Still Unclear - Posted by Sean

Posted by Doug Pretorius on April 23, 2000 at 13:15:04:

…but what is the point of risking the loss of your option consideration without so much as pulling out your calc to see what the balance is?

Still Unclear - Posted by Sean

Posted by Sean on April 21, 2000 at 07:26:26:

I know I’ve sked questions like this before and I’m grateful to everyone who’s tried to help me. I must confess that I’m still unclear on a few points.

Let’s suppose I get in contact with a note holder and he wants to sell. I ask him what price he hopes to get and he names a very reasonable price. We agree, I get an option to buy the note and I record that option.

I’m all ready to begin my due diligence and not only do I not want to leave anything out, but I don’t want to do things in the wrong order. For example if I paid for an appraisal before I found out there’s something else wrong with the note I’d have spent that money for nothing.

What do I do first? Estoppel the payor? Check the title? Calculate the balance due? Order an appraisal? Order title insurance? Go look at the property? Pull a credit report on the payor? Please help me understand the most efficient way to do all this.

Due diligence and Risk Management - Posted by John Behle

Posted by John Behle on April 26, 2000 at 14:07:46:

When buying a note for your own account there are many things you need to establish.

Primarily though, it breaks down into:

  1. What exactly are you buying and for how much
  2. What is your position in case of default
  3. Do you have clean title

With a note purchase I save large expenses on notes I don’t end up purchasing by using a step by step process. I don’t put much money out before I am fairly sure of the result.

For example, before ordering an appraisal, I will already have comps and a good idea of value. Before a title report or insurance is ordered, I will already have pulled my own abstract through the web or Recorder’s office. You can spend lots of money on appraisals or title reports only to find out someone can?t sell you a note, it has problems - or has already been sold to someone else.

So, it’s like the due-diligence is “refined” over time - contingent upon successful results in the step before. If a quick check of the title looks good - then I will order a title report. If the value and LTV looks good - then I may order an appraisal.

But I don?t spend very long or very much before the terms are firm and I have an option. The reason I use an option is that I can cloud the title by recording the option or usually a notice of option. Many people try to keep on selling their note for a higher price and my option prevents that. I point out it is a ?done deal? unless something does not check out. My option is contingent upon verification of the terms of the note, underlying loans and the value of the collateral.

A typical note deal might go like the following.

FIRST CONTACT: - I gather what info the note seller has and establish LTV, terms of the note and terms of the purchase. I will discuss price and negotiate over the phone in that first call.

Then I want the option before I do any due diligence. I will move on that immediately by having the seller come to me or meeting me half way. If they can?t meet right away, I have them fax me info or gather more. I want them away from the phone and involved in the process of selling the note to me.

VALUE AND TITLE: - I or an assistant may then grab a digital camera and run by the property or if it is too far away, will pull comps off the internet and review any info the seller has gotten me. Next I check the title through the Internet or Recorder?s office. I identify any title problems and get started in solving them.

FUNDING: - From the moment I have an option on the note I am also lining up funding. That may mean coordinating with an investor I am going to borrow from or it might mean freeing up funds that are available elsewhere. Ideally there is always ready cash of mine or an investors to fund a note within minutes if need be. Sometimes that can look like short term funds that will be repaid within a few days as the note is more formally funded and/or packaged.

The specific things I need to establish are the ?Integrity of the Title?. This comes down to what position I am in, the status and amounts of all liens on the property and the seller?s ability to give me clear title. I can establish this in a few minutes on the web or at the Recorder?s but the most common and recommended way is a policy of title insurance. In most deals there is a recent policy from the time the property was sold and the note was created. In some cases, this and a quick update at the recorder?s may be all I need to feel comfortable . At the least, a title insurance company should give you a price break by having this current policy available.

The value can be established by comps or an appraisal. Actually, I am looking at the deal differently than an appraiser anyway. I am asking ?what is the least this property is worth?? while an appraiser is asking ?exactly what is the property worth?. The more difficult this question might be - the less likely I am going to do the deal. I am concerned with resale of the property if there were a foreclosure.

Another issue is the note itself - It?s proper recording, endorsement, etc. That should be handled by an attorney or other legal counsel at first. Many times the attorney for a title company will review something like that with you fairly cheaply.

That?s just a taste of the process. It?s not that hard, but important. It?s crucial to learn more about the process before buying notes for your own portfolio. That?s a large part of what the 5 day training in Park City in July is all about.

