This final part of the series covers what you need in hand before you leave the settlement table, and the three things to do right after. Most of these items apply when you are the note investor.
Lender’s title insurance in your name
You must have lender’s (mortgagee’s) title insurance, not just owner’s, with you named as the insured if you are the investor. This may be a new policy binder if no such insurance was bought when the note was created. If there was a previous policy on the note, it can simply be endorsed to you.
Before you finalize settlement, make sure you know what exceptions are listed in Schedule B of the policy.
The seller’s estoppel affidavit and purchase agreement
You must have an estoppel affidavit and purchase agreement from the payee, the note seller. It sets out what the seller represents they are selling. In it, the seller certifies that the loan balance, payment amount, term and payment status are and have been as represented. Many investors also get an estoppel from the payor confirming the terms and balance, although the payor has no obligation to provide one.
If the settlement attorney prepared the assignment, the terms of the purchase agreement with long-term impact should have been carried into the assignment. I sometimes stipulate that the purchase agreement shall survive settlement. Unless you say so, it usually dies at settlement and has no further effect. Make sure the assignment contains the full intent of the contract.
Two documents to take with you
Get two more things before you leave settlement, because you’ll need them right away:
- a copy of the hazard (homeowner’s) insurance policy on the property
- the original payee-to-payor notification letter
Settlement is now complete.
Three steps right after settlement
- Insurance. If you’re buying the note for your own portfolio, contact the insurance agent immediately to have your name added as loss payee (lender). Record the name of the person you spoke with and the date and time. You should be covered immediately and later receive an endorsement showing you as loss payee.
- Notify the payor. Send the payee-to-payor notification letter by certified mail, return receipt requested. In it, the note seller tells the payor to start making payments to you. I add a friendly cover letter introducing myself as the new note holder, assuring the payor that nothing has changed except where they mail their payments, and inviting them to contact me with questions.
- Notify the senior lender. The last item on the checklist is a senior loan letter, or request for notice. It asks the senior lender to notify you if there is ever a problem with payments on their loan. I usually add that I may be able to help cure any problem. Reference the property address, the payor’s name and the loan number. I call the senior lender first to get the name of the right person and address the letter to them.
Why the paperwork matters
That completes the paperwork it takes to get you properly into note ownership and get your cash flow coming in. All that’s left is to set up the files to service the note and move on to the next one.
Most of the documentation already exists from the real estate transaction that created the note. Its real value is in helping you decide whether to buy. The paper you buy rests on an agreement between the property seller and buyer. Since you’re really buying someone else’s position in that prewritten agreement, it pays to examine carefully what you are buying and what you are committing to.
