EP NNA 111 – Note Due Diligence And Its Five Phases

NNA 111 | Note Due Diligence


NNA 111 | Note Due Diligence


How do you perform due diligence? In this episode of Note Night in America, Scott Carson discusses the due diligence process of being a note investor. Scott shares his pre-bid and post-bid acceptance strategy for completing his five phases of due diligence on the property, borrower, and note. He explains how this strategy ensures that you have a note that you can either get back on track to paying, foreclose on legally, or work with the borrower to walk away from. Scott also shares details about his upcoming one-day, Due Diligence Masterclass. Join Scott in his engaging discussion and get answers to your questions about note due diligence!

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Note Due Diligence And Its Five Phases

Welcome to this episode of the show. I am glad to have each and every one of you joining us. However you are digesting this content, we are honored to have you here. I got a lot of great stuff to cover in this episode. This is a topic I think many of you all have questions about. There is a lot of great stuff to cover. We will take plenty of Q&A here for you.

First of all, if this is your first time joining us, welcome to the show. As far as I know, this is the longest continuous running show in the note industry. We have been doing this since 2011. It was once called the Monday Note and it was called something else before that. We started off on Monday nights with a conference call, not a webinar back in the day, and answering questions weekly and providing great content for you guys out of here.

I am honored to have you here. It is hard to believe the years fly by as fast as this, but check out the Note Night In America Podcast. I highly encourage you to do that. All of these videos are also on YouTube under the Note Night In America playlist. We have got over 1,500 videos on YouTube for you. You can always subscribe by going to WeCloseNotes.TV. That will take you directly to the subscribe feature and you will have access to all of our amazing content online.

You can also check out our other podcasts that are available out there, The Note Closers Show Podcast with over 1 million downloads. We had a great day of over 3,700 downloads. We have our Note Camp LIVE Podcast, which are the replays from our mid-year Note Camp LIVE Convention. I am honored to have you here. Check out all of our different content at WeCloseNotes.com. That is the main website. I highly encourage you all, if you guys are not connected with me on LinkedIn, then do so.

I got a lot of great stuff on LinkedIn. We share on it on a regular basis. There are lots of great connections. If you connect with me, you will have a lot more note investors start to connect with you. If we are not connected on LinkedIn, do so now as we want to connect with you there. It is one of our major social media spots.

Moving on, there are lots of great stuff in here for you. Are there any pending questions out there? Is there anybody struggling with something? “How do we learn things? How do we access things?” I want to get into the main content of this episode for you because we have had a lot of questions from people like, “How do you perform due diligence?”

I have actually been speaking quite a bit. I have spoken on a couple of multifamily mastermind groups. Some of you are familiar with The Confident Investor Summit I spoke at and the replay has been going on. Thank you for listening there and being a part of here on the show. It is always great to see where everybody else is joining us from. People all across the country and all across the world join us here. Note due diligence is a little bit different when it comes to evaluating an asset than it would be if you are traditionally looking at a piece of property, like a single-family.

My sister, Tracy, called me from Corpus Christi. She is out driving her bike around. She rides about 8 miles a night with her husband. They are like, “There is this vacant property next to me. There are two vacant properties next to each other on our path. I want more information.” I was like, “Okay. It is easy. Let’s pull up. They are owned by these two people. If you are looking to buy them, give them a phone call, and see what they are looking to sell them. If they are interested in selling them, one guy lives out of Fort Worth and is about 80 years old. The other one was a foreclosure in November.” It is pretty simple. She peeked in the window, knows what the values are, and knows what she can rent them for.

Now it is a matter of negotiating price on that. It is simple for that. When it comes to note investing, when you are buying a performing or non-performing note, you have got some differences. When you look at the due diligence aspect of things, it is different than going out and buying a piece of property. Most investors are buying property. They are going to pull an inspection report. They are going to have an inspector go out and evaluate. Once they go under contract, they agree on a price. They are going to check title work to make sure that it can be transferred to them completely. They are also going to look at the value of the property, what they are paying for it, and look at that, “Is this a good deal versus the cashflow versus the rent? We are going to flip it or we are going to move into it?”

It is a pretty simple process. You put it on your contract and go to a title company. You are evaluating them. If you are paying cash for the deal, that is great. You do not need to jump through hoops for a mortgage company. You are going to get your financing from a mortgage company to make sure you qualify.

With note investing, it is a different story. It is a three-ring circus. It is not meant to be complicated or crazy like that, but the thing that comes to mind is you have three things that you are looking for besides just the property. We are going to look at the property due diligence without being able to inspect the house or, oftentimes, get interior access.

You got to keep that money. You are buying the property as-is with the borrower. If the property is listed for sale or a short sale, you get access to it, but you do not always get the inspection side of things. You are taking it as is while you buy it cheaper. You are looking at the borrower’s due diligence. I try to come up with an idea, are they willing to get paid on time or are we going to have to foreclose? Do we have to go the legal route versus getting it back on track? The note, the documentation, can I foreclose or enforce what the IOU or the mortgage says? Do I have the right to foreclose and take the property back as collateral?

Do I have the right to foreclose? Are all the documents in order? That is why we say it is a three-ring circus between those three things. You also got split up things on the upfront due diligence because you are not going to complete all your due diligence on the front end before bidding. That would be stupid. Unfortunately, most of the time, before bidding, you are not going to pay for due diligence. “I can get an inspection order in court if there is an ongoing foreclosure. I am a part of the foreclosure.” That is different but that is after your bid has been accepted and you are going through the foreclosure process. We are talking about due diligence on the front end for you.

