Most note buyers have heard the dreaded words from a note seller: “Don’t contact the payor or the deal is off!”
Immediately your business sense goes on red alert. You know something is wrong, and you know the note seller doesn’t want you to find out what it is. Just as surely, you know that you will contact the payor or drop the deal.
As a practical matter, you should not buy such a note. The reason is simple: the note seller is right. There is some problem with the payor that is likely so serious it can’t be resolved.
The two reasons a seller hides the payor
There are two reasons a note seller would tell you not to contact the payor:
- There is some problem with the property that has made the payor angry, or the payor can’t or won’t pay.
- The payor wants to buy the note at a discount but hasn’t come up with the money yet, and the note seller feels awkward about selling it to you.
Buying such a note blindly, without knowing the problem, is nothing but a gamble. A prudent note buyer who is determined to get at the reasons will contact the payor regardless of the seller’s warning.
When the payor is angry or can’t pay
Experience shows the first reason is virtually impossible to deal with. You may find the roof leaks, the framing has dry rot, the windows aren’t properly sealed, or the property sits downhill from a landslide on an unstable slope. The seller may not have moved out on the agreed date, or may have left the place a mess that cost money to clean up.
There may be toxic waste problems such as leaking underground tanks, and hazardous waste cleanup could easily cost more than the entire note. The payor will almost certainly demand to deduct the cost of any repairs from the note balance. Buying that note is likely to drag you into a lawsuit to prove your legal rights.
The note seller may also have made written promises to the payor and not told you: a new well, an electrical connection on vacant land, landscaping on a new home, a fence, or removing trees or brush. The payor will almost certainly demand those promises be kept and the cost deducted from the note. Again, buying this contested note could put you in a courtroom defending your rights.
Even worse, the payor may have told the seller about changed circumstances that make it impossible to keep up the payments: a lost job, a divorce, an accident, or a medical problem such as a heart attack. The seller may be deliberately trying to dump the note on you so you’re stuck with an immediate foreclosure.
When the payor wants the note
The second reason, that the payor wants to buy the note at a discount, is less dangerous to you, but it still involves serious problems. Usually the seller has offered to sell the note to the payor, but the payor can’t come up with the money. After a long wait, the seller runs out of time and looks for a buyer because they need the cash.
It may be simple embarrassment on the seller’s part. But it could also be that the seller already has an agreement to sell the note to the payor, and you are offering more money.
As your competitor for the note, the payor can create obstacles to frustrate your purchase. The payor may produce a written agreement from the seller to pay off the note at a discount. Or the payor may try to scare you away by threatening not to pay if you buy the note, giving no reason other than that they’ll call their lawyer.
Why you always contact the payor
The most reliable way to find out whether any of these problems exist is to contact the payor. If that annoys the note seller so much that it ends the transaction, it has most likely saved you from disaster.
