The first thing a prospective note seller wants to do is talk numbers. That’s the last thing I want to do. How can I talk numbers until I’ve seen the “car” I’m buying? Once I’ve seen it, I might not want it at any price.
Yet most people let themselves get trapped. They put their foot in their mouth and lose deals by talking numbers first, lulled into thinking all notes are alike. There’s a reason the things we usually buy are called non-conforming paper.
Put off the numbers without refusing
I defuse the question by deferring it: “Mr. Seller, I’ll get to that in a minute, but first I need some additional information.” I don’t refuse to answer, which would set up an argumentative atmosphere. I just put that part of the discussion off until later. Controlling the conversation is essential to being effective.
I evaluate potential transactions mainly on three things: the property, the payor, and the terms and conditions written in the note and security instrument. So I need copies of the note and security instrument before I can intelligently discuss a purchase.
I also need one more document: a copy of the settlement statement from when the note was created. Have the seller provide all three, and read them carefully.
What the promissory note tells you
The note tells you what you are buying. It shows the payment amount, the date the first payment is due and when later payments are due, the face interest rate, the original amount and term of the loan, and any balloon. It also shows whether the note is assumable, where payments are made, who the note holder is, late-payment terms, prepayment terms and possibly foreclosure terms.
The note also references the security instrument that goes with it. It would be useful to see the same information for any underlying senior debt, too.
Read the security instrument for changes
The security instrument, usually a trust deed or mortgage, defines the legal rights and obligations of both the payor and the note holder, including when you can recover the property through foreclosure. In it you will find:
- the legal description and address of the property
- the name and address of the trustees or mortgagee
- the note holder’s name and address
- the amount of the debt
- covenants and agreements that apply to both the security and the note, covering everything from insurance and property maintenance to whether the loan is assumable
The standard Fannie Mae deed of trust form that is often used has 23 standard clauses, plus possible riders and amendments. The really important thing is to read it, understand it, and look out for changes, amendments, riders and exceptions. If you don’t understand the impact of what you’ve read, get help and find out.
Not to overemphasize it, but get copies of both the note and the security instrument and read them carefully. Then take the time to plan a strategy for your offer and negotiations.
Trust the settlement statement over estimates
The third document, the settlement statement, was often called a HUD-1 after the most commonly used form. It is effectively a financial accounting of the transaction when the note was created, and it contains a ton of good information. In most cases the settlement officer signs a certification that the statement is true and accurate and that funds were disbursed in accordance with it.
I feel a lot safer using this information than the “approximates” a seller gives you over the phone. Take the approximates, but give out no numbers without the actuals. The settlement statement will usually show:
- the actual sales price of the property
- how much cash the buyer has in the deal
- whether title insurance was purchased and who issued it
- information on senior debt, including who holds it and the current balance
- reports ordered, such as credit, termite, appraisal and survey
- the names of the buyer, seller, any trustees, the casualty insurer and agent, the title agent, any real estate company, and anyone else who gave or got money at settlement
Look at your mortgage evaluation worksheet and you’ll see that most of the material facts you need are in these three documents. What isn’t in them, or in any document, is the people side of the deal: the motivations you must discover to negotiate successfully.
If you don’t have sample documents to study, you can get blank settlement statements from a settlement attorney or lender, and copies of real recorded security instruments from the land records at your local courthouse.
Negotiation starts with listening
Once you’ve seen the documents and filled out your mortgage evaluation worksheet, you can realistically decide whether you want the note. Assuming you like the quality so far, you can begin to talk numbers, provided you’ve learned enough about the seller and their motivations.
When you talk numbers, remember that it takes more than numbers to make the deal. Terms, conditions, when and how you pay, what you plan to do with the note and many other issues are all negotiable. Most note sellers are unaware of these issues. Don’t educate them. Decide what you want and ask: “Would it be all right if…?” If you don’t ask, you surely won’t get it.
Negotiation actually begins the first time you talk with the seller, because the first step is collecting information. Listen a lot and talk only enough to keep them talking. An encouraging sound that shows you understand is often all you need.
My personal style is to get on their level in a friendly way so they open up. Especially on the phone, I try to pace people. If you’re speaking with a slow-talking Southerner, slow down, or they’ll take you for a fast-talking city slicker and distrust will set in. And never mistake slow talking for dumb, or you’ve just lost the negotiation. If the person is a fast talker or soft-spoken, get on their wavelength the same way.
The information you want is more about the seller’s needs and motives than about the note, though you’ll pick up a lot about the note while they talk. Listen and take good notes. When they stop talking, I stay totally silent for a full 8 to 10 seconds in case they start again. If they don’t, I ask another open-ended question to get them going, until I have all I need or all I can get.
