Buying mortgage notes can be a funny business.\u00a0 Like most sales jobs (I consider note buying to require even more sales skills than real estate or finance knowledge), there are lots of ups and downs in the business.\u00a0 Some deals go fairly smoothly while others require tons of time and effort, only to blow up and not close at the end.\u00a0\u00a0 The latter frequently have missing documentation, unresponsive note holders, low property values, late property taxes, or some combination of several of those.\u00a0 The bad deals are painful but are made up for over time by the good ones.<\/p>\n
When thinking back on the hundreds of deals that I have closed as either an investor or as a broker, one stands out as my favorite.\u00a0\u00a0It was a high-end property in a town of about 20,000 people in Southern California.\u00a0 In fact, this was the most expensive property in town, with an 8000 square foot house on nearly 15 acres that also included a large, separate RV garage and numerous amenities.\u00a0 The seller was a personable and straight-forward guy who had all of the documents in perfect working order, a recent full appraisal, and a mortgagee title policy that was clear of any liens.\u00a0 He was responsive to all of my questions and wanted to close quickly.<\/p>\n
The payers, one of whom was an orthopedic surgeon, had credit scores of over 700 and had put in a 30% down payment.\u00a0 The only down side of the note was that only one payment had been received, but there was little doubt that this would be a performing note and an excellent investment for the investor that purchased it (because this was a high-priced note, I served as the broker).<\/p>\n
This note purchase closed in less than three weeks.\u00a0 That is, from the time that the note holder sent to me a signed agreement until he had the promised funds in hand was only 14 working days.\u00a0 Usually, a note purchase takes 3-5 weeks, and some notes and properties with \u201chair on them\u201d can take even longer.<\/p>\n
This note had all of the properties of being clean and nearly perfectly done.\u00a0 I wish that one of these would come along even more often, as they are highly profitable and relatively stress-free for the note investor or broker.<\/p>\n
The lesson from this is that, if you are creating notes, try to mimic the fundamentals of the note described above.\u00a0 Rarely will you get everything that you need due to the nature of the business, but try to get a large down payment, work with creditworthy buyers, ensure that the documentation is created by a competent attorney or title company, check that the sales price of the property is close to its actual appraised value, and build a good working relationship with your buyer.\u00a0 If you decide to keep the note, you will be better protected and have a safer investment.\u00a0 If you decide to sell the note to a note buyer, your transaction will close more quickly and you will get more money by having done things right the first time.<\/p>\n