Steve, is the borrower still alive, competent and in possession of the property? Have they filed for bankruptcy? When was the last attempt made to collect amounts due made? Do you have an accounting of payments and 1099s filed in the past? Do you have a copy of the note and deed of trust or mortgage with the book and page where it was filed for record? Do you have a copy of the sale contract and the accountings of the settlement? Was is appraised? Have you checked to see if taxes are current? Can you check for liens against the property yourself, you can have that done later on.
Was the loan made with cash or did it finance equity, as that will determine issues with default and foreclosure and how your proceed. If cash, the entire note balance or as modified can be sought for collections. If by equity, you cash outlay may determine your rights to collect under two allocations, first cash and then equity. Equity amounts do not allow for deficiency judgments and may place the borrower in a position to make calims if excess amounts are receuived from any foreclosure or sale. See your attorney as to the differences and FA Laws.
I prefer to have a seller make a simple assignment for due diligence in connection with the sale of the note. With that you are authorized to speak or contact the borrower. You shoud let the borrower know what is going on, that you will be acquiring it and ask what his interest or intentions are. You could discuss the modification with them and come to an agreement.
You can do all this prior to laying money out for the note. As part of the due diligence, with the borrower now cooperating, you can inspect the property or have it inspected. Any deficiences that effect collateral (from your LTV) needs to be addressed.
The modification can be accomplished prior to and as a condition of the sale of the note. Only the borrower needs to sign the modification, the seller does not need to be involved, your acceptance of the modification can be made as the new note holder after you buy.
Now, to your "exit strategy" you do understand and your attorney understands that buying the note is not buying the property and that you will be in the shoes of a lender to the extent of the cash paid for the note and not the holder of an equity financed installment transaction? Meaning, you may never end up with the property.
Your note due diligences should be accomplished first and then as to the collateral.
The modification will waive existing notice and notice of demands made to date. I also prefer to use a new note siting the old obligation being modified which takes care of ommitted issues, but you can go either way, changing terms paragraph by paragraph as needed along with rates and remaining balances agreed to be outstanding. This will help the attorney "paper things up" LOL
Amounts forgiven need to be reported to the IRS, this can be done when lower amounts are agreed to when the modification becomes effective. Remind your attorney.
You may also modify the security agreement of the mortgage or the deed of trust, again, usually easier to simply refile.
As Dion points out, you can have the right to review financials, unusual for a small loan especially where there is not a right to accelerate the loan upon the failure of management. Who knows what you would be given anyway, unless the borrower is required to have certified audits, for this, I'd skip that. The assignment of rents is very important to include if not there.
The deed of trust will recite that the borrower shall not "lay waste" to the property which includes allowing the collateral to be significantly allowed to go without maintenance, and that resonable inspections may be performed. Insurance assigned with the right of set off as well. And make sure you have the right to appoint future Trustees as some attorneys may simply appoint themselves forever.
There are other issues, but first get these ducks in a row. :)
Bill Gulley, General Real Estate Academy