Before a note investor will pay cash to a seller for future payments, they perform what is called “due diligence”.
This is really just a fancy word for research. You can simplify the process by being prepared for these common requirements.
When an investor makes an offer to purchase a note, mortgage, deed of trust, or real estate contract, it is subject to underwriting and due diligence. This enables the note investor to verify the information provided, analyze the risk, and confirm pricing.
Here are the most common items requested by investors prior to closing:
- Copies of legal documents (Settlement Statement, Note and Mortgage, or Deed of Trust, Contract, etc)
- Credit report on Payer/Buyer
- Current real estate taxes
- Proof of current hazard and fire insurance
- Payment history & verification of current balance
- Title Insurance Policy or Commitment
- Payoff statements for any property debts still owed by seller
- Current Property Value & Photos
- Payer Interview or Estoppel
- Additional items unique to the transaction
The seller usually starts the process by providing copies of the existing legal documents to the investor. The funder will generally handle the remaining items, requesting additional information or document copies as necessary.
Many note investors will cover the cost of due diligence, but policies can vary so be sure to verify. The option or purchase and sale agreement will outline this important information.
Learn more about due diligence and gain confidence with our Due Diligence Master Class.
I see a lot of broker jokers and “finders” trying to work note deals and get quotes on notes that they do not fully understand. The smart note broker or “finder” will learn how to do most of the initial due diligence / “research” in advance of requesting a quote from an investor. This should always involve getting a copy of the Promissory Note and double checking the numbers on your Quote Request before you submit them. Try to look at the note from the investors perspective and ask yourself, “what makes this a good deal?”