Buying owner financed notes

13 Replies

When buying privately originated mortgage notes (owner financed) what documentation should I be looking for to ensure the loan complies with new lending guidelines?

Interested in hearing feedback from seasoned folks.


- Josh

Well I have yet to buy my first note (so sorry I am not seasoned), but listening to the BP youtube video w/ Loc Roa, to me this sounds like something that needs to be reviewed by an attorney.

You may want to check out the video to see if fits what you are asking.


Thanks for your post. Do you have the link to the Youtube video your referencing? I was unable to find it. If you still have the link you can PM me with it.


- Josh

@Joshua Andrews

Do you do conventional loans? Best to go with the same standards for documentation, but such is usually lacking, grossly lacking.

I looked, but I'm having site issues again, there is a list of matters to address in another thread that was posted in the past 2 days, consider that!

If it's owner occupied and was originated after 1-10-14 you better see an originator's seal on the note or you may have a worthless piece of paper!

Verify payment history with an individual holder, you need to see the deposits otherwise that can be fudged, credit is determined as to the deposit date, not a date claimed to be received. If the note was with a servicer you can rely on their accounting.

No appraisal usually, so investigate the sale transaction and valuation as often, the scammer types over value the property.

Specific question? :)

Are there any specific guidlelines you are refering too? I get the impression you bay be referring to the Safe Act/Dodd Frank Guidlines?

But with that said you may want to check out a few of the YouTube videos by Dawn Rickabaugh refers to her self as the Note Queen. She has some of the most clearly and thorough content I have seen on notes, specifically to what you are asking, minus DF an SA info since there a bit dated

Before you buy a note make sure you see all the paperwork if you are dealing with a broker.

Joe Gore

I just have to ask, if I knew very little about a subject, say about biology, how could I, or why would, I recommend others to study the works of someone who had written materials on that subject, if I didn't know what the accepted practice was related to the assumptions, studies and conclusions reached, how do I know what I read and studied was even valid?

Would I look to that author's credentials, level of education, experience their formal training, maybe who the people are that give them positive reviews?

If that author was selling materials of how to reproduce some creature and that product was related to or based upon their rendition of opinions in their book, should that be any cause to question a motive for such opinions?

Seems to me I'd be rather cautious about blindly following the theories promoted by that author unless they really checked out.

So, what is it about these note gurus or any guru for that matter in areas of RE where common sense seems to be tossed aside? Do we base a good book on how it's written, how fantastic it sounds, or the number of unique approaches the author takes? Seriously, how do you know what you read is valid?

One other question, where did the idea come from that finance was a simple subject matter, that just anyone could read a couple books and then reach some level of expertise to subject the public to their self devised financing arrangements? Where they feel like they can bet tens of thousands of dollars on their own thinking, devising financing terms in a very highly regulated area of finance, where does this ego or attitude come from?

In this case, Joshua is listed as a residential lender, I take that as his having a greater knowledge of the subject than those who never made a loan in their life or purchased notes, I assume he already knows lending guidelines and my bet would be, more so than any note guru.

I think his question is, what documents and verifications are related to seller financed originations, not to sizzle of how to buy notes or pull "note rabbits" out of a hat. Anyway..... :)

Use caution when buying notes only because it is very easy for people to make fake paper trails etc. Best thing to do is use a reputable broker and or Lawyer. Don't get discouraged by an over abundance of information, just get informed locally and/or locally to the notes area. Finding your local REI meetups can be a great resource. They can lead you to good Lawyers and Brokers.

@David Rafaloski,

I agree that you need to used caution when buying notes from anyone. I buy direct from the banks and I have to check and recheck their paperwork because the banks are not forthcoming on many things and I think the banks employees were taught by a guru.

My experience.

Joe Gore

Biggest issue by far is overvaluation of the collateral by the Seller. Typically, as Bill mentions, they tend to lack formal Residential Appraisals (Form 1004). What we see then is a borrower who starts out with little or no equity, regardless of down payment since the value was inflated, the loan amount originated is too high. This is predatory in nature.

