There is massive increase in the number of investors purchasing real estate notes. Many first time real estate investors are jumping in as the "experts" explain to them how easy it is to make a fortune buying notes. Of course, there is also danger.
Purchasing a seller financed note is not much different than buying the real estate itself. An investor wants to be certain that it is a solid investment of time and money. There are several issues that should be addressed in any successful real estate note purchse:
Property Appraisal: It is important to get an independent third party to give you an accurate value of the property. This tells you if there is enough equity in the deal for you. Not to mention, the appraisal is beneficial if you are planning to resell the property.
Title Insurance: When transferring title of the property and the note, you as the buyer need to make sure the underlying asset is free of any encumbrances or liens you might not be aware of. Title insurance only protects the buyer of the property at the time of purchase. Therefore, when the seller bought the property they bought title insurance to protect their interest. It is not transferable. You need to make sure you buy a new policy at the time of your transaction so you are protected.
Property Deed: While you are purchasing a note secured to a property, you are also taking ownership of the property. You need to make sure the seller gives you the deed to that property. This is key to all aspects of the note transaction. Furthermore, it gives you the ownership rights of the property in case of forfeiture by the homeowner.
Assignment of Contract: The assignment of contract will detail what the note’s current value is, the terms of the note, and what portion of interest you are purchasing. These final pieces of information will wrap up all key aspects of the transaction ensuring that you the purchaser are getting what was offered in the first place.
Property Insurance: Immediately after your purchase of the note, you should ask the person who lives in the home to give you a record showing that the insurance is paid to date. The policy should always have you named as “additional insured”. If anything ever happens to the property, you will be protected as the “additional insured”.
Leases: You will want to be certain that there are no tenants in the property. They may have rights even against you, the new owner of the property. It is not enough to ask the property owner because the situation may have changed and you are typically buying the note (at a discount) from the lender, not the home owner.
Paddy Deighan, Esq