Prepaid Sales Loans - Understanding How They Work

Cash Value is a post cash flow accounting concept and when used as part of the CVA process will provide you with the essential information needed to calculate the effective tax rate, fair value for property, and the property cost coverage. When valuing property using a pre and post cash flow spreadsheet, there are many different things that can be determined. When determining property values in any real estate transaction, many different things can be utilized. Depending on the actual property value, the amount of the mortgage, the number of liens, and much more can all be utilized as part of the valuation.

To determine the property value, one of the most commonly used methods is called a post cash flow or post loan appraisal. This is where post loan financing will be entered into the equation. This financing will be used to determine the effective market value of the property. Once this is determined the property will then be valued using the net present value method which is also known as the NALA method.

This process will then determine the appropriate tax rate after applying current interest rates. This is critical in that many individuals may attempt to obtain additional funding before finalizing their financing to avoid paying taxes on the excess funds. By valuating the property pre and post cash flow, the investor will be able to determine the value of their investment and the appropriate tax liability. It is also important to note that if the equity has decreased in relation to the market value, this may negatively impact the investor's ability to take advantage of a profit.

Many investors will attempt to obtain financing using either a pre cash and post cash flow combination or a pre loan and post cash flow combination. The pre cash and post cash flow combination is often used for those investors that are in relatively good credit and have collateral to use as security. This will allow them to obtain a lower interest rate while paying down the balance at a steady pace. While this may not always be the most affordable method of financing, it does offer an opportunity for the investor to pay down debt without incurring additional debt. For  startup  that own properties that do not have collateral or are in relatively good credit, this may provide them with an opportunity to finance through the use of a cash generator.

When an investor performs a pre loan and post cash flow evaluation, they will also find that the pre-loan money will be required before the closing of the deal. In some instances, this pre-loan cash will be provided by the seller. In  startup , the investor will require financing from the buyer, which can be done through a private placement of loan. In some real estate transactions, the seller may require the seller to provide pre-approval for the transaction, which can also be accomplished through a private placement of loan. Regardless of the specific loan provider utilized, each of these methods of pre and post cash flow valuation will require the money upfront.

There are a few exceptions to the requirement to obtain pre approval for a cash flow investment prior to closing. If the buyer is financing through a private placement of loan, the lender may require the buyer to sign a promissory note. This note acknowledges that funds will be needed before a final commitment to the loan is made. Because of the nature of private placements, it is very difficult for sellers to receive a commitment for the full amount of the loan before the transaction closes. This caveat is used to ensure that the seller is fully aware of all of the funding requirements and that he has the means to make a down payment if needed.

Other scenarios dictate that the loan must be pre approved in order to be structured. In order to take advantage of the equity finance option (also known as the choice loan) or the first mortgage option, it must be approved prior to signing the sales contract. Because pre and  startup  are used to determine the market value of the property, sellers are well within their rights to seek pre and post approval for these valuations to ensure that they are receiving an acceptable offer when the property is sold. When obtaining either type of this loan, it is important to remember that the lender reserves the right to withdraw, or postpone, the pre approval decision.

Many sellers are unaware that pre and post cash flow loans may also be called a seller loan. Because these loans are used to fund acquisition expenses, it is not uncommon for the seller to be the primary borrower on this type of loan. Because the seller has assumed ownership of the property, this type of loan would make financial sense. However, this financing is not appropriate for all situations and should only be pursued by those sellers who have carefully inspected their real estate and know the amount of the purchase price. For sellers with little experience acquiring financing, it is best to work with a local real estate professional to determine whether pre and post cash flow loans are right for the particular situation.