Let me start by saying these are things you DO NOT want to ignore when it comes to note deals.
What do I mean?
Well, there is a reason investing in private mortgage notes can be an excellent investment – you get all the benefits of investing in real estate without collecting rents, dealing with late-night phone calls, or costly repairs.
That said, there are a handful of things you need to make sure to line up before pulling the trigger and investing in a note. This is called ‘Due Diligence,’ and it is not something you want to skip.
Here are 5 Ways Note Deals Can Go Bad (and what you can do to help avoid them).
1) Don’t Bother Checking the Payers Credit or Work History
Who doesn’t like to find out, after the fact, that your payer has poor credit? I mean, this is the note industry; not every deal is grade A paper, right? Just because they just filed a BK and stopped paying everyone else doesn’t mean they will not pay you, right?
DO THIS INSTEAD: Yes, you want to check the payer’s creditworthiness. No, it does not need to be perfect, but you do want to make sure they have, or will continue to have, the ability to pay.
Checking the credit will also help you determine if the payer’s poor credit is due to a one-off life situation or if you could be dealing with someone that you will continue to have to chase down. Check out pacer.gov to check for items like BKs.
After all, you didn’t purchase the note hoping those payments wouldn’t come in.
2) Don’t Check On The Value Of The Property
It is way more fun discovering you have an overvalued property later – or a property that the payer is upside-down on when problems start. A chunk of raw land with a single-wide trailer sold for $1.2 Million, yea that is probably good.
DO THIS INSTEAD: One of the great things about the note industry is all the ‘offsets’ we can tap into while minimizing the risk on our investment.
Poor credit? Then look to the equity. Investing $40,000 into a note secured by property worth $120,000 is a pretty easy decision. Investing $40,000 into a property worth $20,000 is bad decision. A simple BPO from a realtor or online check can at least get you in the value ballpark.
Know the value of the properties and note deals you are dealing with, and know your note’s position (Hint: You want first if you can get it).
3) Don’t Verify the Payment History.
People selling notes are ONLY selling good notes, with flawless payers. If they tell you the payer always pays on time, you can take that to the bank!
DO THIS INSTEAD: People often sell notes that they don’t want to deal with anymore. That does not make them bad investments; it just means you want to go into those note deals with eyes wide open.
Does the payer miss a payment once in a while? Are they behind in payments? Best case, the seller of the note has the note ‘outside serviced’ by a third-party servicer that can print you the payment history.
4) Skip Getting Title and Title Insurance, I’m Sure It Will Be Fine
Titles are expensive. Someone has to go down the list of deed assignments and documents recorded throughout history to make sure the correct people have claims to the property. No one has time for all this.
DO THIS INSTEAD: The only way to protect your position in a property is to make sure your claim is valid from the beginning. Title and Title Insurance will not only ensure that claim, but it will also show any other ‘surprises’ upfront like liens, payoffs, etc.
5) Don’t Get Educated In Notes; Just Jump Right In.
If you wanted to be an electrician, you start tying wires together, right? I mean, what could go wrong?
DO THIS INSTEAD: Websites like NoteInvestor.com have hundreds of free articles to help you learn and thrive in the note business. Twice a year, we open the doors to a private membership where you can take your note investing to the next level. Wherever you get your info, learn all you can. Have a question, feel free to send us an email; we are glad to help.
We love the note industry. There are not a ton of ‘rules’ when it comes to note investing and note deals, but there are some items you want to pay attention to. The items covered in this article should always be on your list.