I would say the runner up to that is no contribution from the borrower for down payment (maybe even closing costs). We toss around the idea of "Selling a payment" as a description of this act. The borrower is treated more like a renter in terms of capacity to afford the loan. The Seller looked to the payment ratio but failed to look to any other obligations or the lack of reserves for rainy days. It's hard to see good intentions past this type of event as it really looks like the borrower should not be borrowing since they have little to no assets and contributed very little to obtaining the loan. So on the flip side, it looks like the Seller is trying to ditch the property, perhaps taking advantage of the less than conventional standards of credit worthiness of the borrower/buyer.

I agree with what Bill said on underwriting too. Use the same conventional guidelines as your wisdom barometer when underwriting a Seller Origination and you will tend to stay safe. The rules are still new and the body of law coming from the litigation of those rules is not understood well just yet so much of this is CYA type stuff. From a paper file perspective we would want contract, HUD, Mortgage/DOT, Note, Title Policy and income and asset documents. There is a specific set of guidelines in the ATR rule for income and asset documents, but these are basic entry level MLO stuff, you should be pretty comfortable with them already. If you have processed any of your own loans you will see the layman errors in the manner in which they treat the math on income and assets and as to the accepted paperwork. Might be a bit of an advantage if you can establish your knowledge of borrower documents on a conventional loan as a baramoter, perhaps lead to a little bit of additional discount for you since you can establish the increase in risk.

It's better to have a MLO write the loan so you do not have to worry about the volume of loans the Seller made being in compliance. Some states have exemptions under certain limits of volume. Problem is, if Sammy Seller says he only wrote 3 you have no real way to know if he really wrote 33. Even with that idea, we do not know what type of defense that would really afford a borrower and if a note own in succession would be be responsible for damages.

@Bill Gulley

I don't want to high-jack the thread on a tangent (perhaps a topic for another thread?), I can say that I have seen the impact of guru voodoo as of late. So much so that when reality is put back on the table the newbie looks at reality and some of the practical applications in illustration of the proper real idea or the converse of showing why a guru voodoo idea doesn't work that reality becomes almost fiction. They don't want to believe. It can give you a sense of how Galileo felt.

I apologize for the late reply on this thread. I appreciate everyone's input.

To clarify I was asking for specific items to remain aware of on owner originated loans. From the thread and other info I've read, it seems the best route would be to have an attorney review the loan docs for compliance with today laws. I would use an attorney located in the same state the loan was originated in.

To me this seems the most sensible route based on your feedback and what I know.

Thanks for your responses!

- Josh

Originally posted by @Joshua Andrews :
I apologize for the late reply on this thread. I appreciate everyone's input.

To clarify I was asking for specific items to remain aware of on owner originated loans. From the thread and other info I've read, it seems the best route would be to have an attorney review the loan docs for compliance with today laws. I would use an attorney located in the same state the loan was originated in.

To me this seems the most sensible route based on your feedback and what I know.

Thanks for your responses!

- Josh

Frankly, I'd think you could be wasting money unless you found a lending/finance attorney, the run of the mill RE attorney usually isn't familiar with underwriting and processing.

Buying notes from individuals is more risky, the covenants of you note purchase agreement could be hard to enforce, especially if they need cash and spent the proceeds.

The exemptions Dion mentioned can probably be checked running a check on filings under the name of that note holder/originator.

With individuals you usually have more time, especially if it's an off market note that you located.

You need to give notice, 60 days I believe, to changing payment addresses, this is a valid reason to introduce yourself to a borrower, explain what is going on basically, certainly not in detail. You can then begin verifying what was presented.

Some say you can't contact a borrower, which isn't true, you have an expected business interest in the note and you're required to give advance notice of any new address to send payments, deliver a payment book or other collection methods, contact information and an estoppel statement. :)

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