Part One: Pre-Bid Acceptance

Here’s the thing. Are you putting money down? Are you paying for due diligence before you ever go to contract? You should not. Once you do get a bid accepted, then there is a different facet to finalize your number and take a look. A lot of times, you are looking at online values before you submit your bid and your bid is accepted or countered. You agree to that counter and then you have got a whole other facet of deep-dive due diligence.

The biggest mistake that a lot of investors make is they try to do as much deep dive on the front end and they waste too much time, too much energy doing a deep dive on the front end, and they never make an offer. They end up killing a lot of the deals off before they ever get around to it. I am a bigger proponent of, “Let’s make a lot of offers. Let’s control the asset. Let’s control the tape if we can, and knowing that if we make 60 offers, 30 are not going to be accepted, 20 are not going to be accepted.”

That is okay because we control the bid. We control the discussion versus trying to target the best asset. We are going to get a bigger deal, a better deal, bigger discounts, and have a lot more flexibility, but there are some things to look at. I have broken this down into a five-part series. I am going to encourage you to ask questions, but I am going to ask you to read this as we go along here. I do not need any, “I can do this. I can do that.” Wait until the very end.

If you do not understand what something says or means, it is okay to ask, but keep your specific questions to the very end. On the front side, let’s say, you get a tape. When you get a tape, what are we looking at when we get a tape? This is the thing. First and foremost, this is one thing that most people forget. That is to look at the pricing or ask if they did not tell you what the pricing is. Does it make sense? If you are a brand new note investor, you may not know what sense it makes. My friend Catherine Bell and Laura Miller got a tape in the seller with 90% of the unpaid balance on non-performing, which is just stupid.

They want 80 cents on the dollar for performing, which is more in line or they were paying more for non-performing than performing. That did not make sense. We had to clarify that. If they are wanting par or they want the full value of the legal, that is stupid. It does not make sense. It is not worth going on. Let’s say the pricing does make sense. I only want 70 cents on the dollar and we are going down that route or 60 cents on the dollar. There is a lot of the equity above. The first thing you want to do is get rid of states you do not want to buy in, New York, New Jersey, Kentucky, and other states that you do not like.

You want to look at the assets and mapping them fast. Are they whirled up in the middle of nowhere? Are they small assets, like 1,000 square feet? Do they have low value? Are they below $20,000, $30,000 or below $50,000 for some? Do they have a low UPB or Unpaid Principal Balance? Do they only owe less than $20,000 on the deal where there is a ton of equity? Some people want to get rid of vacant properties where it has been vacant for a while. Some people want to look at vacant properties. They do not want to deal with all that. That is all going to differentiate on what your particular formula for what you are looking for.

The first thing you do is get rid of stuff that you do not want to look at and states you do not want. The tape with a spreadsheet is going to give you a value. Sometimes you will be lucky enough to see how old that value is. Sometimes this is Zillow or Zestimate. They just pulled online values, so we will look at the online values. The beautiful thing about notes and due diligence with notes is you can often reduce or fade your bid if the values come back low.

You are not obligated to stick by the values that they give you if they have not pulled it in the last 90 days. You still need to jump over online and check the taxes that are owed because that is going to affect your bid when you submit your bid. Looking at taxes and your online values, the tape values, are the values that you find online higher or lower? Using similar resources to make some things happen, look at the payment history. History will often determine your exit strategy. If someone has not paid in 2, 3 or 10 years, they are not going to pay, but they have not paid in six months or maybe a year or they were paying and then COVID kicked in. That may be a potential modification or it could be a deed in lieu, Cash For Keys, as a way to work with a borrower.

If it is vacant and they have not paid in a while, it is going to be a foreclosure for the most part. Look at that, doing your due diligence. If somebody has not paid in ten years, there is no reason to even think that they are going to modify. You go straight to foreclosure. Each state will vary on the timeline that takes to foreclose.

You are going to run your estimated return, your ROI calculator, running some formulas down to columns, “60% of fair market value, we are buying this it is worth $165,000 times that. It is worth $65,000. They owe $130,000. That is not a bad deal. Let’s go ahead and deduct the $5,000 in back taxes owed. That means our offer is roughly $60,000. That could be a pretty good deal if it is in good condition and we can foreclose, but there is a lot of equity above it. If there is negative equity, that is okay. We have got to make sure our bid makes sense as far as value.

You are going to make the initial indicative offering to the seller, but this is not complicated. They may be filling in a column on the spreadsheet. You may send them an email with a spreadsheet. You may say, “Scott, I want to offer $10,000 for this one property with such-and-such address and loan number in Detroit.”

It is not difficult, but your pre-bid is looking at quick stuff online, what is owed, what is the value and what information do they give me on the spreadsheet that I can start getting a picture of what is going on here? I can start looking at things. Maybe I googled the borrower’s name. I looked at the borrower’s name and see what is going on. There are some things that you take a look at. That is pre-bid bang.

