There is no such thing as “smart money”, only smart people, money goes where they go.
Options
As a note investor, you have two basic approaches that will put a note in your books:
You can buy an existing loan that has already been closed and completed;
You can originate a new loan, which requires you to complete it;
In this article we will look at the process of purchasing an existing ticket instead of originating a new ticket.
Let’s first look at the advantages of buying an existing note:
You will not have to create any new loan documents. The only time you’ll have to spend before receiving payments is the time and effort required to review all existing loan documents.
You may receive a payment history if the loan has been around for a while.
You will not have to negotiate the terms of the loan with the borrower.
The disadvantages of buying an existing note:
You will have to accept or reject the loan documents as they exist now; You will not be able to modify any of the existing terms or clauses to adapt them to your preferences.
If certain loan documents that you think are important are missing, or never completed, you will need to decide if their absence presents a reason not to purchase the loan.
You probably won’t be able to meet with the borrower before you close on the purchase due to privacy laws.
Why is the loan being sold?
When purchasing any note, a reasonable and very important question to consider is “why is the loan being sold?” Essentially, it’s likely to be sold for one of three reasons:
There are problems related to the loan itself.
There are problems related to the borrower.
There are seller related issues.
A savvy note shopper will find the answer to this question before proceeding. If the reason for selling relates to the seller, then it is a green flag procedure. But, if the reason is related to the loan itself, or to the borrower, then it’s a red flag: don’t proceed with the purchase until you find out exactly what the problem is. Once the problem is discovered and understood, it can be evaluated to determine if it is a fatal problem, or simply one that requires special attention, but can be accepted.
Examples of problems
underperforming loans
There are many names applied to “underperforming loans.” They are often called high maintenance, slow pay, irregular pay, etc. These loans require a tremendous collection effort to keep the borrower behind on their payments month after month.
In some cases, there may be accrued late payments, late payments already added to the outstanding principal. Or, an existing Tolerance Agreement exists between the lender and the borrowers to prevent a foreclosure. Or, there may be a amendment agreement in force that prevails over the original documents of the loan.
Does not make loans
This type of loan occurs when attempts to collect the loan have been unsuccessful and the loan account is simply not paying anything. You are delinquent with missed payments and other expenses owed.
Lenders who need cash liquidity are often willing to heavily discount the amount they will accept for the sale of their underperforming or delinquent loan accounts. These troublesome loan accounts are a financial burden to the lender in both time spent and money lost.
For savvy and experienced note investors, these difficult loans present an excellent business opportunity. An experienced and capable note investor can create a handsome profit by acquiring these troubled loans at a discounted purchase price and then fixing the problems.
In essence, they can make lemon aid from a lemon.
But, for an inexperienced note investor, this type of loan should be avoided.
Necessary loan documents and steps to take when buying an existing home loan
The necessary loan documents required when purchasing a real estate secured note are essentially the same whether you buy from a private note seller, an estate, Bankruptcy Court, or a commercial bank. The steps to follow and the required loan documents are listed below:
1. Determine if a Modification Agreement is in effect For many bank loans being sold today, the original loan documents have been Modified or changed in an effort to help the borrower maintain ownership of the property. The new, Modified terms now control-void original loan documents. Get a signed copy of the Loan Modification Agreement, if it exists.
2. Verify Outstanding Loan Balance Verify the outstanding loan balance owed on the promissory note and the actual payment terms of the promissory note or Modification Agreement. You have to Check out the actual documents that were executed!
3. Obtain a Payment History of the loan Check with the seller of the note that interest and principal have been paid up to a specific date. Check when the next payment is due.
4. Determine that the mortgage (or deed of trust) is a FIRST lien loan
Make sure the mortgage (or deed of trust) has a secured FIRST lien position; Obtain a copy of the mortgagee’s title insurance policy. Review the Mortgage Title Insurance Policy. Typically, the lender’s/mortgage’s Title Insurance Policy was issued when the loan was originated.
5. Determine the status of property taxes, whether they are current or delinquent, and determine if an escrow/repossession account exists; if it does, it should be transferred to you. Often the borrower pays monthly property taxes and fire insurance premiums into a separate escrow/escrow account. It is your responsibility to have that account transferred to you, if it exists.
6. Determine the property’s hazard insurance status Obtain a copy of the hazard insurance policy. Later, after completing the loan purchase, the policy must be endorsed to show you as the new loss payee.
7. Confirm the value of the property secured by the promissory note Confirm the value of the collateral real estate secured by the promissory note: the current market value. Obtain a current real estate appraisal of the collateral property; Or, you can do your own evaluation; or Hire a competent real estate agent to do a Broker Price Opinion Report: “BPO”.
8. Have the real mortgage (or deed of trust) assigned Get the real mortgage (or deed of trust) assigned to you. The assignment, once executed and recorded, will comply with this and transfer to you all right, title and interest in the instrument.
9. Have the original promissory note endorsed Have the original promissory note endorsed, making sure that the security instrument assignment and the promissory note endorsement match each other. The endorsement may be made directly on the actual original promissory note instrument or through a separate document called an extension that is later attached to the promissory note.
10. Have physical possession of the promissory note that was delivered to you. Have physical possession of the original promissory note issued to you. This is the title of credit that you are buying and whose rights you can enforce for non-payment of the debt. It is very important that you have physical possession of the note. The promissory note is a negotiable instrument. If it is lost, it can be counterfeited and sold. If you have to foreclose, you will be required to show the original notice to the court or trustee public.
11. Have the borrower execute an affidavit of legal encumbrance if possible. You should try to obtain an affidavit of legal encumbrance from the borrower. That document affirms the actual balance and terms of the note and verifies that there are no existing disputes or compensation. It will be very useful if a dispute with the borrower arises.
12. Prepare “notification letters” Prepare signed notification letters to both the borrower and the fire insurance agent notifying them of the transfer of the loan to you. These letters are often known as “farewell letters” (from the loan seller to the borrower), “welcome letters” (from you to the borrower), and “notification letters” (to the insurance agent requesting a new loss payee). . Approval).
Do not try to buy a promissory note loan without professional help
As you can see, this is a multi-step technical process. This process can be easily handled by well-trained specialists who are very familiar with the process and documents. It can be easily damaged by an untrained person. No one is born knowing how to buy a promissory note. Everyone has to learn, and learning can be very expensive. Don’t pay tuition with your life savings!
Specialist in Promissory Notes and Lawyer
At the beginning of the buying process, retain a reputable note specialist as your advisor, and also retain a reputable attorney who has specialized experience in the note area. The few hundred dollars you’ll pay these two will save you thousands of dollars and many, many sleepless nights.
Once you own the actual loan, there are a number of options available to try to collect or make the note instrument work. Some of these options will be covered in a future article.