Most deals that fall apart at closing could have been saved earlier. These are practical lessons on getting a note purchase from first offer to funded closing: what to learn about your investor, how to protect your offer, and how to keep the seller and payor comfortable along the way.
Know your investor’s requirements
Know exactly what the investor you’ve chosen for your exit strategy requires. For example, some investors will buy a corporately signed note and some won’t. Some will only buy a note that is personally guaranteed.
Be clear with your investors and be organized. Present neat, complete packages, keep copies of everything, and anticipate the obvious questions and requirements. At the end of the day, most investors want the same items.
Learn how your investor typically handles its closing and the transfer of documents and funds. It might go through attorneys, title companies, escrow companies or be handled in-house. Don’t make any representations about how it works until you know.
Determine early on how the investor will pay: wire transfer, certified check or regular check. Designate specifically who is to be paid what amounts, and prepare your seller for how it will be handled.
Make your offer subject to appraisal and title
Prepare your seller from the start that your offer is “subject to appraisal and title.” Don’t carve your offer in stone, because you may have to backtrack if the appraisal comes in low or a tri-merged credit report looks worse than you first thought. Additional liens may appear, or there may be some offset claimed by the payor.
Leave room in your agreement, your conversations and your representations. If the deal is still doable, you may have to come back and offer a partial, a split, or have the seller pay the payor’s past-due real estate taxes, insurance and so on.
Know when to hold ’em and when to fold ’em. On appraisal, title and investor-requirement issues, your time is money. Fight the fights you really believe you can win. Each investor has its own way of evaluating risk, and you can’t fight city hall all the time. Don’t burn your bridges.
Check value and title before you spend
- Before ordering an appraisal on an older mobile home, a rental, or a property where condition, pride of ownership or demographics may be an issue, try to get a real estate agent’s opinion of value or photos first. That can save you the full expense.
- Online valuation reports can give you some idea of a property’s value for a lot less money, though much less reliably.
- Order a preliminary title report before going to further expense. It shows whether there are liens that may keep the deal from closing at all.
- Learn how to speak with title officers and win their help.
Walk the seller through the process
Walk your seller carefully and gently through how the process works, up front. Give them the basics of the items you’ll need to close on your purchase of the note. Explain how much their help will speed things up, whether they provide the items or point you to another professional, perhaps an attorney or title company, who has many of them.
This is why you have the note seller sign a Permission to Provide Information form. It lets you move quickly to wherever the information is. Explaining the process clearly, without over-detailing it, builds the seller’s comfort level and confidence in you.
Keep your seller updated regularly to maintain the relationship and their comfort. Lack of knowledge causes discomfort.
If you know your seller’s motivation from the outset, you should know whether there is a deadline behind the sale. Be realistic about whether you can meet it. If not, offer options, which may include contacting the creditor with assurances that payment is coming.
Handle objections, payors and escrow
If the seller’s agent or attorney objects to the closing documents, ask to speak with them directly. If you’re comfortable doing so, explain what the documents do and the reasons behind the language. If you’re not, ask your investor to talk with them. Knowledge builds comfort, and there is usually nothing unrealistic in standard investor closing documents.
When a land contract has to be converted into a note and mortgage or deed of trust, you need the payor’s approval, and the payor may resist. Get that approval before you spend any time or money on the file. You can explain the benefit: title passes completely into the payor’s hands and is no longer subject to any possible liens against the seller. Keep the payor in the loop as the file moves toward closing so you don’t lose their cooperation later.
Suggesting an outside escrow is always safe, because every investor will work with one. Let the seller choose the escrow so they feel they have some say. If they have no preference, suggest whoever closed the original sale of the property for them, if they were happy with that company. This builds comfort and trust.
