Due Diligence: 6 Tips for Notes Deal Vetting

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.

#1 Property Valuation

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. 

#2 Verify The Property 

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: 

  • existence of structure
  • occupancy
  • structure type
  • square footage
  • lot size
  • number of bedrooms and bathrooms in the structure
  • year built
  • county name
  • population size
  • violent and property crime ratings
  • rents 
  • comp sales, use “like for like” comparison and data 

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. 

#3 Inspect The Asset

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. 

#4 Check For Unpaid Taxes

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: 

  • research on the internet 
  • call the tax office 
  • ask for tax deed sale or tax sale lien
  • find out who paid the taxes (borrower or bank)

#5 Research Liens Or Judgements

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.

#6 Follow Chain Of Ownership

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. 

Due Diligence Key Takeaways

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: 

  • Property valuation: do your research, and have someone local to supplement 
  • Verify the property: your local team is invaluable here
  • Inspect the asset: banks mess up sometimes; trust but verify
  • Check on the taxes: the tax man will always extract their pound of flesh, don’t get bloodied
  • Research liens: make sure no one skips to the head of the line 
  • Follow the chain of ownership: find out any and everyone who has owned the mortgage

Are you ready to speak with an expert? Learn about our comprehensive solutions you can use to achieve financial freedom, reclaim your time, protect your assets, and build your legacy. Book a FREE discovery call now.

Last Updated: 
July 14, 2022

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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