If you are new to buying mortgage notes, it can be overwhelming. We have included 6 keys step to know when buying real estate notes as a newbie.
Step 1 – Determine Criteria
The first step is to determine your criteria. An example of this would be to determine what lien position you would like to have, where do you want to invest, what type of collateral are you going to use/require in your investment, what is your budget. The types of lien positions include first, second, third, etc.
In this example, we will use a first position mortgage. When deciding on location, there are multiple factors to consider: i.e. Is the state judicial or non-judicial? This is important because in judicial states, the foreclosure laws require for you to go before a judge to foreclose on the property.
Therefore, if the overall investment is questionable in a judicial state, it is best to pass on this opportunity. Another factor to consider is the speed of foreclosure within that state. In Texas, you can foreclose within 45 days whereas in California, the process can take between 8-10 months. In New York, the process can take between 2-5 years.
This means that someone can live in the property over that period without making a single payment. Another important factor to consider is the collateral, which is commercial or residential land. The final factor to consider is your budget.
Step 2 – Find a Note Seller
The next step in the process is to reach out to people and institutions who sell notes, which can be found online by search using terms such as note sellers or note holders. You can also go to the recorder’s office in any county to see who has been selling notes by doing an assignment search to find out the names of the note sellers and note buyers.
Then, you can reach out to these people online or via direct mail to inquire about buying notes. You can also go to a list broker and buy a list of all people who own notes.
Another option is to reach out to these note owners via mail and make offers to buy notes from them.
Additionally, you can reach out to community banks and small credit unions and inform them that you are in the market to buy mortgage notes, whether they performing or non-performing.
You can also locate various note brokers online as well on sites such as LinkedIn and other social media platforms, who can in turn, provide you a list of notes they have for sale. Buying a note from a note broker may also require you to pay a fee to that broker. You can also buy notes from note dealers, who hold notes in inventory.
You can also reach out to real estate agents because when an agent sells a house for a seller, sometimes those sellers carry back paper, meaning the seller finances the sale of the real estate. Those owners may want to sell that paper and the real estate agents can enable you to get in touch with that owner. This may require paying the agent a referral fee.
Another possibility is going to a hedge fund. However, they may require you to buy multiple notes at once. Remember, it is always important for you to conduct your own due diligence. The only time you are guaranteed a fully vetted note is from a note dealership. After finding a note seller, you should write a letter of interest (LOI). The LOI should include a clause which states that if the due diligence is below your satisfaction, you can back out of the deal.
Step 3 – Due Diligence
The third step is to conduct due diligence. This means you must check out the property, which is also your collateral. It is in your interest to know what the community is like and if it is a desirable place to live. You must ensure that the note is properly written and is in fact a legal document.
You need to find out if the mortgage or assignment is recorded or in recordable format. You need to know if it was written by an attorney. If you are unsure about what you are reading, you need to take the documents to a local attorney for that state or county.
You must make sure the title is clear and that there are no liens on the property. You want to make sure there is not a break in the chain of title. Then, you want to verify any information you can about the borrower since they are going to be making the payments to you or signing the property over to you in lieu of foreclosure. The seller can provide some of the data about the borrower and you can find out other information about the borrower through your own research.
Step 4 – Exit Strategy
The fourth step is to develop an exit strategy. This all depends on whether you want to buy and hold, buy and sell, buy and foreclose, or find a method for the borrower to surrender the property to you without foreclosure. Then, you can list it with the agent and sell it or put a tenant in the property and rent it out.
Step 5 – Closing the Transaction
You begin this by completing and signing a loan sale agreement with the seller. Once the loan sale agreement is signed between buyer and seller, then you want to cue up your funds for the transaction.
For example, if you are conducting the transaction through your individual retirement account (IRA), you must notify the IRA custodian that you will be taking funds from the IRA and sending them over to the seller. Therefore, you must fill out the required paperwork to complete this process. If you are using your own funds, you must inquire with your own bank what you must do to wire funds to the seller. They will provide the necessary documentation.
Then, you need the seller to provide you a draft copy of the assignment and the allonge. An assignment is a document the seller will use to transfer ownership of the mortgage from their company to you. The allonge is the document the seller uses to transfer the ownership of the promissory note from their company to you. Unlike the assignment, the allonge is not a recordable document.
You should get a draft copy of these documents before you wire any funds. Make sure that the assignment is in recordable format for that county and that you or your company’s name is properly spelled.
Once you have the draft copy, go to the county website for the recorder’s office, and see what requirements they have on a recordable document. Then, make sure that the document you receive from the seller, is in compliant with what the county is expecting. Once the seller has your money, it is difficult to get them to move quickly when it comes to resolving problems with the document.
Next, reach out to a licensed loan servicing company. You need to inform them that you are buying a note and they should expect the transfer of a note to their company for servicing. There are two basic types of transfers that will happen. One is a transfer from servicer to servicer. That occurs when the current note seller already uses a licensed servicer.
Another type is a note is self-serviced by the note owner. In this case, it is going from a seller to a servicer, which will require more interaction from you. If you reach out to your loan servicer and inform them that you are buying a note, they will walk you through the things you need to do, to make the transfer seamlessly.
Then, you must wire the funds to the seller. Within 30 days, the seller will send you the loan package, also known as the collateral file. In the collateral file. You will get the original note, original assignment, and the original mortgage.
If you are not familiar with the note seller, you may want to consider using a closing agent to assist with the transaction. A closing agent is title company or attorney, who will receive your money, holding your funds until the original loan collateral file is received from the seller. If using a closing agent, include that in your loan sale agreement and try to negotiate with the seller to share the cost of the closing agent with you.
Step 6 – Post Closing Activities
Follow up with your loan servicer to make sure the note gets uploaded or boarded in their system. Once they tell you it is boarded, review it. Let them know about any errors if necessary. Then, you can start your asset management plan.
There are a lot of moving parts when it comes to buying mortgage notes. That is why education is an important part of becoming a stellar note investor.
You May Also Want to See:
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- 8 Ways to Make Money with Real Estate Note Investing
- Struggling Wholesalers to Thriving Note Investors – Our Story
