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  • Randy Rodenhouse

10 main factors to consider when buying performing notes - Part 2

  • 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

6. PROPERTY TAXES AND INSURANCE. It is important that the taxes and insurance are up to date and that the borrower is paying. The property taxes can be checked by going to the county treasurer or using Netronline as discussed in this prior newsletter. You will need to get a copy of the current hazard insurance with the proper dates and coverage. The coverage should be higher than the balance on the note so that you will become whole if the house burns down.

7. OWNER OR TENANT OCCUPIED. You will ask the note seller if the house is owner or tenant occupied. I prefer owner occupied since they are more emotionally attached to the home and typically will go over and above to keep from losing their home. Owners also take better care of the property versus a tenant. Would I buy a tenant occupied performing mortgage note? Yes but depends on the neighborhood and house condition. Also I want to see that the rent payment is well above the mortgage note PITI payment. If the property is tenant occupied make sure the insurance is a landlord policy.

8. BORROWER CREDIT AND BANKRUPTCY STATUS. Sometimes the mortgage notes you buy already have a credit report from the note seller. Many of the institutional notes do not, but I rarely run credit and instead review the payment history and the servicing notes. It is important to check if borrower is in bankruptcy and this is done as discussed in this prior newsletter. I do buy notes in bankruptcy but want to get a bigger discount since the servicing costs are higher and the risk as well. Notes in chapter 13 bankruptcy can provide a consistent stream of income since monitored by the court.

9. WHO IS ON DEED. You want the person/entity on the deed to match who is on the mortgage and note. The deed is the physical document that proves ownership. The title is the concept of legal ownership that the deed grants you. So many times people interchange the words deed and title. So how do you check who is on the deed? You will run title search and it will show the ownership and who is on the deed. We will have an entire newsletter in the near future to discuss title search and how to read the title search.

10. LEINS AND JUDGEMENTS. You must be search the title to determine what judgements and liens are on the property. There can be IRS liens, mortgage liens, state tax liens, property tax liens, city code violation liens, judgements and various other title defects to be aware of. Never buy a note without getting an updated title search. Now you don’t necessarily have to get title insurance as you do with buying a property but you have to know all the liens and judgements since your note bid will be affected by these liens and many times you will pass since the numbers just don’t make sense.

SUMMARY: You can see there is much to consider and research before you hand over your hard earned money to someone selling a note. But if all looks good there is nothing better that getting a big fat check in the mailbox each month.

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