 President's
Corner
During the due diligence process you, as
a note broker, have a responsibility, no a duty, to provide your investors with
all of the information that you receive from the note holder. Whether the
information is good or bad, positive or negative, inconsequential or notable you
must pass it on to the investor.
Last
month I was assisting a new broker in the industry with his first transaction.
The price was accepted and the broker collected the appropriate copies of
documents and information. Everything looked satisfactory, the investor gave
their preliminary approval and due diligence was started. First on the list was
the payor’s credit. A credit report was run and although the credit wasn’t the
greatest the credit of the payor was approved due to a good sized down payment
and 15 months of seasoning.
The next step was the verification of
the value of the collateral. In this case as long as the value came in for the
sales price of the subject property we would be ok. The collateral on this
transaction was a commercial property so it would cost a little bit more and
take a little longer to get done. When the appraisal was received, although the
property was in a mediocre neighborhood it was in good condition and the value
came in for a little above the sales price. The investor approved the
appraisal.
As the appraisal was being worked on the
title company was searching the public records and preparing the title
commitment. The title commitment came in a few days before the appraisal and
showed that the note was indeed in first position and that there were no other
liens or encumbrances that would affect the value of the collateral or the value
of the note. One little hurdle came up that the property taxes were
delinquent. The property taxes were either going to have to be paid before we
could fund or we could pay them out of the seller’s proceeds. After a phone
call to the broker a signed letter from the seller was faxed over saying that
she had agreed to have the delinquent property taxes deducted from her
proceeds. Issue resolved.
After the credit, appraisal and title
were reviewed and accepted by the investor the closing documents were prepared
and sent to the seller. A call was placed to the broker to alert the seller
that they were coming and who he would receive them from along with instructions
on what would need to take place before the transaction closed and funded.
Included in the closing package were a simple Payment History Verification Form
and Estoppel Letter for the seller to fill out and to verify for us that the
payments were current and that there were no offsets or warranties against the
note.
The seller received the documents and
returned them directly to the investor a couple of days later. Everything was
perfect except for one thing. The seller had made a note on the Payment History
Verification that she had not received a payment in 3 months. The closer called
the seller and asked her about this and the seller said that she had told the
broker about it in the beginning and that the broker said it would not be a
problem.
Well, to make a long story short the
transaction was eventually cancelled. I guess the broker thought that we
wouldn’t find out. He guessed wrong. He wasted my time and the investor's time
and for what? A commission? Come on. There are plenty of good deals out
there to go after and it is never necessary to hide or lie about information
just to get a deal.
During
the due diligence process the investor will ALWAYS find out everything about the
transaction. Don’t waste the investors time, money and effort. Don’t waste
your time, money and effort. Disclose EVERYTHING that you find out from the
note holder when you find it out. It’s better to not do a transaction at all
than try to hide, change or lie about anything to the investor. Run your note
business straightforward, honest and fair…the way it should be, and you will
have a long and prosperous relationship with your investors.
More to come next
week! Remember, Success Demands
Action! Keep on marketing, it’s going to
work! TWITA!
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