There is an article here for more reference to some of this about ?Risk Management? at:

Re: Still Unclear - Posted by William, Columbus, OH

Posted by William, Columbus, OH on April 25, 2000 at 13:33:13:

Sean: You need to be using a form, usually provided by a principal investor or master broker, which you fill out before you even make an offer to purchase.
With all the information gathered you are better able to make an intelligent decision than you can make with the limited information you were provided. I, personally, would use a principal investor or master broker for the first few deals to get the process down
and avoid any expensive seminar via do-it-yourself. I feel it is worth the small difference in profit taken.
My principal investor usually quotes me the same day or within 24 hrs and is very competitive. He has been very helpful in my learning process. Inexpensive education, I feel. Best wishes for your success.

Consider MASTER Broker services - Posted by Michael Morrongiello

Posted by Michael Morrongiello on April 22, 2000 at 15:05:54:

There are numerous investors, brokers, and funders that allow you to “learn while you earn” if you are going to broker the paper to them. They are often called “Master Brokers”

Working with a REAL PRO many times can save you a whole lot $$$$, frustration, heartache, and headaches in maneuvering a deal through the dangerous “shark invested waters” involved in processing, packaging, closing, and actually funding a note acquistion deal.

Years ago I worked with individuals that knew how to get around title and appraisal issues that always seem to come up, deal with uncooperative payors and sellers, work through documentation logistics, etc. - I considered this time spent with these individuals well spent time and a sort of “apprenticeship”.

This very often is a good way to go on the first few deals so that you get a comfort level under your belt.

To your success,

Michael Morrongiello

Re: Still Unclear - Posted by Doug Pretorius

Posted by Doug Pretorius on April 21, 2000 at 17:12:53:

Just guessing here, but wouldn’t it be a good idea to know the balance of the note BEFORE agreeing on price?

Well… - Posted by David Alexander

Posted by David Alexander on April 21, 2000 at 18:50:36:

Not true… in my opinion. You should be getting enough info to generate an estimated balance by your calculator and working backwards. You should be getting your best price in the forefront and if you have to later give reasons as to why you cant pay that much then that’s the way it is. If you dont tie it up someone like me will come along and tie it up first.

With this all said that’s wht I think if your a principal Investor. On the otherhand if your brokering then your gonna have to get some preliminary information before you can buy it so that you know you have a good spread from your buyer.

As far as order of work, every deal is a little different, but I would say check title first on most. Then proceed with the rest. Possibly estoppel second to uncover any animosities of the payor. Check any underlying liens out. The last money I spend is on the appraisal and Title Insurance. Then again most deals I’ve done rarely involve appraisals or title insurance.

David Alexander

Well… - Posted by Sean

Posted by Sean on April 21, 2000 at 18:41:32:

…the scenario I had in mind a guy approaches you with his note and says:

“Well, the buyer’s been paying $150 a month … I think he’s made 15 or 16 payments? What? Yeah that’s the original note right there.”

So you look at it and you think, “It’s probably worth $7,000” and you say, “So how much were you hoping to get for it?”

He replies, “I dunno, I think I’d be happy with $6,500” and you scratch your chin dubiously until he amends that down to $6,300 and you end up with a price of $6,250 while you think, “Cool, I just saved $750 by asking him what he wanted and then scratching my chin for awhile.”

So you get the option to buy it for $6,250 and you’re out to make sure it’s worth that amount. You hop in your car, drive a few blocks and whip out your financial calculator and figure out you’ve negotiated a 17.4% yield. “Not bad,” you think, “Maybe I can also use one of those 117 ways to improve the note and make more.”

Of course a lot could go wrong. What if it’s a second instead of a first? What if it’s a silent second? What if the buyer insists he paid $250 the first 12 months instead of $150? What if it doesn’t appraise well? What if the payor’s one step from bankruptcy?

See my reply to Sean below… (nt) - Posted by Doug Pretorius

Posted by Doug Pretorius on April 22, 2000 at 12:32:51:


Re: Well… - Posted by Doug Pretorius

Posted by Doug Pretorius on April 22, 2000 at 12:32:19:

I see. I thought you were commiting to a price thinking it’s got 10 years left, meanwhile it actually has 1 payment left. If the seller agrees that you can buy for less if things don’t turn out to be as presented or imagined, then of course I agree!

The point of an option… - Posted by Sean

Posted by Sean on April 22, 2000 at 17:41:11:

…is that it’s a one-sided contract. You end up with the exclusive right to buy at an agreed upon price and if you don’t want to buy, you walk away losing any earnest money put down up front.