Buying bank notes for non-performing loans is one of the easiest ways to make money in real estate today. Sure, it's not absolutely fool-proof (nothing is) but it comes pretty close. So, why does it seem there are so many people making a mess of buying bank notes?
Like most things in life there are always a few people that give something a bad name but that doesn't mean it should stop you from adding bank notes to your personal investment portfolio.
Find out for yourself what the most common bank note blunders are (and how to avoid them) with this quick checklist:
- Failure to verify the outstanding balance due and the actual repayment terms of the note. Yes, it sounds obvious enough but you might be surprised at the number of people that don't really understand what they are buying. Take time to inform yourself about the original conditions of the note and terms before finalizing the transaction. A little information and education can go a long way.
- Failure to verify the lien status; first liens/mortgages are much stronger than second ones. Once again, a simple concept but one frequently overlooked. Don't be persuaded by higher fees without understanding the inherent risk associated with each. It's also important to understand the status of property taxes, liens and escrow balances associated with the property. Once again…know what you are buying before finalizing the transaction.
- Failure to confirm the value of the collateral property in today's fair market value. Whether you perform your own evaluation or use a BOP, independent appraiser or other method it is essential to have an up-to-date valuation performed before finalizing the transaction.
- Failure to obtain or record legal rights to the property…ie, assignment of the actual mortgage or trust deed or endorsement. Closely related to this is the failure to obtain a physical copy of the paperwork. As evidenced by the current state of the mortgage industry, paperwork fiasco's are common. Protect your investment by taking a little extra time to obtain physical copies of all documents.
In fact, many investors find it useful to obtain an estoppel affidavit from the assignor indicating the balance and terms of the note as well as hazard insurance documentation. Small precautions can add up to major protection in the event of a claim or other unfortunate event.