In the Note business locating the Original Promissory Note is an area where we see the most frustration affecting note sale transactions. The Texas Note Company just recently closed a note sale transaction and up to that point I thought I had seen it all when it comes to having the ORIGINAL PROMISSORY NOTE for closing and reviewing this latest transaction I’m amazed we were able close the deal.
I have written many articles regarding how to create real estate notes and the importance of the seller keeping the ORIGINAL PROMISSORY NOTE in a safe place to retrieve at a future date. I have attended note conferences and conventions where I have discussed, at length, with friends and colleagues strategies on how to get the ORIGINAL PROMISSORY NOTE to closing. My eBook, The Gold in the Paper, details on creating notes and owner financing strategies that stresses the importance of the ORIGINAL PROMISSORY NOTE.
The ORIGINAL PROMISSORY NOTE is the GOLD in the transaction, The Texas T. Losing that document can be a very costly mistake and akin to burning cash. I have been to a few closings where the note seller does not have the ORIGINAL PROMISSORY and kills the deal altogether. The signatures should be in blue, but if they are in black you can wet your finger and then rub on the signatures. If they smear you have the original document, if they don’t then you have a copy.
Aside from losing the promissory note, you can save yourself a lot of pain and anguish if you practice sound record keeping practices. Keep the original promissory note and all the documents from closing in a safe, findable place. Don’t just shove them in a drawer or box and forget about them. These are the documents that will be needed to sell your note at a future date.
- Deed of Trust
- Promissory Note
- Settlement Statement / HUD 1
- Buyer Credit Report
- Warranty Deed
- Property insurance (hazard)
- Title Insurance
If you have all these documents at hand, this will expedite the process to sell your note significantly, if not, then the note sale transaction can drag on for several weeks chasing paperwork.
To continue with the story of our latest transaction, I was surprised to learn that it is not always true that the note seller loses the Original note or misplaces it. In this instance the title company that completed the sale of the property when the note was created was the party to blame.
To provide a little background, the seller of the note was in an abusive situation and had to sell the property fast, so fast that all the seller’s contents remained with the house; the buyer of the property got a good deal lower than normal sales price. The seller’s real estate agent at the time recommended that the property be sold using owner finance to expedite the sale. The seller was new to selling real estate and did not know a lot about owner financing and the responsibilities that go along with doing so. The seller relied on the expertise of the sales agent and the title company to get it right. Here are the terms of the sale:
Sales Price – $94,500.00
Down Payment – $2,000.00 (2% down payment, I would advise never to take less than 10%)
Orig Note Amount – $92,500.00
Interest Rate – 6.00% (low interest rate, I would advise 8.5% or greater)
Monthly Pmt – $800.12
Term – Payment to be made over 173 months
Borrower Credit – Less than 600 (Great deal for borrower with less than below avg credit)
There are several items here that can be analyzed on how the seller could have received more money for her note. If you are going to provide seller financing, I would recommend terms with an investor in mind like the 10/10/10 strategy. 10% down, 10% interest rate over a 10 year term or 120 payment. I would also check the credit of the borrower and make sure the FICA score is above 600. The above transaction was put together by the agent.
Once the transaction was complete the seller left her dream home to a safe place away from the abusive situation. Now the seller of the property was to receive monthly payments of $800.12. Over the next 18 months or so the seller and the borrower developed and unhealthy relationship. The seller did not fully understand being a lender. The borrower made monthly payments within the confines of the contract, but used the payment grace period often and to the seller’s dismay. After 18 months of collecting the payments, the seller learned that it was in the cards to sell the note for a lump sum of cash and be done with all things pertaining to the once dream property.
The seller contacted the Texas Note Company to buy the note and as we processed the note sale it became clear to the seller that the transaction to the sale of her dream home was not handled properly. When the Texas Note Company buys a real estate note we ask for copies of the documents listed below and tell the seller to make sure they have in their possession the ORIGINAL PROMISSORY NOTE that was signed by the borrower when the property was sold.