You want to spend a little bit more time if the seller does provide some due diligence docs. If they run a broker price opinion or an appraisal within the last 90 days, they would want you guys to be a little more specific on your bidding because they identified the value. They know what is going on. Also, if they provided a title work where they have pulled an ownership and encumbrance report, a title update, that is to help you speed up or expedite your bids. I am working on a deal in Florida. The seller does not want to give me a contract until I am good and ready to fund. That is fine. We are working through things. We have gotten comps from a realtor. We got somebody who drove by the property. We are pulling title work on it.

NNA 111 | Note Due Diligence

Note Due Diligence: You don’t need to jump through hoops for a mortgage company. In note investing, it’s a different story. It’s a three-ring circus. It’s not meant to be complicated.


Part Two: The Property

We know that once we get this thing approved, which we are pretty excited about it, we will be able to close in roughly 48 hours on it. We are doing a little bit more of our due diligence. We know what their bid is. We know they have accepted it, so we are moving to the second stuff. On the other ones, we are going through this and we have made our offer and wait for him to come back. Here is the thing. Do not spend money on a BPO, Broker Price Opinion, on an appraisal. Do not spend money on title work before your number is approved.

I often say, “Do not get rock and rolling before you have a signed loan sale agreement and a contract.” That is the case, but 90% of the time, I will go ahead based on the seller and the seller’s relationship I had knowing that, “They have agreed to my bid. They have agreed to the numbers. They do not want to sign a contract until I am ready to close them and that is okay.” For the most part, you guys and gals out there, you are not going to be spending money. There is not going to be spending $500 in due diligence on the front and everything. There is no reason to.

You are basically doing everything online and within a few minutes, we are talking 30 minutes or so, you can find the taxes owed, quick valuation online, and make your offering based on the documents in there. Some of you guys are just flipping out there, “I got to check everything on everything.” Narrow it down first to a few assets and then work your way up from those assets.

If the house looks decent online and it is a current photo of the last year on Google maps, it is in pretty good shape. If it is an older photo, then you need to get somebody involved. The sellers are not going to penalize you for only looking at online values and online photos until you have a contract unless they have otherwise said.

It takes us to part two. You have submitted your bid. Your bid has been accepted. They are saying, “Yes, baby.” You got a deal accepted. That is a beautiful feeling. It is exciting. It is like, “I got a bid accepted.” A lot of people are like, “What do I do next?” It is a little bit more of a deeper dive into the due diligence side of things. This is basic information that we are going through. We will talk about how to do a deeper dive, step by step, bullet by bullet, later on.

This is now where once you have gotten accepted, then you are ordering some of the due diligence. You are ordering a broker price opinion or having your local realtor pull up comps and drive by the asset. You always want to put eyes on the property. If you are dealing with a condo, you cannot see inside the property, but you can get a bit of an ideal feel for it, not worried about repairs in a condo.

If the condo building is looking great, that is what you put forced-placed insurance on. If you open it up and it is a horror living inside, you will follow an insurance plan. We will get to that later on. You want to specify your values. You have a subject-to contract form that you used to bid. Let’s not get so bogged down in the legalities of this.

You are going to get a loan sale agreement from a seller who is going to provide it most of the time. If, for some reason, you find out that that value is crap, you are going to cancel it and walk away. If it turns out there is mold and you could not get inside of it, that is what you pay insurance for. You are always going to put eyes on a property. Make sure that it is still there and has not been washed away in New Orleans or destroyed by a tornado in Fort Worth, Texas.

You are going to order title work, what we call a title update. That is an ownership and encumbrance report. In the note business, you do not need a full title report because the title is still in place from the one that loan was originated. You are checking for new liens, judgments, etc., that have been attached to this note or to this property after the note was originated.

You are buying a note and it was originated in 2009. You are doing a title update in 2009, not to the point of creation for the asset. You are going to call the county, if you have not done this, and verify the taxes owed. Make sure that there is no pending tax sale or foreclosure just to double-check. It is a good thing to do.

You have this under contract. Now, you have a vested interest in the property. Calling the utilities department is a good thing to do to see, “Are the utilities up to date? Are they on a payment plan? Are they utilities even on or are they off?” You are at the bank and you have a vested interest. A lot of times, you can get a lot more information versus, “I am just calling, checking a property.” “I represent the bank. We are getting ready to foreclose on this thing. I want to make sure and check it out.” Some places will give you a lot more information. Some will be a little more guarded. It is still worth calling and asking out.

You call and you find out that the power and water is off, it is vacant, if you did not know that already. It also helps to determine the interior, especially if it is in Chicago, Ohio, or some of you have Yankees up there where the ground is still frozen. If the power has been off for six months, you got to make sure you do not have an inside skating rink. You are going to need a little bit of work. Hopefully, squatters have not moved in and been lighting up a fire. That gives you a bit of an idea of what condition it might be.

I do not care if somebody has not paid their mortgage in a year and a half. If the utilities are paid, that usually tells me that somebody is living in a house and taking care of it. At this point, you want to call and get a bid on the property for force-place insurance. Should you have to foreclose, what is it going to cost?

The insurance can kill your deal, especially if you are buying a higher zone like Houston, Texas, where there are a lot of hurricanes or flooding in New Orleans or Florida. The insurance can kill your deal. You got to know what your bid is on the asset. What is it going to cost you to have forced-place insurance on it for a year and then what is it going to cost if you foreclose and then take it back as an REO property.

It is good to talk to your insurance agent about that. We had Beth Boisseau-Coots with JB Lloyd‘s Insurance Company on here. To go and get your forced-place insurance, you would order your BPO and your owning reports. You can go to Baldwin Advisory Group. It is a pretty easy one-stop-shop to order those to start looking at.

