How to Invest in Real Estate Notes – Part 3 of 4

If you did not already read parts 1 and 2 of this article, please find them in  How to Invest in Real Estate Notes – Part 1 and How to Invest in Real Estate Notes – Part 2, or request copies from the author.


The first two sections of this article covered the basics of why you should consider real estate notes as an investment, as well as the first steps in developing a relationship with a broker and providing your first quote on your way to becoming a full-fledged mortgage note buyer.  Now, let’s move to an overview of the due diligence process that you as an investor should go through prior to buying real estate notes.

At this point, you or a broker presented an offer to the mortgage note holder, who has accepted the offer and faxed over a stack of documents.  Now, what do you do?
For starters, make sure that you have all of the needed documents, all documents are legal and signed in the right places, and that the information matches what was originally communicated to you.  Here is a general list of most of the documents and what you should be looking for:
  • The Mortgage Note, also called the promissory note, is the most critical document.  Be sure that the terms are clearly stated, including a description of the grace period and what happens in  the case of default.  Is the payer’s
    signature on the note?  Does the  holder of the mortgage note have the original in his possession?  Is there a mention of any other liens against the property?
  • The Deed of Trust is used in most states in the Western  U.S. and parts of the east, with the remaining states using a mortgage.  Although the two types confer different options in the event of a default, here we will use them interchangeably.  The document makes the property collateral in case of default on the note.  Make sure that the legal description on the document is correct.  In states like California, the date of the Deed of Trust should match that shown on the note.
  • The Closing Statement shows the breakdown of the costs of the  transaction.  Check that the sales and down payment match what you were told, and that the statement is final and signed by the title company or an attorney.
  • The Insurance policy should cover fire and possibly other hazards to the property structures, and the mortgagee should be shown as a beneficiary.  Liability insurance should also be shown for commercial property and even for some vacant land parcels.
  • Title insurance protects the mortgagee against unknown liens on the property.  If a mortgagee policy was provided (meaning the lender is insured), then a date-down to the policy is permitted in most states other than Texas.
    The pay history and proof of payments show the payer’s history on the real estate note.  Proof of payments is generally demonstrated by copies of checks or bank statements.
We will cover the appraisal and the assignment of the note from the person selling the mortgage to you, the mortgage note buyer, in the next section.

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