Buying First Note through Paperstac
Brittany P.Pro Member
Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votesBuying First Note through Paperstac
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Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes
3y@Brittany P. I agree with everything @Chad U. stated.
Just to add a little, I think the audit can be a nice supplement to your own due diligence process, especially for new note investors. But I would not solely rely on the audit, even for just for the collateral-file-review part of your due diligence process. My advice is not to buy a note yet if you don't have your due diligence process down already (whether through Paperstac or elsewhere).
Regarding the the PSA, I agree with Chad. Although you can still cancel a transaction after you've signed the PSA, that should be done in rare cases. You should be essentially ready to close once you sign the PSA. One suggestion I had was for PS to add a 2nd (middle) phase for each transaction; essentially a due diligence phase after you've agreed upon a price but before you've fully committed to closing (and signed the PSA).
49 Replies
- Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes3yNo it does not pull a title report for you. The audit verifies that all of the collateral is there or not.
Quote from @Brittany P.:
Questions for all you seasoned note investors: does Paperstac's built-in auditing services furnish a title report?
If not, what are we getting out of the auditing services on their platform? I'm just trying to figure out what part of due diligence I should be handling myself versus what is covered in their $500 escrow/auditing fee.
Also, are you Paperstac experts completing due diligence before signing the sales agreement, or just before you wire money? Does the sales agreement allow for the buyer to cancel the whole action before the escrow process if due diligence turns up an incurable defect? Just trying to determine the best time to sign if I'm going to sign. Thanks!
As for completing your due diligence, yes it should be done in advance of signing the sales agreement. You do not want to tie up a deal for a length of time then pull out at the 11th hour.
- Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes3y
@Brittany P. I agree with everything @Chad U. stated.
Just to add a little, I think the audit can be a nice supplement to your own due diligence process, especially for new note investors. But I would not solely rely on the audit, even for just for the collateral-file-review part of your due diligence process. My advice is not to buy a note yet if you don't have your due diligence process down already (whether through Paperstac or elsewhere).
Regarding the the PSA, I agree with Chad. Although you can still cancel a transaction after you've signed the PSA, that should be done in rare cases. You should be essentially ready to close once you sign the PSA. One suggestion I had was for PS to add a 2nd (middle) phase for each transaction; essentially a due diligence phase after you've agreed upon a price but before you've fully committed to closing (and signed the PSA).
- Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votes3y
Thank you both. Really helpful. That "middle" phase would be great. I get that we all want to close these deals ASAP, but a little leeway for diligence in the interim would be great.
- Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votes3y
Hey, experts, just a couple more questions:
1. Is the sales agreement in Paperstac based on a standard Paperstac template? If so, do you all still have a lawyer review it for each of your Paperstac transactions, or do you trust their templates to be appropriately state-specific?
2. If the cut-off date is past the date that the next payment is scheduled, does the buyer still receive the full UPB for the loan? The notes in Paperstac say that the cut-off date is the last day by which the buyer is still entitled to the specified UPB. Does this mean that if another payment takes place during negotiations/closing, the seller is required to pass that payment on to the buyer?
Thanks for all the help on this!
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Brittany P.
I always recommend have an attorney review a contract
So today is April 28, if cutoff date is may 2nd and a payment comes in may 1st you do not get that payment the current lender does. BUT your bid price should be reduced by the percentage reduction in UPB. What I mean by that is if you paid 90% of UPB and the UPB was $10,000 (buying for $9,000) and the payment reduced UPB to 9,500) you would get credited $450. (90% of the $500 UPB reduction)
Hope that makes sense
Side note if payment comes in may 3rd that is all yours
7e investments53 Reviews - Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votes3y
Really helpful!
- Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votes3y
I'm going to see how much advice I can glean from you all before you get sick of me. Two more questions for you regarding the Paperstac process. Let's say I've received collateral package and money has been wired to seller:
1. Is this the point at which I try to lock in title insurance? Once I have the docs, including title/deed in hand?
2. I assume recordation is solely my responsibility as the purchaser?
Thanks!
- Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes3y
The title policy from origination (covering that date backwards), is what we look for. We typically do not purchase any additional title insurance.
Yes, recording is typically the buyer’s responsibility. @Brett Burky can answer specific Paperstac questions.
- Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votes3y
Interesting. Thanks!
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Brittany P.
If it’s a contract for deed then it will not have title insurance - then it’s up to you if you want title insurance.
If you are required upon satisfaction of the loan to issue a warranty deed then it’s wise to get insurance when you buy it
7e investments53 Reviews - Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votes3y
Thanks, Chris. On that note, if I'm purchasing contract for deed on Paperstac, how are transfer taxes handled? Should I negotiate that into the deal during negotiations? Are those typically the buyer's responsibility like recordation? Do most title agents handle contract for deed like a standard closing?
