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by Jonathan Richards

A common practice in both real estate and the note market is to “crank” the note or get some cash out of it. To do with a note you need to increase its present value and then sell part of the note or borrow on part of it. If you can borrow or sell part or all of the note for more than you paid for it you will make a handsome profit. In other words if you can borrow at a much lower rate than the yield on the note you have found a way to generate a quick and dirty cash flow.

Consider a $60,000 note that looks like this:

N                 I/Y                         PV                         Pmt                                           FV

84                12                $60,000                          $600                      $60,000

You bought the note for a 24% yield as follows:

84                24%                                          $600            $60,000

To “crank” the note you can restructure it by making an amazing offer to the note payor. If he can raise his payments substantially to $2,500 per month you agree to lower his interest rate to 0% from the 12%. Although this is substantial increase, the payor may agree because:

• He will save $36,000 in interest over the life of the loan. Every payment will go toward principal.

• He will pay off the note in 24 months not in the original 60 months.

• He will not have to worry about the balloon payment. You can eliminate it.

Here is his new loan:

          24                0%               $60,000          $2,500                  0                  

There is no balloon payment.

You now own the following note:

          24                23%             $40,000                $2,5000                0                  

You yield is increased because you are getting your discount back more rapidly.

You are now in a position to sell this note for a 13% yield as follows:

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