“How do you find the utility department in the county? Who is the utility?” Call the city gas department, google it and find out what is going on. I like to take it one step further. I like to call the zoning department or the code enforcement offices in that city or county and ask, “We are getting ready to take a property back. We are ready to foreclose on a property. Are there any zoning issues we need to worry about or are there any code enforcement lanes that are not showing up on title yet in that property or in that zip code?” It tells you, too, that if you ask it in that one specific block and they pull up all these properties in an area they need to work on, that is probably a rough neighborhood.

Your BPO should show the neighborhood and your online due diligence should show some of it too, but it is also good just to ask those things. I bought notes, whether it was a $1 million-plus code enforcement lien against the property. We got reduced down to $2,000, but that is a bit of a shocker when you see, “There is a $1 million lien on the property.” That will hurt if you do not know how to handle it. The reason you call the utilities department is to find out if there are past due water bills. In some areas, the water bills follow the property, not the borrower. Checking the crime map is important. Trulia is not bad for heat mapping.

This is why I also like calling the police department, “What is going on in this area? Are there a lot of calls to this community or this zip code?” Trulia is not bad, but there are also areas like south side Chicago, Gary, Indiana has some rougher ones. That is an important thing. Stacy asked a question, “Could you also call an HOA for any unpaid fees here? HOAs can be a bit of a pain.” You are buying a first lien.

In most cases, you are going to end up wiping out that first-lien when you foreclose. You need it on a state-by-state basis like Florida, Colorado and Nevada. They have something called Safe Harbor, where you are going to have to pay the HOA a percentage of what the original sales price or 6 or 12 months of fee. You need to know the HOA. That is an important part of knowing your strategy, “What is the HOA? What is it like in a 55-plus community?” If it is in the villages, you got to know what is going on with the HOA as well too.

That is the property aspect of things. That should help you when you see those things that should come from your BPO and your agent pulling that information for you when you ask them to put the eyes on the property and tell you about the asset. Thank you for asking that, Stacy. It is important to know what the HOA is going on. Especially if it was a condo, there is a special assessment that is going on. That stuff is definitely important.

Part Three: The Borrower

Let’s move on here. That is part two. Let’s go to part three. Your bid is accepted. You have looked at the property. You are comfortable with the property. Let’s talk about the borrower, the person you got to try to collect from or work with. Most people do not know this, surprisingly, but you can ask, “I demand the servicing notes from the seller. I want to know the conversation. I wanted to see the call logs. Has the borrower been friendly? Have they been unfriendly? Have they told the servicing company to go pound sand? Have they provided hardship letters of why they could not pay or have not paid? Are there short sale files or loan modification files?”

Get the note from the servicing company. That will tell you if a borrower is friendly and wants to stay. We will order a skip trace on the borrowers. We will also look at Spokeo or Whitepages.com for info on them. We will look for their next-door neighbors. We will look for family members, like I was helping my sister out. She is looking for this on this property and the borrower lives up in Kingwood, Texas. We found the borrower’s phone number. We found his wife’s name, wife’s phone number, and neighbor’s phone number so she can reach out to about buying this one property.

I have done this on some three-day workshops where I have actually called the phone number to see if it was a working number. I did not say, “I am buying your note.” That is illegal to do, but I can still see if it is a working number if it goes to voicemail or anything else. There are some things you want to say and things you do not want to say to make things work. I always double-check to see if the phone numbers work. The more information you can find specifically on a non-performing asset, the better it is going to be to give that information to your servicing company, who is going to be doing the borrower outreach or trying to Right Party Contact, RPC.

That information will give that to the servicing company. If they have already started the foreclosure process, this is a question we ask the seller. “Have you started the foreclosure process?” If legal has started, we ask to talk to the attorney handling it. The seller has got to give permission. We will get on the phone, “What is it going on? Has everything been filed? Is there a pending foreclosure date?” You have looked at this loan file. What is going on? If legal has not started, you are going to want to have the collateral file, the title reviewed by an attorney to make sure you have the right to foreclose and go from there. In some cases, the borrower has filed for bankruptcy. That is something not to be scared of in the note business.

If you are a property buyer and you are buying a distressed asset and the borrower filed bankruptcy, that is going to delay things for you. If not, kill the deal. With us, it does not kill the deal. It actually expedites it because we can now go to PACER.gov and download the bankruptcy filing. The borrower on a PACER report is going to show everything they know, what they owe, what other assets they have, what they think the value is worth, and their other debts. It is them opening the kimono and we can see everything down. We can see them totally nude, but when it comes to due diligence. It is one of the best things that you have.

That is a good thing. You want to download and take a look at it and provide that to your servicing company because you will need a separate trustee to work with the bankruptcy court to collect on your behalf. As you may have seen me do in one of my classes, we check out the borrower’s social media and we google them. You never know what you are going to find.

NNA 111 | Note Due Diligence

Note Due Diligence: The biggest mistake that many investors make is trying to do as much deep dive on the front end and waste too much time and energy, but never make an offer.


In a class we taught, we found out that there was an asset in California where the son had been arrested and had been shot to death. It was a drive-by shooting. That would make sense. He was killed in February. The family stopped paying in March. I am not going to buy a note. Some people would. I am not going to add to that borrower’s difficulty. We have found all sorts of other information. You have heard me tell the story about finding the borrower who is going to pay you to go to Disney versus paying their mortgage.