I've used Protitle before because they're nationwide and pretty convenient; does anyone know if they'll handle "closing" and insurance for a CFD deal on Paperstac?
- Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes3y
@Brittany P. Paperstac has an escrow option, but this is not the same as closing through a title agent. You may find it difficult to obtain title insurance on a CFD, given the likelihood of Quit Claim Deeds being involved. A title search is quite different from a title policy. Recording fees/taxes are typically paid by the buyer.
- Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votes3y
Awesome--super helpful. I know Protitle will link you up with insurers following title search; if their search shows the property is free/clear, any reason their partner insurers wouldn't set you up with a policy based on their search/report, even if it is CFD?
- Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes3y
I have only gotten title insurance one time on a note I have purchased (bringing the policy current up to the date of purchase). I am not saying you shouldn't try, but it is common not to purchase title insurance with mortgage notes. Yes, my guess is you will struggle to obtain title insurance on a CFD due to the likelihood of QCDs having been used to transfer the property. But all of this is very asset-, state- and insurer-specific. Has very little to do with Paperstac or ProTitle.
- Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votes3y
Yeah, what you're saying makes me wonder how much it's actually worth trying to climb the title insurance tree, or whether I just hang my hat on due diligence/title report.
For transfer taxes, dumb question: they're paid in the state where the property's located, right? Not my home state (for out-of-state purchases)?
- Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes3y
In my opinion:
A title policy does not insure your interest in the Note since that is personal property, not an interest in real property. The title policy insurers the lien of the mortgage/deed of trust which secures the debt.
If the mortgage you're buying is already insured by a title policy you probably become the Insured as soon as you purchase it so a new title policy may not be necessary. You may want to ask for an endorsement to the policy to move the Date of Policy forward through the date the assignment of mortgage is recorded.
There shouldn't be a reason you can't purchase a title policy insuring your contract interest in real property. The Interest insured will be "contract" rather than "fee".
A quit claim deed does not normally cause a title underwriter to refuse to have its policy issued so long as the title search does not reveal any indicia of fraud and the underwriter's requirements regarding insuring chains with a quit claim in it are adhered to.
- Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes3y
@Peter Walther that may be true in some cases, but having bought and sold many CFDs across numerous states, I'd say that in practice it can be challenging to obtain title insurance with the messy chains of QCDs and AOLCs that we often see (and the fact that we, as the investor, have legal title but not equitable title). I am catering my answer to land contracts, specifically, since that is what she asked about.
To be fair, we don't typically even try to get an owner's policy when buying a CFD because it doesn't make sense form a business standpoint. So, maybe it is easier to get than I realize.
- Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes3y
Quote from @Jamie Bateman:
@Peter Walther that may be true in some cases, but having bought and sold many CFDs across numerous states, I'd say that in practice it can be challenging to obtain title insurance with the messy chains of QCDs and AOLCs that we often see (and the fact that we, as the investor, have legal title but not equitable title). I am catering my answer to land contracts, specifically, since that is what she asked about.
To be fair, we don't typically even try to get an owner's policy when buying a CFD because it doesn't make sense form a business standpoint. So, maybe it is easier to get than I realize.
It sounds like your problem is with the quality of the title, not the fact there's a QCD involved. Bad title can happen even with a warranty deed in the chain if it's fraudulent, forged or even just improperly prepared.
I handled many title insurance claims in Baltimore (County and city) so I know how bad the problem can be so I'm surprised you take an interest in property without title insurance. I can also remember a time when the Recorder's Office was over a year behind in posting recorded docs making searching title a fool's errand.
My answer was addressing obtaining a title policy insuring a contract vendee's interest in a property as in a CFD. That's why I wrote the estate or interest insured as shown on Schedule A of the policy would be "contract" not "fee". I don't know why you would have a problem obtaining a policy except perhaps you're dealing with a title agent unfamiliar with the process. If they check with their underwriter the method should be made clear.
Here's a link to Stewart Title's instructions for issuing an endorsement to an existing policy insuring a contract purchaser for use when the debt is paid off and the contract interest ripens into a fee.
- Investor · Upper Marlboro, MD · Member since 2022 · 54 posts · 6 votes3y
Thanks to both of you. I like getting into all the minutiae on this. I'm definitely having trouble dealing with the few insurers and agents I've spoken to who seem to scratch their heads when I discuss a policy covering buyer/seller in a CFD. Part of it is because I keep using the term "closing" in quotes. How would you all describe a CFD execution? It's hard for me to use the word closing per se because deed and legal title aren't transferring at time of contract execution. Is it still considered a legit closing?
