As we discussed previously, debt instruments can come in different flavors – Mortgages, Trust Deeds, Contracts, etc. In order to simplify somewhat, henceforth, we will just lump these together and call them “PAPER”.
Further on when we talk about what you are buying when investing in paper, we will call the actual document that spells out the details of payment the “NOTE”. At any point in these posts is you do not understand what we are talking about, please let me know and I will try to clarify. PLEASE do this because it can (and will) sometimes be very confusing. It is NOT a simple subject HOWEVER it can be and is a very lucrative investment program.
Further on when we talk about what you are buying when investing in paper, we will call the actual document that spells out the details of payment the “NOTE”. At any point in these posts is you do not understand what we are talking about, please let me know and I will try to clarify. PLEASE do this because it can (and will) sometimes be very confusing. It is NOT a simple subject HOWEVER it can be and is a very lucrative investment program.
Investing in paper can be, and should be, very rewarding if the investor is prudent and knowledgeable. In goal, these posts are to make you more knowledgeable and point out some things to help you be prudent.
I’m sure you’ve heard that the three most important things about Real Estate are Location, Location, and Location. The three most important things about investing in paper are Equity, Equity, and Equity. You want to be sure that if the worst happens and you have to foreclose on the security property that you have enough equity in the property to get your investment back. HOW DO YOU DO THAT?
You do it PRIOR to buying the note. As we discussed in a previous post, you need to establish the true market value of the property. This can be done by an independent appraisal (just like the bank does it) or by your own experience or by a trusted person that you know who is very knowledgeable about the local Real Estate market.
If you intend to keep the note (not resell it at a profit, which we will discuss later) your due diligence is not over. Some things you need to pay close attention to are:
Is the payor keeping insurance on the property? (If improved property; house, etc.) Be sure you are named as additionally insured on the policy and you get proof from the insurance company each year that the insurance is renewed.
Is the payor keeping the Real Estate taxes paid on the property? Demand that the payor send you a copy of the taxes paid receipt. You can always check with the Tax Collector’s office to check this out.
If improved property, drive by (or have someone drive by) the property occasionally to make sure it is being reasonably kept up.
If possible, obtain a credit report on the payor on the note. Also, check the payor’s employment situation. With this information plus the credit report you should be able to determine if the payors seem capable of making future payments on the note.
Check the pay history on the note with the person selling you the note. You want to know if the payor has consistently been on time with his payments. Verify this with actual documents such as canceled checks, deposit slips or service records if the note is serviced by another party. Be cautious if the pay history is handwritten by the owner on tablet.
Is the payor keeping insurance on the property? (If improved property; house, etc.) Be sure you are named as additionally insured on the policy and you get proof from the insurance company each year that the insurance is renewed.
Is the payor keeping the Real Estate taxes paid on the property? Demand that the payor send you a copy of the taxes paid receipt. You can always check with the Tax Collector’s office to check this out.
If improved property, drive by (or have someone drive by) the property occasionally to make sure it is being reasonably kept up.
If possible, obtain a credit report on the payor on the note. Also, check the payor’s employment situation. With this information plus the credit report you should be able to determine if the payors seem capable of making future payments on the note.
Check the pay history on the note with the person selling you the note. You want to know if the payor has consistently been on time with his payments. Verify this with actual documents such as canceled checks, deposit slips or service records if the note is serviced by another party. Be cautious if the pay history is handwritten by the owner on tablet.
Actually, even if you intend to sell the note, your buyer will want to know all this information as well. Next time we will talk about Interest, Return, and Yield. Is Interest the same as Yield?
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
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