We found a borrower in Illinois who was an author who had broken his leg and was unable to speak and was out of work for six months or a University of Missouri professor who had been sick and was back to work after overcoming cancer. There are a lot of things you will find that people put on social media. We check Facebook, LinkedIn, Twitter and Instagram. There are a lot of them out there, but we check to see what is going on. We are also going to look at the loan files that are going to get me the information stuff. We are also going to google them and go to the county records in the nearby counties to see if they own any other properties.

We are also going to check the mailing address. We are going to check to see if the mailing address of the property matches up. If the mailing address does not match up with the property we are looking at, that means they do not live on a property. It is either rental or investment. When I was looking at it, I found that the borrower’s mailing address was not in the same town they are at. It is a different town. We discovered that that person had retired and moved to her family with her kids because she is too old to live alone. They helped us identify, “We are not going to get this reinstated. It is going to be more of either deed lieu, cash for keys, or a foreclosure.”

“What if the HOA will not tell you if it is in arrears and the owner has to call?” You are the bank. Most of the time, they will tell you. If they will not tell you that, it is not that big of a deal, Susan. Usually, when you say you are the bank and you are getting ready to foreclose and you represent such-and-such company, sometimes it is sending over a letter. “I bet you are getting ready to foreclose.” They will tell you the information. It is not usually that bad, especially if it is going to go to foreclosure. They want you to get paid. The HOA wants to get paid in some sort of fashion.

I have never had an HOA tell me they would not work with me because HOA is getting ready to file a lien against the property. That would be public record if there is a lien. That is why you would check out on the title reports if they filed a lien. You can almost 100% guarantee that the borrower has not paid the taxes, mortgage, or HOA.

One of the things too, when we check and see if they own other property, we use that as marketing to keep the borrower back on track or to deed the property over, provided there are no liens against the property above it. They see that they own 4 or 5 of the rental properties in the same area. If we foreclose and we do not get taken care of, we will file a judgment against those other five properties.

That is a nice bargaining chip to go after. If you have gotten the original loan application, this will goes a little more in the collateral file. When you are looking at servicing notes or you are looking at the collateral file, which is the next part, we are going to look at the original loan application, which they disclosed.

They shared what financials they have, what they did, what happened with the savings, your original loan application or in the mortgage business, they call it the Original 1003, is a lot of information talking about what they are doing. Where did they work before? What happened? A guy who was a VP of Bank of America and was losing his house before he was laid off. We found a lot of things by looking at it if that helps us with the borrower information, all valuable things. The last thing we do is we have the realtor. You can often see this if you type it in Google. You will see if there was a previous MLS posting or if the property was listed for rent somewhere.

Those are great things to look at. They will often give interior your photos or tells you, “This borrower was trying to sell the property in a short sale six months ago. I am ready to walk.” “What if they only have other properties by different LLCs?” They are not going to show up. If it is a different LLC, it is not going to work, Susan, but if it is in the same name, the same LLC, that would work fine there for you. Most people, unfortunately, are not the most savvy when it comes to asset protection. They keep it the same LLC or the same name in a lot of cases. If it is a different LLC, you cannot go after claim.

Part Four: The Note

That is the borrower. Let’s go on to the note, the actual collateral file that you are buying. You are not buying the property. The property is the collateral for the IOU. The borrower is supposed to be paying on it, but the most important thing is the note. You are not going to get the physical copies. You are going to get a soft copy, which is a PDF. It is a scanned copy of the collateral file. You are going to review these. One of the most important things you can look at is the date the collateral file was created. The collateral file is more than 90 days old. It is a year old or two years old. It does not have everything in it. You got to make sure to have them, “Can you please rescan the collateral file?”

I have had deals when they rescanned, there was a deed in lieu sitting on top of there or there were assignments that were recorded or other notices in the collateral or another hardship letter from the bar that was not shown in the original one. You want to make sure that the original note is in there. If the original note is in there and they have a lost note affidavit, that will work. Let’s not get all bent out of shape.

There are a few issues dealing with loss note affidavits. Look for the deed in there. You do want to ensure that there are in assignment of mortgage and then every time that mortgage has been sold. If it was originated with Chase back in 2019, then it was sold to Wells Fargo. You want to make sure there is an assignment of mortgage from Chase to Wells Fargo. If it was sold from Wells Fargo to Gemini, there is an assignment from Gemini, it was sold from Gemini to ABC Investments, there is an assignment to ABC Investments, and there is, hopefully, one to whomever you are buying the note from.

It is the same thing with an allonge. It is a one-page endorsement. It used to be that banks would flip over the last page of the mortgage documents and endorse it. If you have got to check and ever endorsed a check, that is the allonge. You need to have an endorsement assigning over the cashflow and the right to collect, endorsing the IOU over to the next party. Most banks do not hold on to their original mortgages, so that is why they need that. They create a one-page launch, not notarized, but it is signed. You want to make sure that there is an assignment and an allonge for each time that note has been sold.