This might be a question for an attorney, but to circumvent the whole rigamarole of getting a new policy issued for buyer/seller, could you work into the CFD that in the event of title defect, Seller will reimburse Buyer's interest/equity in property in the event that the Seller's policy is exercised? Or is that crazy? For example, if I have a policy for my $300k property and a little old lady presents legit title (maybe mine was based on a forgery?), I get paid out by my policy and am required to pay Buyer for the $200k equity they've built up. Would that be a simpler way to handle?
Also, what about my earlier rookie question about tax transfers: I assume they're transferred in the state where the property is located? How are they typically paid, just by contacting the county treasurer's office and working through them?
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Brittany P.
A contract for deed is legal title transfer. You can go through with a typical closing and get title insurance but the policy will exclude coverewge for the contract for deed.
As an example, let’s say I own the property and Jamie Bateman has a land contract with me.
I sell you the property (typically via quitclaim deed) but you could get a warranty deed that would protect you for your concern about others.
As part of the sale an assignment of land contract is also issued (similar to assignment of mortgage) where the rights to the land contract are transferred to you.
Typically the buyer (you) is responsible for all county and recording fees.
You as the buyer would be responsible for any and all taxes, fines or other costs which is why it is very important to run a title report and have it reviewed. In certain states you want to check water and sewer as getting stuck with a $10k water bill is not fun (ask me I know).
Hope this helps explain it a little better.
7e investments53 Reviews - Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes3y
Yes, it’s all about the state the property is in.
Many of the CFDs out there have changed hands numerous times and have messy title chains, which can lead to difficulties getting tire insurance. If you are buying a $15k CFD that has been owned by 5 investors before you, it probably doesn't make sense from a business standpoint to close with a closing/title agent and attempt to get a title policy. I'm not saying it's impossible, but may kill your return. And many title companies will have no idea what you are even talking about. Again, this is very state-specific.
We have chosen to convert many of our CFDs to notes/mortgages (DOT) over the years. - Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes3y
I have an short article explaining CFDs on my website. Among other terms, they can be called a “contract for deed,” “land contract,” and “land installment contract.”
In many states you still have to go through a foreclosure anyway. And there comes with it the liability and responsibly of owning the property (as compared to buying a note/mortgage). Your FPI costs will be higher as well since you need liability coverage (and the buyer/occupant likely cannot get homeowners insurance).
Just things to consider when buying a CFD.
- Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes3y
I've read several statements in this thread that if I'm understanding what the writer is intending to convey, I disagree with, but before addressing them I'd like to define some terms and roles in a CFD transaction. This is all just my opinion.
As I understand it, a person who owns property and agrees to sell it to a purchaser under a CFD is known as a Contract Vendor. The purchaser on the on the other hand is known as a Contract Vendee.
A CFD does not transfer or convey any title though in some states if a Vendee fails to make the required payments, the Vendor must either obtain a release of the Vendee's interest (via a deed or release executed with the formalities of a deed) or foreclose the Vendee's interest (a judicial process).
I've seen some Vendors attempt to circumvent that requirement by obtaining a QCD from the Vendee at the time the CFD is entered into and hold it off record until the Vendee defaults. Unfortunately, most title insurers will not rely on a deed executed in advance of the Vendee's default for various reasons. This procedure has resulted in many of the problems with the chain of title with a CFD in it that I've seen. A property owner will enter into a CFD with a buyer who ultimately defaults. The Vendor then records the previously executed deed and then enters into another CFD with a different Vendee. Perhaps that buyer defaults and the Vendor enters into a third CFD who makes all payments due and wants a deed and a title policy insuring his/her interest. The title agent discovers the two earlier CFDs and requires a release of the interests and of course the Vendee either can't be found or wants to be repaid all or a portion of the payments they paid before defaulting. In either case resolution of the interests may not be easy. This possibility is why I wrote earlier that I was surprised any investor would buy an assignment of a CFD without obtaining title insurance.
I've never entered into a CFD either as a Vendor or Vendee simply because of these problems and some others (what if the assignor is in bankruptcy, which may or may not appear in the county land records?).
I have leased property to tenants with an option to purchase but that right has a time limit and requires they be current on their lease payment. The option also has its own non-refundable price which generally is applied to the purchase price if the option is exercised.
If I was considering purchasing a CFD Vendee's interest I'd probably just ask the Vendor to exchange the CFD for a deed and mortgage (since I'm going to be talking to him/her anyway to verify the terms of the CFD and amount still due).
