Does the seller have to worry whether an investor can demand payment once they sell their owner-financed note? The answer depends on how the note was endorsed along with the terms of the Purchase Agreement.
When a Mortgage Note is sold an Assignment of Mortgage is recorded at the county level. Additionally the note itself is endorsed over to the investor. The type of language used on the endorsement plays an important role in whether the investor has any recourse against the seller or prior note holder for repayment of the note.
A standard note endorsement would read:
“Pay to the order of (Insert Investor’s name), without recourse.”
When the endorsement specifies “without recourse”, an investor can only seek recourse against the payer or property for nonpayment of the note.
However if the endorsement reads “with recourse”, the investor has the option of also seeking recourse against the seller if the buyer quits making payments.
If the note does not specify either with or without recourse, then it is assumed that the endorsement is made with recourse.
The Purchase Agreement also plays a role on what type of recourse an investor might have against a note seller. This agreement often contains certain representations and warranties that the seller makes in order for the investor to purchase the note.
Most sellers would prefer to sell a note without any recourse or obligation to buy back the note from the investor should the buyer or payer fail to make payments. It is important to understand the documents that will be executed when selling a note to avoid any surprises.
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