If it has been sold four times before the seller is selling it to you, you got to make sure it has 4 allonges and 4 assignments. I put an asterisk next to the assignment of mortgage. If there is an assignment missing, I will not close. If there is an allonge missing, I do not mind. I will go ahead and close if all the assignments are there. You also want to look at the loan documents and what is going on. We talked about this beforehand. Is their original tenant a loan application? Is it their original appraisal? Is the title work all there? Those things come in handy for taking a look at things. Are there hardship letters? Is there a short sale? Was the borrower trying to do short sales? Is that short sale file in the scanned copies? Has the borrower been modified?

If it has been modified, you want to make sure that the loan modification paperwork is in there and scan it. A student of ours is going to buy a note, whereas a modification was written. It was a really sneaky. They made a normal monthly for 12 months. After 12 months, from payments 13 through 36, they made a $0.01 payment each month. That is some crazy stuff. “Make 12 months of payment. After 12 months, you make us a $0.01 payment for 24 months.”

If you did not read the loan modification documents, that could hurt you. You got to read some of this stuff. Look at the pay history. Look at the payoff to make sure that the payoff statement from the servicing company matches up with what you are figuring the payoff if it is pretty close, especially on the legal side.

Talking to the attorneys, “Has the attorney been paid for the legal work?” Otherwise, you are going to get an illegal bill. Jack asks the question here, “One cent was the agreement?” The agreement was 12 months of payments, plus then for payment month 1 through 12 for the loan mod. It was normal payments and then payment month 13 through month 36, it 1 cent payment. I got a copy of it, Jack. It was stupid. I was like, “Did you read this?” My student was like, “We had not read this.” I am like, “Read the damn thing. This does not make sense. Do you see this?” You got to read this stuff. You got to take a look at it.

The only way you get better at identifying this stuff is actually take the time to look at it. We talked about this before. You want to make sure that the borrower on the note matches up with who is on title and who owns the property. It obeys me some deeds or people taking over something or they get it from themselves to a land trust. That is okay. That stuff happens.

Make sure you look at these collateral files. If you do not know what the hell you are looking at, get somebody to take a look at it for you. Have a third party like Richmond Monroe or have your attorney take a look at it and make sure you have the right to foreclose and the ability to foreclose if you need to and that everything on there is accurate.

If there is something missing, how difficult is it to get fixed? What do we need to correct before we fund? Once you fund, it is going to be harder to get your money back if they do not have this stuff. It is going to be harder to get this stuff corrected. A seller out there who was like, “He was trying to get away with selling notes to somebody without them looking at the collateral file. There was nothing in the loan sale agreement that outlined the clawback period.” I have bought a portfolio, 175 assets. I had six months for due diligence after I closed and then I could swap those assets out that I found did not work well with new assets. It was a great deal.

You are not going to see that very often. You’ve got to be willing to negotiate that in a lot of cases to come to an agreement on the front end side. If a seller tells you, “You cannot review any of the collateral files until you fund.” That is no-no. Do not do that, especially on one-off assets these days. Bigger portfolio and sometimes different things, but make sure that the collateral files are there and the ability to foreclose on it. That is why you always have a third paty, Richard Monroe or your attorney or Joel Markovitz or somebody, take a look at the collateral files.

Make sure everything is there and that you have the right to foreclose. If everything looks hunky, do not worry. Look at it yourself. If something does not look right, “I need some help. Can you take a look at this if this makes sense?” I am not an attorney or an accountant. Do not call me, “Can you look at my collateral file?” I am not going to look at your collateral file. I will take a look at that deal that I am working with you on, but otherwise, you need to get a third party that does that for you.

That is part four. If everything looks good so far, the property makes sense, the due diligence on the ballroom makes sense, and then the due diligence on the note looks good, it all matches up with what your bid was accepted on. That is great. If something is missing or stuff that does not look good, you could go back and say, “I need a counter my bid or fade my bid because the value was not there or there are issues involved with the deal. I need to adjust some things.”

If you need to adjust some things, that is okay. Go back and forth from there. If everything looks good, values look good, taxes look good, the note looks good, everything looks good with what you are going to do with your foreclosure or what the exit strategy is, then you fund. When you fund, that is not the end of your due diligence. There are other things that you have to do after closing.

Part Five: Post-Closing Actions

I bring this into part five because it is not just, “We fund the deal and not do anything.” Unfortunately, there are some people out there and that is what they do. They buy a deal. They do not touch it with anything else afterward. It hurts them. There are some post-closing actions that you need to do. By post-closing, I mean post-wire transfer. You wire the money in and there are things you got to do.

First and foremost, a seller should be providing scanned copies of the assignment of mortgage and the allonge showing the transfer from their entity to your entity. It is going to take 24 to 40 hours for the originals to show up, but they can always scan them and send you over to them. You can get the originals recorded or maybe they sent them in to get recorded electronically. It all varies on how you want to do that. It is better to contact your servicing company.

NNA 111 | Note Due Diligence

Note Due Diligence: If you are a property buyer buying a distressed asset and the borrower filed for bankruptcy, that will delay things for you, but it doesn’t kill the deal. It expedites it.


We had Covey Financial on, which was a great call. Whoever your servicing company is, hopefully, you have set up an account with them. You will need to make sure and talk to the servicing company before you close to make sure that you still want to keep it with them and if their fee structure works for you. If not, then you need to make sure, and you are moving into a new servicing company and making sure that paperwork is set up. It is an easy, simple process. Servicing is not going to transfer immediately. It is usually going to take about 14 days to 30 days.

