Pitfalls of selling a note?

Question

I'm currently in the process of shopping a note around to see what I can get for it. I'm down to two companies that are bidding back and forth right now. I'm wondering if anyone has any advise on what to look out for or avoid during the process? The offers that I'm looking at are for the remaining payments and I keep the balloon in five years. Thanks for any help!

Marco Bario · Answer

@Clinton M. - Most professional note buyers will want to control the asset while they are collecting payments. For that reason, it's common they will insist the Deed of Trust be assigned to them, they hold physical collateral, and their servicer handles the file.

In my opinion, these are good things assuming you're dealing with someone established and reputable. Why? Because your interests are aligned, and because you've just brought a more experienced player with greater resources into the deal.

Ask who's funding the deal. That's who's paperwork you'll be asked to sign and who would be the party taking the assignment and actions I mentioned above.

Clinton McGilvray · Answer

Yes, balloon is part of the same note as the payments.

1. Currently a title company is servicing it but I assume it would be up to the note buyer to continue using them or change services?

2. They are paying all closing costs.

3. I haven't gotten that in depth with them yet so would appreciate your thoughts on the different ways to do that.

4. One of the companies specified that I would retain foreclosure rights.

The property is raw land in Oregon but I'm in Ohio. The note is10 years into a 15 year term so it is quite seasoned. I've talked to a couple of local attorneys but I'm not sure if they have the experience with this type of transaction that I'm looking for.

Chris Seveney · Answer

@Clinton M.

Is the balloon tied to the same note?

It sounds like you are only selling a partial of the note since you are keeping the balloon.

In this instance there is a lot to make sure you account for in the agreement as This can get hairy if borrower defaults

1.during the time who is managing it and servicing it?

2. Who is responsible for any out of pocket expenses?

3. How are you transferring ownership/assignment

4. What happens if borrower defaults?

Your best bet would be to get the borrower to modify the loan where you have a first which is the payments to the buyer and then you go in 2nd position with the balloon. This is assuming the property has plenty of equity

Whatever you do you will need a very sophisticated attorney to draft up the agreement which will probably run you $1000+ if you want to do it right (if you need an attorney I have one)

Also what state is this in and is it an owner occupied loan?