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Don’t Hide The Facts

Written by Jeffrey R. Armstrong – President/Owner of Armstrong Capital

Your favorite Master Note Buyer – Straightforward, Honest, Fair…

During the due diligence process you, as a note broker/consultant, have a responsibility, no a duty, to provide your funding sources with all of the information that you receive from the note holder.  Whether the information is good or bad, positive or negative, inconsequential or notable you must pass it on to the funding source.

Last month I was assisting a new broker in the industry with his first transaction.  The price was accepted and the broker collected the appropriate copies of documents and information.  Everything looked satisfactory, the funding source gave their preliminary approval and due diligence was started.  First on the list was the payor’s credit.  A credit report was run and although the credit wasn’t the greatest the credit of the payor was approved due to a good sized down payment and 15 months of seasoning.

The next step was the verification of the value of the collateral.  In this case as long as the value came in for the sales price of the subject property we would be ok.  The collateral on this transaction was a commercial property so it would cost a little bit more and take a little longer to get done.  When the appraisal was received, although the property was in a mediocre neighborhood it was in good condition and the value came in for a little above the sales price.  The funding source approved the appraisal.

As the appraisal was being worked on the title company was searching the public records and preparing the title commitment.  The title commitment came in a few days before the appraisal and showed that the note was indeed in first position and that there were no other liens or encumbrances that would affect the value of the collateral or the value of the note.  One little hurdle came up that the property taxes were delinquent.  The property taxes were either going to have to be paid before we could fund or we could pay them out of the seller’s proceeds.  After a phone call to the broker a signed letter from the seller was faxed over saying that she had agreed to have the delinquent property taxes deducted from her proceeds.  Issue resolved.

After the credit, appraisal and title were reviewed and accepted by the funding source the closing documents were prepared and sent to the seller.  A call was placed to the broker to alert the seller that they were coming and who he would receive them from along with instructions on what would need to take place before the transaction closed and funded.  Included in the closing package were a simple Payment History Verification Form and Estoppel Letter for the seller to fill out and to verify for us that the payments were current and that there were no offsets or warranties against the note.

The seller received the documents and returned them directly to the funding source a couple of days later.  Everything was perfect except for one thing.  The seller had made a note on the Payment History Verification that she had not received a payment in 3 months.  The closer called the seller and asked her about this and the seller said that she had told the broker about it in the beginning and that the broker said it would not be a problem.

Well, to make a long story short the transaction was eventually cancelled.  I guess the broker thought that we wouldn’t find out.  He guessed wrong. He wasted my time and the funding source’s time and for what?  A commission?   Come on.  There are plenty of good deals out there to go after and it is never necessary to hide or lie about information just to get a deal.

During the due diligence process the funding source will always find out everything about the transaction.  Don’t waste the funding sources time, money and effort.  Don’t waste your time, money and effort.  Disclose EVERYTHING that you find out from the note holder when you find it out.  It’s better to not do a transaction at all than try to hide, change or lie about anything to the funding source.  Run your cash flow business straightforward, honest and fair…the way it should be, and you will have a long and prosperous relationship with your funding partners.

Remember, success demands action! Keep on marketing, it’s going to work! TWITA! (That’s What I’m Talking About!)

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