Real Estate Notes: A Dream Come True or Nightmare?
Investing in real estate notes can be a great way to build wealth and have passive cash flow for you and for your heirs. However, note investing does carry does risk. There are some things that a note investor cannot control. You cannot control whether the borrower stops paying due to job loss, divorce, or other reasons. However, there are some things that you do to help your note investing experience to be a possible experience. Most of those things can be summed up in two words: Due Diligence. Do your homework on what you are buying.
Here are a few things that I encourage you to do if you are and are contemplating purchasing a real estate note:
1. Check the borrowers credit and/or their work history- If the borrower does not have a job,, they are probably not be able to pay their monthly mortgage unless they are independently wealthy. With the help of the note seller or a vendor, check to make sure they are currently working at their job. If the borrower has only been paying monthly payments for a short span of time, you also might want to check their credit history. While all of us have had times when we faced financing challenges, a credit score gives you a snapshot of the borrowers credit worthiness.
2. Check the property value- With the help of free online sites like Zillow and realtor,com and/or with the help of a vendor, determine the value of the property. Discover what you can about the condition of the property and the community where the property is located. In most cases, we may not be important if the home is one where you would live. However, you do want to make sure that the projected value of the home fits your projected loan to value or investment to value .
3. Verify the borrowers payment history- Verify the borrower is up to date on their payments. This is fairly easy to do if the loan is serviced by an objective third party loan servicer. However, if the note is self serviced by the current note holder, this may take a little more effort. If that is the case, do not mind asking the note seller for copies of their note payments.
4. Do a title search and have title insurance- A title search will show whether there is a clean chain of title and that there are no liens and judgments. Title insurance will insure that there is no cloud on the title that would threaten the note and your note payments.
5. Get educated about real estate notes and note investing- Learn and then learn some more. While it is good to use vendors that can assist with your due diligence, it is imperative that you can control to educate yourself and learn.
These are a few important things you can do to insure that note investing is a dream come true instead of a nightmare. Best wishes in your investments.- R.L. Wall