Posted by John Behle on April 07, 1999 at 14:30:15:
My posts sometimes stress moving quick and alternative ways to find out information and protect yourself. If I do that, think “ADDITIONAL” was to save time, protect yourself and avoid fraud.
Although I may close at times without a title company, title insurance, appraisals, etc. - - - Someone new to notes should not even consider it. A good rule of thumb is that if you have to even question whether you should or could close without professional help - then that tells you the answer - you need it.
As I mentioned, many of my posts emphasize the possibilities of what you can do and the areas of notes that are overlooked or even unknown by many or most note brokers. The emphasis doesn’t become the rule. I invest in notes because they are safe. Safety is first and paramount. Never sacfice that.
I am not really in the note business, but today one fell in my lap. Here is the scenario:
Got a call from a guy I am buying a junker from and he tells me he has a second that he wants to sell. He created the second($9900 face value) when he sold one of his junkers in October of 1997. The terms were 8% for 15 years with payments of ~$95/mo. This guy is kind of a “player” and said he didn’t want to fool with collecting $100 each month, so has really not actively collected on the note and therefore has received no payments. The underlying first is for $24,500 with UC Lending. The FMV of this property is ~$50,000. I normally would not even look at this type of deal, but he said he was looking for $3,000 out of this note and would probably take $2,500. That made me think about it.
Three scenarios:
Buy the note and hold it and tell the people to start paying me $100 a month for 15 years(hey it will pay the electric bill) or I will foreclose.
Buy the note and start collecting payments, but strongly urge the payors to refi and pay me off(perhaps at a discount)
Buy the note and, since it is technically in default, immediately start foreclosing to ultimately acquire the property(I usually am a landord)
What sort of due diligence do I need to do to purchase this note. I am familiar enough with the area to not need an appraisal, but do I need to be concerned that the first is in default? How do I check this? If I foreclose, I will need to pay off the 1st, correct?
The first move would to be to get an estoppel affidavit from the payor. Does he agree that he owes the amount that the seller of the note claims? Title insurance(or search) is in order. The payor may very well give you the information to be able to check on the first. The owner of the note should be able to check.
You should not have to payoff the first to protect your second. You would have to catch up any back payments.
Is there somewhere I can get an estoppel affidavit? Does it have to be formal, or can I just make a statement that “I agree I owe 9,900 pursuant to the terms of the second deed of trust dated XX/YY/ZZ” signed by the payor. When you buy a note is it normally closed at a title agency or does the seller just assign the note to you and be done with it? I know there is usally a large discount on seconds(especially non-performing.) Does this seem like an acceptable deal?
If you are putting out money that you can not afford to lose then close at a title company with title insurance. They will prepare the transfer of lien document. On the note itself the endorsement is made that it is now payable to you. You can have him sign a letter to them that you will now be collecting the payments. As John says get your contract and do your homework to see if they are going to pay.