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President's Corner

Last week we started to examine exactly what we are looking for, what our funding sources do purchase, what we can help people with AND what we don’t do.  Once people know that you have access to millions of dollars to buy notes they will be contacting you for every conceivable real estate related cash need you can think of. Last month we looked at Second Position Notes, Non Performing Notes, Simultaneous Transactions and Loans and whether or not we can help people with them or not and if so how. 

Hopefully you have a clearer view of what our primary job is in our industry, the purchase and sale of Seller Financed Notes.  We purchase existing seller financed first position notes secured by real estate on the secondary market.  These are called these “Purchase Money Mortgages.”  To further explain, we buy existing first position notes secured by real estate that were created when the seller of a property carried back a note to facilitate the sale of the property.  An existing note is one that the seller has already received at least one payment on it. This is 99% of my business, the purchase and brokering of existing first position seller financed notes secured by real estate on the secondary market.

So why is it that in our little niche that our investors and funding sources only buy the Seller Carryback notes that are these “Purchase Money Mortgages”?  Well, it has to do with the differences between negotiable instruments and contracts and the definitions of being a “good faith purchaser” and a “holder in due course”.  Following is an explanation and court case that explains it more clearly:

“…Negotiable instruments – checks, bank notes, and so on – are promises to pay or orders with an implied promise to pay, and are thus contracts. But they differ from contracts in two important ways. First is the idea of “merger.” Normally, a contract right is an abstraction that is located nowhere in particular but belongs to a party to the contract or to a person to whom that party has assigned that right. Possessing a copy of a normal contract has nothing to do with who has rights under that contract. But in a negotiable instrument, the contract right is “merged” into the document. Assignment of that right takes place simply by transferring the document (in the case of a bearer instrument) or by indorsing (signing) and transferring it.
            The second big way negotiable instruments differ from contracts is the “good faith purchaser” or “holder in due course” rule which is illustrated by Miller v. Race. In a normal sale of goods under common law, the new owner’s title to the goods is at risk to the contractual defenses of a prior owner. For example: Alice is Dr. Barb’s patient and is feeling ill. Barb says to Alice, “sell me your Mercedes for $100 and you’ll feel a lot better.” Alice complies, but then later realizes she was snookered. Meanwhile, Barb sells the car to Chuck, who knows nothing of how Barb acquired it, for $50,000. Under contract law, Chuck can get no greater title to the car than Barb had. But the contract is void for undue influence, so Barb doesn’t have legal title to the car. Ergo, Chuck does not, either. Alice can sue Chuck to get her car back. Chuck must then sue Barb for his $50,000, an expensive and often-futile thing to do.
            Contract defenses are invoked so commonly that any downstream owner of a good is at significant title risk under common law. This risk could make things very bad for paper money, which to work efficiently should change hands dozens of times or more. Thus, Miller v. Race has long been celebrated as an advance that made bank notes under the common law a more efficient form of money. Miller helped create for promissory notes under common law (including, crucially, bank notes) what is now known as the “good faith purchaser” or “holder in due course” rule. Summarized, this rule says that a holder in due course who obtained the instrument for value, in good faith, and without notice of any upstream claims or defenses, is entitled to enforce the promise to pay in that instrument regardless of most kinds of such claims or defenses.
            The good faith purchaser rule can cause its own problems. For example, when you sign a promissory note to get a mortgage, these days the bank usually sells that note to an aggregator, who bundle up these mortgage notes in packages and sell them to investors. In most states if you make your mortgage payments to Bank A, who has meanwhile sold the mortgage to Bank B (and perhaps not told you), Bank B can bill you for that same payment and foreclose on your house if you don't pay. You have to pay Bank B and then beg, plead, or sue Bank A to get your money back.
            Today, the differences between negotiable instrument law and contract law are sufficient that negotiable instruments and sale of goods are in different and largely distinct sections of the U.S. Uniform Commercial Code….”

I hope that explanation helps you understand better of why we only buy Purchase Money Mortgages, because when we do we are a “holder in due course”.  Next week we will talk about more of the basics of a Seller Carryback note and the different documents that we are actually purchasing when we buy a seller financed real estate secured note.  Remember, Success Demands Action! Keep on marketing, it’s going to work! TWITA!

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Question of the Week

Q – Hey Jeff: 

          I currently have a business note I would like to submit for pricing. What criteria is required for a business note quote? Thanks!

If the business note you found DOES meet the above criteria I will email you our Business Note Worksheet for you to fill out as completely and legibly as possible and return to me for pricing options. Hope this helps!

                                                                               ~ Jeff

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