Experienced note buyers know that the balance owing on a note is the most important number in the transaction. Everything else is based on it. It’s what you’re buying, so it had better be right.
The person selling you the note will give you a figure for the balance owing. Common sense says to verify it with a third party.
Where the balance figure comes from
Most of the notes I buy are handled by a professional servicing agent. Servicing agencies collect the note payments every month and send the money to my account.
A servicing account is normally set up when the note is created and followed until the note is paid off, no matter how many times it’s sold. Some note owners can change agents whenever they wish.
If a servicing agent handles the note you want to buy, they will give you a definite figure for the balance owing. The question is, should you rely on it? And if you don’t, what do you do then?
The payor: your best source and biggest competitor
If you doubt the servicing agent’s figure, the only more authoritative source is the note payor. But asking the payor carries a built-in hazard. They will learn, if they don’t know already, that the note is for sale.
That means they’ll realize they could buy the note at a discount themselves and save money on the payoff. The note payor is your biggest potential competitor for the note.
The payor is also your best guarantee that the balance is correct. If you think the balance is higher than they do, they’ll tell you in no uncertain terms.
If you can get the payor to sign a statement verifying the balance owing, called an estoppel, you have the best guarantee available. Even if the figure turns out wrong, you have a document showing you acted in good faith, did your due diligence and had no reason to doubt the balance. That can make it much easier to defend your rights in a dispute.
In reality, many payors won’t sign anything for you, even if they have no plan to buy the note out from under you. They have no incentive and no obligation to sign an estoppel. It’s a bother, and it’s easy to say no.
How servicing records go wrong
This is not a complaint about servicing agents. I value their skill and professionalism, use them all the time with few problems, and consider them essential to the note business.
Still, especially if you’re a beginner, there are good reasons for caution. Aside from ordinary human error, a servicing agent can receive wrong information from others through no fault of their own. Bad information gets into the file three main ways:
- When the account is set up, the note seller provides wrong figures. The agent can only catch this if both seller and payor supply figures to compare, which doesn’t always happen.
- The payor sends one or more payments directly to the seller or the seller’s attorney, and nobody tells the servicing agent.
- The payor has a dispute with the seller, and neither one notifies the servicing agent.
Even the most careful servicing agent can’t guarantee that you know the real balance owing. Most of the time it’s correct, but not always.
Why you should still check with the payor
That’s why I recommend that beginning and emerging note buyers always check with the payor, even knowing they risk losing the note.
The reason is simple. Losing the note is an annoyance. Losing a substantial amount of money because the servicing agent had the wrong balance when you bought could be a catastrophe.
How to approach the payor
Here are a few tips for making the best of a hazardous situation:
- Be courteous. Identify yourself and tell the payor up front that you’re buying the note. Listen carefully to the response for clues about what they’ll do. Don’t be aggressive or threatening. You need a favor, not an argument.
- Confirm the figure. See whether the payor agrees with the balance owing you have. If the answer is yes, you may have a chance at the next step.
- Ask for an estoppel. Ask them to sign an agreement that your balance owing figure is correct. They probably won’t, but it’s worth asking.
Expect stalling after your first contact. The payor is probably checking whether they can buy the note out from under you.
Also expect the note seller to try to raise your price by saying they’re thinking of selling to the payor. Don’t offer more than you think the note is really worth.
It’s a little like playing poker. But it’s the most secure, if least adventurous, way to get the right balance owing, and that is the number that had better be right.
