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  • Randy Rodenhouse

10 main factors to consider when buying performing notes - Part 1

  • Lien position

  • Value of the property

  • Unpaid principle balance (UPB), terms and maturity

  • Verifying actual note seller

  • Payment history

  • Property taxes and insurance status

  • Owner occupied (O/O) or tenant occupied

  • Borrower credit and bankruptcy status

  • Who is on the deed

  • Liens and judgements

Today we will talk about the first 5 and leave the remaining 5 for the next blog post.

1. LIEN POSITION: It is super important to determine if you are buying a 1st, 2nd or 3rd lien position and how many mortgages are on the property in total. I have purchased 2nd liens and later found out they were 3rd liens (a great story with a happy ending which I will share in another newsletter). How do you determine lien position? Order a title search.

2. VALUE OF PROPERTY: You need to research and determine the value of the property that secures the note and mortgage. How do you determine value? Get a BPO (brokers price opinion) or an AVM (automation valuation model). A BPO is the estimated value of a property as determined by a real estate broker or agent. An AVM is a software-based tool that's used in residential and commercial real estate to determine property value. The service uses mathematical or statistical modeling with a combination of existing databases to determine the value of a particular property. You could also simply ask a good agent familiar with the area to run COMPS for you. Below is an example of the comparable sales page in a multi-page BPO.

3. PRINCIPLE BALANCE, TERMS AND MATURITY: Many times the seller of

the note will tell you these items but you must verify the outstanding balance due and the note terms and maturity dates for yourself. How do you determine UPB, terms, maturity? Read the original note (example below) and make sure you understand the terms of the note. There are many little things that can trip you up so read the note carefully. Also, the seller's servicing company will have all the information with respect to the UPB, rate, months to maturity, etc.

4. VERIFY THE ACTUAL NOTE SELLER: There are many people brokering notes but do not have direct ownership of the note. You need to confirm the actual note owner and watch out for daisy chains (one person selling a note to another and that person selling to the next and so on). How do you determine the actual note seller? You need to look at the chain of assignments and this can be found in the title search report that I mentioned above. An assignment is the transfer of ownership from one entity to another which is recorded in public record.

5. PAYMENT HISTORY: You need to verify that the note is actually performing and determine the next payment date and whether there are any outstanding property taxes or insurance past due. How determine if performing note? You need to get the payment history (see example below) and any servicing notes and review the details. Did they have any gaps in payments, are they contractually current, etc. You can check the county treasurer to see if the property taxes have been paid. See this prior newsletter for details concerning property tax lookup.

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