or larger investors would reasonably be expected to require for a given note.

"Retail Pricing"– the approximate yield a smaller private investor would likely require.