Due diligence involves investigating, auditing, or reviewing circumstances and facts around a deal. As a competent real estate investor, you’ll want to conduct due diligence so that you have a clear understanding of the financial ramifications of any agreement.
Doing your due diligence is especially important when you consider note deals. Suppose you want to invest in first-position non-performing notes backed by real estate. Non-performing notes are when the borrower has stopped paying. You want to ensure that the investment you are committing to is fiscally sound, right?
After all, notes are an asset class with growth potential. Like all investments, note deals carry some risk. Royal Legal Solution mitigates the risk to your property with our asset protection strategies in all 50 states, for all asset classes–including notes.
This article outlines six factors you should consider when vetting your note deal. Continue reading to get a primer on due diligence best practices.
Property valuation is essential when looking at what notes to buy. You can analyze the property using online research tools. The next step is to have someone who is boots on the ground do an inspection and value the home for you as well.
The property valuation is the basis for your discounted purchase price. You won’t necessarily pay the unpaid principal balance.
Sometimes note investors can get into a sticky situation by only doing online searches. You need to follow up by sending someone to see the lot and verify that a structure is on the lot.
If you don’t do your due diligence here, you might buy a note and end up with an empty lot. That’s a devastating oversight!
Here are the things that you will want to get verified:
If you choose to get into note investing, you’ll want a good return on your investment. Reasonable due diligence maximizes your profit and minimizes your risk.
The bank might tell you that the property is a single-family home. What might happen is this–it might be a mobile home or a condo. Those types of structures might not be in your plan. Trust but verify because the banks get it wrong sometimes.
Make sure that you know how much delinquent property taxes are. When someone stops paying a mortgage, they usually stop paying their taxes. In this case, you will want to know when and if a tax sale is scheduled.
Steps to take when checking for unpaid taxes:
You will want to verify any liens, judgments, or junior lien holders. Knowing about other lien holders is vital if you accept a deed instead of foreclosure.
For instance, suppose you receive the deed as payment in full for the loan from the borrower. Even though you are in the first position, someone with a lien, HELOC, or judgment against the property will move ahead of you. That means you become responsible for those liens. That could be costly.
You have to follow the chain of ownership with notes. Make sure you are intimately familiar with where the loan originated and all the subsequent note holders.
The county courthouse will have records of all assignments of mortgages for each transfer of the mortgage to subsequent note holders. These records will be in the correct order, so you should be able to follow the chain of ownership.
Suppose you decide to get into note investing. Don’t you want a risk-free return on your investment? You’re in luck because doing due diligence maximizes your profit and minimizes your risk. Here are six critical factors in doing your due diligence when vetting notes:
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Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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