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Lessening Obstacles In The Note Business

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

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

Growth usually does not come quickly for a fledgling note business yet there may be some things you can do to help with growth and success.  One of those things is the strategy of trying to speed up the process of selling a note.  The idea of selling a note faster and more efficiently is nothing new. Those of us in the business every day are always trying to lessen or minimize last-minute hurdles and obstacles that can arise through due diligence.  Instead of holding your breath through the due diligence process, knowing what might go wrong, and how to deal with it if anything does go wrong, is a strategy that pays off.

The typical note buying process (with no hurdles or surprises) from the time that the seller signs the initial agreement to the actual funding is about 28-42 days.  Traditionally, when a note purchase offer has been accepted the due diligence — credit check of the payor, drive by appraisal of the subject property and title search — are performed. That process itself can lead to closing delays for the note seller and a stressful sale with surprises for the seller.

After 23 years in the Seller Financed Note Business buying and brokering more than 1600 notes for sellers I have made a checklist for the sellers so they know what they can expect once they sign the initial purchase agreement. With this changing note market, this checklist can also change and not all experiences are the same. However, these are the most common hurdles the seller has to go through when selling their note.

To begin with it is nice to let the note seller know what to expect when selling you’re their note to me.  The seller can expect the latest technology to move the transaction along quickly, updates at least once a week, Experience and Knowledge, out of the box ideas to get their note to the closing table when hurdles and surprises arise and more.

There are five key contingencies for a note purchase offer and hurdles to get to closing.  The first of which is verification of the information given.  Sellers do not always give us the exact numbers, terms, descriptions or information correctly. Whether on purpose or not it is our job in the due diligence process to peel the layers of the onion and make sure our price is consistent with exactly what the seller has.  Examples might be a lower or higher interest rate, a shorter or longer term, a different property type or an underperforming pay history.  These are not always reasons to lower or change the pricing but knowing everything upfront makes the original offers stick much better.

The second contingency and hurdle is acceptable credit of the payor.  The key word here is acceptable.  Different investors have different criteria and what is acceptable to one investor may not be acceptable to another.  Knowing your investors is step one in minimizing price changes due to the credit of the payor.  In addition, most sellers usually think the credit of their payors is… ”like gold”… because they have been receiving their payments on time.  As we have seen time and time again, just because they are making payments on their note does not mean in any way shape or form the credit is going to be acceptable.  Mentioning to the seller that the initial pricing is based on good and acceptable credit of the payor is another way to minimize the surprise to the seller during the due diligence process.

Acceptance of a drive-by appraisal or BPO (Broker’s Price Opinion) is the third key contingency or major hurdle to overcome during the due diligence process.  The note investor will order their own third party valuation of the property taking into account the quick sale value as well as the local market value. These days a note investor wants to be sure that the comparables used for the appraisal have 1) sold in the last 3-6 months or less, 2) are within a 1 mile radius, or possibly 3 miles depending on what has sold and 3) the age, size and condition of the properties are similar.  In addition, the property should be occupied (not vacant), shows pride of ownership and should be exactly what we were expecting (i.e. – not a mobile home when we are expecting a single family stick built home OR not a commercial property when we are expecting a residential property, etc).  The property should also appraise for at least the original sales price when the note was carried back or the pricing may be adjusted.  Letting the seller know of these requirements up front could possibly minimize confrontation and stress later on.

A fourth key hurdle and contingency is the title report.  If there is already an existing title report then the note investor will get an update (also called a date down) to make sure the title is clear.  If there is not an existing title report from the time the note was created then the note investor will order one.  Not only are they looking to make sure that the note they are buying is secured to the property but also that there are no other liens or encumbrances that could affect the value of the note such as lien position, delinquent property taxes, mechanics liens or other “clouds” on title.  Most clouds are fixable it just may take a little more time.  This is the reason the questions are on the worksheet about if the note seller has title or not, if the property taxes are current and if there are any underlying liens, etc. These questions up front minimize the surprises during due diligence.

The fifth and final key contingency and hurdle is the closing.  The note investor will send the documents to the note seller by overnight mail and they in turn should sign them in the required places and send them back with their original note and security instrument.  This is where it gets interesting.  Sometimes the sellers do not like the verbiage in the agreement (especially on partial purchases) so we have to hold their hand and walk them through it. Sometimes they send back only a portion of what was required to fund and we need to do more follow up. Other times we get everything back endorsed okay but they send us a copy of the note OR may have lost the note entirely which sets up a whole new adventure in trying to get the transaction closed.  Alerting the seller to the closing procedure before the final documents are sent is the way to make sure they are on the same page and does minimize these hurdles from even presenting themselves.

There are other hurdles and surprises that may come up but these are the 5 most common.  The bottom line here is in order to minimize hurdles a note buyer or note broker should communicate with the seller in all stages of the process so that they are not surprised when something comes up.  I am definitely not saying that you should tell them all of the horror stories but just making them aware of potential obstacles goes a long way in how they will react to them if they arise. And above all never guarantee them that the transaction will definitely close, until they receive their funds!  Whatever you do, remember, success demands action! Keep on marketing, and being persistent, it’s going to work! TWITA! (That’s What I’m Talking About!) J

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