Owner Financing is the oldest form of lending that there is. It existed before banks and traditional mortgage lenders began the practice of lending. It is for this reason that it is the form of lending that is known least about. I have written about the importance of the ORIGINAL promissory note and the documents that go with and I have written about the importance of Payor Co-Operation, this article is about a note holder who employed an attorney who didn’t know what he was doing and it cost the note holder MONEY.
Creating a Deed of Trust and a Real Estate Lien Note is not calculus, but there are certain formats that need to be taken into consideration. When you buy and sell mortgage notes on a daily basis you will see all different type of notes; notes with a term of a week, 0 interest rate, various sorts of balloons even documents and titles that are unusual, or a note where the preparer forgot to include the interest rate.
In this case a home owner elected to use Owner Financing for the sale of her property. She employed the use of an attorney to create the documentation. The transaction went through with out a hitch no problem. Now this is not a large note buy here are the details of the note.
|Original Note Amount:||$43,000|
|Date 1st Payment||Nov / 2004|
Now lets jump to 69 payments later where the note holder decides that she would like to take the money out of her investment and sell the note. She contacts The Texas Note Company, we provide her with a quote that she accepts were are on our way slam dunk right? Not so fast my friend. After we received all the documents that went into the original sale, we received an Agreement Deed and a Real Estate Lien Note that was not clear on the different terms of the note. An Agreement Deed was new to us we had not seen a document with this title heading that was to serve as the deed of trust. The buyer of the note informed us that we would need to update the documentation and convert it to an actual mortgage and clearly define all the terms in the Real Estate Lien Note with the payor signature before we would close the deal. Also there was not a title policy on the note so the seller would need to purchase a policy. Ok no problem we outlined to the seller what needed to be done.
Here is what we did with the paperwork, we created a Deed of Trust, the document that is commonly used in Texas and the Real Estate Lien Note. The Deed of Trust identifies the Lender, Borrower, Trustee and provides the legal description of the property. None of which were on the Agreement Deed we received. Additionally the property description in the Agreement Deed was wrong and in had the property in another county. The Deed of Trust also outlines the obligations of each party and references the Real Estate Lien Note amount and where to find it. The Real Estate Lien Note includes all the terms of the note and includes clauses such as late payment and due on sale. Quick note here, often is the case we see the Real Estate Lien or Promissory note fail to include the maturity date but rather put the term in months. That’s ok, but it is wise to make the documents abundantly clear and not leave anything up to calculation or assumption. That is why when we create docs for our customer all the variables are very clearly defined. Secondly, the legal property description doesn’t always tell you where the property is. Again it is wise to include the phrase “Property commonly referred to as address: 123 Maple Street, City, State USA. That little phrase will also help you keep the document together.
The Texas Note Company uses the services of North American Title to help you sell your note and issue title policies when needed as in this case. We ordered the policy and the Texas Note Company created the documentation to convert the note to a sellable mortgage. We reviewed the documents with the seller and the buyer illustrating we included an effective date of November 2004 for the Deed of Trust and Real Estate Lien Note. Good to Go? Not Yet. When we contacted the payor to review the documents and have him sign he was not available, as he works on an oil platform in the Gulf of Mexico and would note be back for two weeks. Well we have to wait for the title policy, so ok.
One of the items on the Agreement deed identified was the 1st position loan that the note holder had with the previous buyer. The note we were selling was originally a 2nd position note. She had owed a balance to the person who sold her the property. In the paperwork we received from the note seller was a Release of Lien document, the note holder had paid off the balance of the 1st position note and used said attorney to file the paperwork to release the 1st position lien. The attorney never filed the paperwork and the lien was still active on the property.
The note holder went back to the attorney and they charged her another $200 to re-release the lien. In my book UNBELIEVABLE! I wouldn’t have been as understanding. Nonetheless we got the lien released now all we had to do was get the papers in front of the payor and deal is done. Not so fast my patient reader.
The payor returned from the oil platform in the Gulf. We put the papers in front of him but he was reluctant to sign anything. He was very determined to tell us that we could not force him to do anything and that he was going to take his time before he did what we asked. Legally the payor is right he does not have to do anything and tough darts for the note owner. This was a surprise to us all as there were 69 on-time payments with hardly a cause to slow up the process. Usually in a case like this where there is a well defined payment history with nothing but on-time payments there is usually no cause for concern. The issue here is the payor does not work with mortgages everyday and does not fully understand what was trying to be accomplished. We conveyed to him that his monthly payment and note balance would remain the same, the only change he would endure would be the address in which he would send his payment. The payor was thinking why would the paperwork need to be redone and have to sign again? Are they changing my terms and going to cost me more money? All very valid concerns and a simple answer. No. The Payor did eventually sign the paperwork and we were good to go Right? Not so Fast my Friend.
We were ready to go to the closing table and the buyer failed to check credit on the payor. There were 69 on-time payment all merit to the note how bad could the credit possibly be? Well pretty BAD, it was below 500 with 15 charged off accounts. Still with 69 on-time payments it was obvious to the buyer and The Texas Note Company that he valued his home and wasn’t going to walk away. The seller had to take a bit more of a discount but we were able to get it done.
This was a particularly frustrating deal, especially to the seller. The seller had done everything within her power to put a good deal in place from the beginning. Used an attorney to create the owner finance paperwork, used an attorney to release the first lien which wasn’t done correctly. What the seller failed to do was do a credit worthiness check on the payor to understand what potentially she was getting into. Our recommendation is to always check the payor’s credit and add social security number to the file.