Prevention versus Recourse - Posted by John Behle
Posted by John Behle on October 31, 1998 at 14:01:35:
(Continued from “Details” post)
I focus heavily on prevention when it comes to the loss of time and costs also. Little time goes into an offer before I have an option signed. Once I have the option, the “due-diligence” begins in a time and cost saving manner. This applies to local notes. It is much more difficult when distance is involved - which is part of why my strategy involves local notes.
Once I have an option signed, I do a title check. This is just a quick check to make sure the note is in the position it is reported to be, there are no current or past payment problems I don’t know about and there are no problems (like already having sold it to someone else - or borrowed against it). This might evolve into a full abstract of title going back to the date the property was built, the last new first mortgage or possibly the date of creation of the note. There are reasons for each level that I can’t go into here. At this point, I am just looking for problems that would prevent the sale or that need to be solved. Firteen to thirty minutes are spent and days of costs and hours of time can be saved. At this point, I record the notice of interest to block a sale to anyone else.
I do a quick drive by on the property for pictures and general impression of the property, occupants and neighborhood. I use a digital camera for the pictures and have them immediately for myself or an investor. If the property is a bread and butter type SFH, then it can be simple to establish value later. That’s part of why be re-imbursed for the costs of an appraisal are not that important for me. Sometimes I do not get a full blown appraisal and when I do, I already know the value. Basic information about the property or an old appraisal gives me the ability to run comps on the MLS or free internet sites. The driveby may just take a few minutes and finding comps, about 10 minutes.
When the courthouse is nearby the recorders, which is most of the time, I may also check the payor and note seller for judgements or lawsuits. I can also do this on the internet. Judgements or lawsuits on either could affect the sale and clarifies their motivation.
In all, I could be ready to buy a note in a couple hours with no capital invested, except a recording fee and a couple bucks of gas. If the deal won’t fly, I’m not out a thing. If I then need appraisals, title insurance or anything else, there is little risk of loss.
I usually pull credit on the payor immediately. Not that their credit is extremely important, just to identify problems and risks. My decisions are based ont the property value.
In cases of large or odd deals, I will build in some protections for my costs on the due-diligence.
One reason recourse doesn’t mean as much to me is 99% of the time I have found it to be useless. They sell the note to someone else or back out of the deal and I’m left with recourse against someone who usually can’t pay. I’ve covered my major risks in my preliminary due-diligence, so there are seldom problems. They can’t sell to a legitimate buyer because of my notice of interest and any problems with the title, property or payor are known within a couple hours. I rely heavily on what information they have available at first, like past title reports, appraisals, closing statements, etc - - - - BUT! — that is just to save time and identify problems at first. I DO NOT rely on any information provided by the note seller, payor, Realtor or anyone else for the final due-diligence. I’ve seen supposedly knowledgeable note brokers and funding sources scammed by relying on phoney title reports, appraisals and closing statements. That is one of the reasons I suggest everyone learn the basics of doing the due-diligence on a note deal themselves. Relying on others ends up being either costly or risky.