Often is the case that a customer or potential customer will come to The Texas Note Company and have a note that they would like to sell and ask “How long will it take to close?” It is almost a trick question. What is boils down to is how well the note holder has kept the records that pertain to the note and the accounting practice that is in place to keep track of the payments. It really is as simple as that as to how fast a note sale can close. On average it usually takes about three to four weeks if all the documents are available and the due diligence checks out. We just recently closed a transaction in two weeks, and the only reason it took two weeks was because the note seller was on vacation the last week.
A CPA contacted the Texas Note Company to sell a note that was part of a Revocable Trust Agreement and they were liquidating the assets of the estate to be distributed to the heirs. The CPA was on the ball. When I first spoke with her to make an offer, she had all the pertinent information we needed to be able to quickly make an offer. She provided the following items:
- Terms of the Note
- Property Address
- Copy of the Real Estate Lien Note / Promissory Note
- Copy of the Recorded Deed of Trust
- Copy of the HUD Settlement Statement
- A brief description about the borrower (i.e. – Borrower is a husband and wife with two children in middle school, the husband works for UPS and has been there for 5 years. The wife is a nurse and had been at her job for 2 years. The borrowers are current on their note as wells as taxes and insurance.)
- How does the borrower make their payment each month? (Cash, Check, Money Order, Electronic Deposit)
The CPA was great. She had all the above information to us within the hour, so we could prepare our offer. With the information provided we were able to go through our process that allows us to evaluate the note, the property and the borrower’s ability to make future payments. We reviewed data from the county and other sources provided to us along with the information received from the CPA to make our offer. Later that afternoon we presented the offer to the CPA.
It is important to highlight the terms of the note that allowed us to quickly come to agreeable terms with the CPA and be able to proceed with the transaction:
- Sales Price of property – $141,298.00
- Down Payment – $48.00
- Original Note Amount – $141,250.00
- Unpaid Principle Balance – $131,082.65
- Interest Rate – 3.5%
- Monthly Payment – $634.28
- Date 1st Payment – 1/1/2012
- # of Payments Made – 43
- # of Payments Remain – 317
From an investors point of view at first glance this is not a great note; the interest rate was a bit low at 3.5% and the $48.00 down payment was discouraging as the borrower has very little protective equity in the deal which makes for more risk. Statistics prove that homeowners who make less than a 10% down payment have a 45% higher default rate than those homeowners who make a 10% or higher down payment. Greater risk for the investor. However, this note had 43 payments (3.5 years) made and were timely. Additionally, the property had appreciated in value to $156,000 since the time it was purchased. The property had good curb appeal and was located in a nice neighborhood.
We were able to come to terms with the CPA where the note investor came away with a 10% yield and the estate received $60,000. Now that we had agreed to terms with the CPA, we needed to complete our due diligence to close the transaction. We verified with her that she was in possession of the ORIGINAL Real Estate Lien Note signed by the borrower at closing, as this is the document we are buying. We requested the following documents to complete the note sale:
- Trust Documents
- Trust Certificate designating the CPA as Trustee
- Warranty Deed
- Lender’s Title Policy
- Payment History of the Note (copies of the checks or a bank statement)
- Escrow Accounting and Balance (The CPA held escrow for taxes and insurance)
- Proof of Property Insurance
- Borrower Information
- W9 – Social Security #
- Mailing Address
- Mobile Phone
- Home Phone
- Work Phone
- Email address
- Pictures of the property
Again the CPA was on the ball and had the above requested information to us by the end of the day including the pictures of the property, then was off on vacation to the Rocky Mountains. While the CPA was away, we ordered a Nothing Further report from the title company that did the closing to check that the title was still clear. We also ordered a valuation (BPO) on the property to verify that the property value was expected. By the end of the week we had all the information that was needed and were ready to close. We had the transfer docs written up by our real estate attorney and waited for the CPA to get back from the Rocky Mountains. When she got back the closing docs were waiting for her, she executed them and returned them to us. All was in order for us to wire the funds to the CPA’s office and record the transfer docs with the county. Transaction complete.
In the last paragraph it may seem that I came to a quick closing of this article, but really it was that easy. Due to the fact that the CPA was very organized and had all the information easily accessible made the transaction go smooth and very quick. In the note business we spend a majority of the time tracking down documents and information.