- Deed of Trust
- Warranty Deed
- Promissory Note
- Settlement Statement (HUD)
- 12 month Pay History
- Property Hazard Insurance
- Pictures of property
- Borrower’s contact information
The seller provided us with all the information requested, we made an offer for the note based on our initial analysis, the seller accepted and we moved on to the next phase of due diligence. The first item we checked was the credit of the borrower which came back sub 550, an item that could have killed the deal right there, however there was enough equity in the property for us to move forward, but with different pricing. We had to modify our offer $3,500.00 less than the original offer. The seller became upset because when the sales agent recommended seller finance, it was the responsibility of the sales agent to provide a buyer with a credit score 600 or better, they did not and it cost the seller $3,500.00.
The Texas Note Company completed the next phase of analysis: verifying the pay history, property tax current, insurance current, the valuation of the property came in above the sales price, and checked to ensure clear title of the property with the only lien the seller’s note. We were set to close and set a date and time for the seller to go into the title company and complete the transaction.
(Quick note: The Texas Note Company originally tried to use the services of the Title Company that closed the property sale of 18 months prior, but they would not communicate with us on status and if title had even been opened to complete our transaction. After two weeks of this behavior from the title company we took our business to another title company down the street to complete our note sale transaction.)
With the due diligence process complete I advised the seller when and where to go for closing; sign the necessary documents and then collect a check for the proceeds of the sale of the note. I also instructed the seller to bring the ORIGINAL PROMISSORY NOTE to closing because that is what was being sold. This is where the transaction began to unravel. The note, the seller had in possession was not the ORIGINAL PROMISSORY NOTE it was a copy and the transaction came to a halt.
The seller, upset because she did not have the ORIGINAL PROMISSORY NOTE in her possession, went down the street to the title company that had closed the sale of the property 18 months prior to retrieve THE ORIGINAL PROMISSORY NOTE. Upon arriving and explaining the dilemma she was in and her need to retrieve the ORIGINAL PROMISSORY NOTE, the title company told the seller “In owner finance transactions the seller does not receive the ORIGINAL PROMISSORY NOTE, the buyer does.” When I heard that I was left speechless. The title company clearly did not know what they were doing. That is a HUGE mistake on the title company’s part and after 18 months to still have that belief is more troublesome.
Our next step was to contact the borrower and determine if he will come into the title company sign a replacement note for us to complete the transaction. Did I tell you that the buyer and seller had an unhealthy relationship as borrower and lender? When I contacted the borrower and explained the dilema and we needed his assistance what he said was a new experience. The borrower told me of the displeasure he had for his lender and that this was the “first time he was in a position of leverage” with the seller. He was willing to bring in the ORIGINAL PROMISSORY NOTE and the original Deed of Trust given to him by the title company only if the seller gave him $5,000.00 of the note sale proceeds. He was not concerned if that would kill the deal and he would have to continue with the current relationship with the seller. It did not matter to him and he wasn’t going to budge.
After hearing the news the seller was extremely upset and reluctantly gave into the demands of the seller to close the transaction move on with their life.
In summary, this was a transaction where the professionals the seller put her faith and trust in did a disservice to her and ultimately cost the seller close to $10,000.00. Had the sales agent had the best interest of the client in mind and done what was asked, of finding a buyer with decent credit, the seller would not have had to forego $3,500.00 on the note sale price. Had the original title company been the custodian of the transaction they were suppose to, and sent the ORIGINAL PROMISSORY NOTE to the seller, the lien holder, as they should have, the seller would not have been extorted by the borrower and forced to pay $5,000.00.
A story like this should truly tell you how important the ORIGINAL PROMISSORY NOTE is, and if you sell real estate and create a note using seller financing, make sure the ORIGINAL PROMISSORY NOTE is in your possession when the transaction is complete.