That is where you want to make sure in that fourteen-day process that the goodbye letters and the hello letters are mailed from the servicing companies to your borrower. A goodbye letter is the old servicing company sending a letter to the borrower saying, “Thanks for not paying us. If you want to make a payment, this is who you make payments to.”

The same thing in hello letters, “Thank you for not paying such-and-such, but now your loan is with us. Now you need to make your payment into this.” The earliest goodbye and hello letters will be sent out is fourteen days because you have got to give the borrower at least fourteen days from the time the note is sold to contact.

That does not mean the payments wait fourteen days. The payment is received the day after funding. That new payment is now due to the buyer. You got to make sure you check insurance. If your insurance is not in the collateral file or there is no insurance, which most of the time, there is not going to be on a non-performing, make sure you have called and gotten your insurance filed. You paid for your forced-place insurance. If the borrower is able to prove up in a month, do not worry about it. You will get your payment back. Whatever insurance you paid for, you will get that refunded back to you.

Also, make sure that you notify the transfer counsel. Your seller will usually say, “We are no longer the owner of this note. We sold the note to such-and-such. You will be representing this borrower or representing this buyer on the foreclosure.” Make sure you talk to the attorney and let them know if you have. If they do not have an attorney, then this is where you are going to want to notify your attorney, “I bought a new asset and in Florida, we are going to have to foreclose. Here is where everything is at and here is everything we have done.”

If the house is vacant, you have driven by the property, your agents, your best friend or whoever, tells you the property is vacant and needs some protection. Do you want to go and secure it? Yes. If it looks vacant and there is nothing. If you see weeds growing up, go change the locks and winterize it. Get it in there to protect your investment.

Realtors often have locksmiths and are used to doing this. The realtors will leak the locks, so they want to see what they are dealing with in the listing. You do not want to go on and move any of the property out of there or anything. You want to put a notice that you have secured the property and that if anybody has any questions, they can contact your agent or you directly or the servicing company to do that.

To secure your property, you have the whole right to go in and change locks. It is a vacant property. You can change the locks. If it is an occupied property, you cannot go change the locks. Do not do that. If it is listed for a short sale and it is vacant, you can change the locks. Fannie and Freddie have done that for years to protect their investment. You may want to put a lock box on it somewhere.

If somebody does come back to you, like your vendors or your realtor, they can get into the property for easily. If taxes need to be paid, hopefully, whatever you funded from your investor, if you had the extra in there to pay the taxes, if it is going to tax foreclosure. If there is a pending sale coming up, that is important to go ahead, so you do not lose it.

We bought notes on a Monday. We were paying taxes Tuesday morning to avoid a tax foreclosure. If there is a tax settlement or some sort of payment plan, you start working with the county or worry about the redemption period to pay the taxes off so that you can redeem your ability to foreclose. Each state is a little bit different. That is why you want to call and talk to the county before you ever fund.

I personally like to send my hello letter out a week after I fund. I am not waiting 14 days or 30 days, and this is nothing against my servicing company. Some servicing companies are tremendously slow as molasses. You never know what the situation is. Some sellers pay their servicing company up to date, yet some servicing companies wait to transfer until they are paid in full on their side of the servicing side.

I still send out my own hello letter. It works like a charm, getting people to respond to our message, especially those borrowers who want to stay in their property or try to work out a payment arrangement. It gets us talking to them or talking to the servicing company in an expedited faction. We will send out our own door knocker after a week. If we send the letter out and nobody responds in a week, then we will send out our own door knocker in two weeks and knock on the door. That is usually the realtor or a third party that you can hire from your servicing company to go out and do door knock.

About 30 to 45 days later, that is getting the original collateral file. That is the original loan docs. When you get those in, do not go throw them in the corner. Put them in a safe spot that does it is not going to get damaged, that your kids are not going to show up, “Look at the paper,” and start drawing colors on it or your dog like, “I can do something,” or a cat goes, “Look, a litter box.”

You do not want to put this somewhere. People put them in a safe deposit box. Personally, I put them in fireproof boxes and I have them at the self-storage facility on the fifth floor with sprinklers and everything. What I do first is when we get collateral files, I take them apart. I look at them individually, look at everything on there. I have seen the deed in lieu, sign and write a rule that we could follow. We would have to foreclose. We just take the property over. I have gotten the keys. The properties, there have been insurance checks that needed to be filed that we could collect on insurance. You never know what you are going to see in the collateral file.

Take the time to take a look at it and save it. There is stuff in your collateral file that was not scanned, like utility statements or other hardship letters or short-sale. There is a lot of great information in those collateral falls do use in your negotiations with the borrower. That is usually going to come 30 to 45 days after you fund. Make sure you get that and you keep track of it.

A lot of times, it will be sooner. It all depends on the seller. That is the fifth part. Once again, let’s go back here a little bit. In the five-part series, once again, the first part is your pre-bid acceptance. The second part is going to be your property once your bid is accepted. The property due diligence, making sure everything worked there. Next is the borrower, making sure everything is hunky-dory there with the borrower.

Sometimes borrowers are a pain in the asses that I did not want to deal with. We are dealing with a couple. It is what it is. Same thing when you move into the actual property. You have the right to foreclose. Do you have everything you need to step into the bank’s shoes and then after you fund both closings? I want to open it up now like a Pandora’s Box, opening it up for any questions from you guys and gals out there.