- Investor · Baltimore County, MD · Member since 2014 · 466 posts · 439 votes3y
Quote from @Peter Walther:
I've read several statements in this thread that if I'm understanding what the writer is intending to convey, I disagree with, but before addressing them I'd like to define some terms and roles in a CFD transaction. This is all just my opinion.
As I understand it, a person who owns property and agrees to sell it to a purchaser under a CFD is known as a Contract Vendor. The purchaser on the on the other hand is known as a Contract Vendee.
A CFD does not transfer or convey any title though in some states if a Vendee fails to make the required payments, the Vendor must either obtain a release of the Vendee's interest (via a deed or release executed with the formalities of a deed) or foreclose the Vendee's interest (a judicial process).
I've seen some Vendors attempt to circumvent that requirement by obtaining a QCD from the Vendee at the time the CFD is entered into and hold it off record until the Vendee defaults. Unfortunately, most title insurers will not rely on a deed executed in advance of the Vendee's default for various reasons. This procedure has resulted in many of the problems with the chain of title with a CFD in it that I've seen. A property owner will enter into a CFD with a buyer who ultimately defaults. The Vendor then records the previously executed deed and then enters into another CFD with a different Vendee. Perhaps that buyer defaults and the Vendor enters into a third CFD who makes all payments due and wants a deed and a title policy insuring his/her interest. The title agent discovers the two earlier CFDs and requires a release of the interests and of course the Vendee either can't be found or wants to be repaid all or a portion of the payments they paid before defaulting. In either case resolution of the interests may not be easy. This possibility is why I wrote earlier that I was surprised any investor would buy an assignment of a CFD without obtaining title insurance.
I've never entered into a CFD either as a Vendor or Vendee simply because of these problems and some others (what if the assignor is in bankruptcy, which may or may not appear in the county land records?).
I have leased property to tenants with an option to purchase but that right has a time limit and requires they be current on their lease payment. The option also has its own non-refundable price which generally is applied to the purchase price if the option is exercised.
If I was considering purchasing a CFD Vendee's interest I'd probably just ask the Vendor to exchange the CFD for a deed and mortgage (since I'm going to be talking to him/her anyway to verify the terms of the CFD and amount still due).
I am fine with the fact that you disagree with me. Simply speaking from my experience. I am not referring to lease options. Referring to contracts for deed or land contracts. I have bought and sold many of these in different states but I don’t know everything.
- Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes3y
Quote from @Jamie Bateman:
Quote from @Peter Walther:
I've read several statements in this thread that if I'm understanding what the writer is intending to convey, I disagree with, but before addressing them I'd like to define some terms and roles in a CFD transaction. This is all just my opinion.
As I understand it, a person who owns property and agrees to sell it to a purchaser under a CFD is known as a Contract Vendor. The purchaser on the on the other hand is known as a Contract Vendee.
A CFD does not transfer or convey any title though in some states if a Vendee fails to make the required payments, the Vendor must either obtain a release of the Vendee's interest (via a deed or release executed with the formalities of a deed) or foreclose the Vendee's interest (a judicial process).
I've seen some Vendors attempt to circumvent that requirement by obtaining a QCD from the Vendee at the time the CFD is entered into and hold it off record until the Vendee defaults. Unfortunately, most title insurers will not rely on a deed executed in advance of the Vendee's default for various reasons. This procedure has resulted in many of the problems with the chain of title with a CFD in it that I've seen. A property owner will enter into a CFD with a buyer who ultimately defaults. The Vendor then records the previously executed deed and then enters into another CFD with a different Vendee. Perhaps that buyer defaults and the Vendor enters into a third CFD who makes all payments due and wants a deed and a title policy insuring his/her interest. The title agent discovers the two earlier CFDs and requires a release of the interests and of course the Vendee either can't be found or wants to be repaid all or a portion of the payments they paid before defaulting. In either case resolution of the interests may not be easy. This possibility is why I wrote earlier that I was surprised any investor would buy an assignment of a CFD without obtaining title insurance.
I've never entered into a CFD either as a Vendor or Vendee simply because of these problems and some others (what if the assignor is in bankruptcy, which may or may not appear in the county land records?).
I have leased property to tenants with an option to purchase but that right has a time limit and requires they be current on their lease payment. The option also has its own non-refundable price which generally is applied to the purchase price if the option is exercised.
If I was considering purchasing a CFD Vendee's interest I'd probably just ask the Vendor to exchange the CFD for a deed and mortgage (since I'm going to be talking to him/her anyway to verify the terms of the CFD and amount still due).
I am fine with the fact that you disagree with me. Simply speaking from my experience. I am not referring to lease options. Referring to contracts for deed or land contracts. I have bought and sold many of these in different states but I don’t know everything.
I was offering the lease option as an alternative to a CFD, that's all.
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