Due Diligence with Seller-Held Mortgage Notes

Like any other investment, you need to treat a seller-held mortgage note with care. If your paperwork is missing or your information is inaccurate, you may be in for a nasty surprise on two fronts. First of all, if you missed something and the borrower feels that you misrepresented the value of the property you could get in legal trouble. Second, a reputable mortgage note buyer like us won’t buy your note in the event that you want to convert it into cash. It’s just too risky and irresponsible.

This article isn’t legal advice on due diligence by any means. To get that, you need to employ a lawyer to talk about your specific situation in detail. In fact, you shouldn’t manage a seller-held note without a real estate lawyer’s help, period. That said, here are a few informal tips to get you on the right track to managing your note responsibly.

Get the Original Note: One of the most common gambits desperate homeowners are doing to avoid bank foreclosure right now is challenging them to produce the original mortgage note – and it turns out that some banks aren’t organized enough to do it. This delays and even defeats foreclosure attempts. Now imagine that you are in the bank’s position, trying to recover payments due from your borrower. Not a pretty picture, is it? Make sure you can always produce the original mortgage note upon request.

Get the Property Inspected: make sure the property is up to local codes for fire safety, electricity and water, and that you and the borrower have an explicit agreement on the current state of the property. Two people can leave a meeting with very different expectations as to the condition of a property unless you get it in writing.

Get Title Insurance: Among other things, title insurance sets down loan priorities on the property. It may seem like a no-brainer to you that your claim on the note comes first, but if the borrower goes to the bank to take a loan out on the property they won’t necessarily know that. Title insurance avoids one potential source of legal wrangling.

Get Tax Information: You and your borrower should understand what the property’s tax obligations are, past and present, right down to the penny.

The core principle at work is that you’re offering financing with full knowledge of the property’s characteristics, and that you and the borrower are in agreement as to the property’s state and who is responsible for any changes, improvements or other costs. This requires a bit of preparatory work but if you do it, you’re experience with a seller held note will not only be a positive one, but you’ll be in an excellent condition to sell your mortgage note if you decide that you’d rather convert it into cash. Get a free mortgage note quote to find out how much you might get from your note.