Jack asked a question, “What is your experience purchasing notes owned by Freddie?” They are not at a discount. I do not buy notes from Freddie or Fannie Mae. They are not selling at a price that makes sense for us, especially with government insuring sellers. Even non-performing notes go in at 90, 95 cents a dollar. It does not make sense for me to buy a note backed by government insurance. It is too expensive. I find better deals. There are still plenty of other non-government insured notes out there.

I know I went through that. There is no way for you to understand note to due diligence and what I go through, 45 minutes roughly. We started a couple of minutes after and go from there. There is a lot of that goes into it. You are not going to learn it in one hour at all. It takes time. It takes looking at assets. It takes breaking things down.

We do a pretty good job on the front end of breaking down due diligence of looking at tapes to know what to make offers on, but it is that after you make a bid and dive into the deep side of due diligence that has a lot to it. That is where the answers and some amazing deals are found or duds that look like deals are discovered that you can kill.

You got to know what you are looking at. That is why I want to remind you, we were initially going to have the due diligence class. I had to rebook it because some things popped up, but we have our next masterclass on due diligence. We will go through the front end. We will go through all five phases of our due diligence process, the pre-acceptance and the post-acceptance, and then focus on the borrower, the property, and the note all in one phase, and then even post-closing matters as well too.

We will go through all five phases of this. We will bring up copies of load mods, paddle reports, and collateral files. We are going to take a look at PACER.gov reports and bankruptcy filings. We will go through a lot of these things, how we perform this social sleuthing on the borrower, how we pull information. It is an A to double Z process onto it.

Frank asks a question, “Do you buy in Georgia? My understanding is you have to have a lender.” You have to be a mortgage broker in Georgia to buy in Georgia unless you are using your self-directed IRA, Frank, or you are partnering with somebody who has her license there. It is not that difficult to buy in Georgia. You just have to know how to connect with people or find somebody there who is licensed there for you, but we will go through a due diligence breakdown for you guys. Start to finish.

You will see collateral servicing notes. You will see what we need to look at with the spreadsheet, plus a checklist for you to, “Check, this is in place. Check, that is there.” You can do your due diligence from start to finish. Tony asked a question, “Once you decided to pull specific loans from a tape for due diligence, how much do you actually spend on different components of the due diligence when a lot of stuff might be readily available for free?” That is a great question, Tony. If you can get a PACER report, that is going to be $9 or $10.

I do not need to do then a skip trace at that point. What you are going to pay for will be a broker price opinion unless you have a realtor who can drive by and pull good comps for you. If you have a realtor in that area, that will save you from having to pay $150 or $200 for BPO. A title report is something you will pay in a title update. $85 to $100 is what you are paying, not a full title report. I always pull the top apart, even with the PACER.gov report. If there is no bankruptcy, then you are going to do some things and that is going to make things a little more expensive for you, but it is what it is.

That BPO for $150 may save you $50,000, so it is why it is important for you to look at these things. It is worth having somebody take a look at your collateral file and make sure the docs are there the first time for $150. You will understand the process and then what to go through. “Do you have a PACER through your law firm?” You should be buying a lot of notes, Tony. You should definitely buy a lot of notes.

NNA 111 | Note Due Diligence

Note Due Diligence: If a seller tells you, “You can’t review any of the collateral files until you fund,” that’s a no-no. Do not do that.


The good website for comps is for you to get a realtor that is local. You got to put eyes. You cannot replace that. You always got to put eyes on an asset. You could use NARRPR report, A National Association Realtors Real Property Report, but you got to be a licensed agent. It is just like an AVM. It is not putting eyes on the property.

It is not going to tell you if the roof is caved in or the roof caught fire or there is a slab there anymore. You got to have a realtor to do it. You got to make some offers. Usually, this is $199. If you get signed up before April 22nd, you can get it at half price for $98.50 by just going to WCNMasterclass.com. You need somebody to drive by. It is what a realtor is for, to drive by and tell you what it looks like for you. That is why you can order somebody at Baldwin Advisory Group and order a drive-by there.

If you are interested, WCNMasterclass.com, I want you to get signed up. We will send you the Zoom link for you to RSVP your spot, and then we will upload. We are working to finalize and adding a few more things into the actual manual of what we put together already. There is good stuff for you guys. It is yours truly teaching. I am going to have 1 or 2 other vendors come on and focus on a little piece here and there throughout the day. Rhe due diligence masterclass for you guys at WCNMasterclass.com is how you get signed up for that. I would love to have you.

Are there any other questions, any other comments, and concerns for you guys out there? Was this valuable? For some of you, this may have been the first time you heard this stuff? If you are a part of the WCN crew, the $97 a month membership is included. There is no additional cost for you to take part in. It is part of what your monthly $97 is.

Do not wait until the last minute. Get signed up so you would be ready to rock and roll and get rocking. You never know, we might just look for assets in your backyard. We will do that from time to time. Pull up a deal and something that you would take a look at for yourself. I do not have anything else. I just want to say thank you again for being on the show. Get signed up for WCNMasterclass.com.

As always, you can always go to TalkWithScottCarson.com to book a quick phone call and pick my brain for 30 minutes. If you have any other questions besides that, feel free to go there. Thank you, everybody. We will see you guys. The replays are on our YouTube channel. If you go to subscribe to WeCloseNotes.TV, you will be alerted when it goes live there. Other than that, everybody have a great day.


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