When you buy a seller-financed note, you want the seller to endorse the note over to you. The difference between an endorsement and an assignment is only a few words on paper, but those words can have a big impact on your legal rights.
What an endorsement does
An endorsement (often spelled indorsement) gives you legal protection when you buy a negotiable instrument, such as a note. A typical endorsement says something like this:
For valuable consideration received, pay to the order of [Buyer’s name].
Dated this [day] of [month, year].
[Signed by note seller]
The endorsement is usually written on the back of the note. It can also go on a separate paper permanently attached to the note, called an allonge.
By endorsement you can buy a negotiable note and, if you meet the other legal requirements, qualify as a holder in due course (HDC). An HDC is an elite note owner who is protected against many claims of third parties.
What you give up with an assignment
If you take less than an endorsement, you are likely giving up valuable legal rights. You may be buying the note by assignment instead. A typical assignment says something like this:
I hereby assign all my right, title and interest in this note to [Buyer’s name].
Dated this [day] of [month, year].
[Signed by note seller]
An assignment may give you ownership of the note, but it is not likely to give you HDC status.
When endorsement language still isn’t enough
Some situations are more complicated. Even if you use endorsement language, you may end up with a mere assignment:
- Two owners, one seller. If two people own a note but only one sells it, without both signatures you may have an assignment.
- Buying only part of the payments. If you buy the next 60 payments and not the whole note, you may have an assignment.
These are complicated legal matters. Always consult your attorney to make sure that, whenever possible, you are buying the note by endorsement and not by assignment.
