(Article 5 out of 5 in the miniseries)
With this article, I conclude my 5-part miniseries on Real Estate Note Investing. Here, I will break down the processes of Due Diligence and Closing The Sale in a Partial Note.
If you’re not caught up yet, I urge you to read the preceding four parts to better understand the conclusion.
You can find them here:
Part 1 - Notes Vs Property: Which Is The Better Real Estate Investment?
Part 2 - 3 Tips On Taking Advantage Of Real Estate Note Communities
Part 3 - Using Self-Directed IRAs To Invest In Real Estate Notes
Part 4 - Breaking Down Partials In Real Estate Note Investing
I wrote this miniseries primarily for the Financial Independence, Retire Early (FIRE) community.
But if you’re a beginner in the investment field aiming for the same things — freedom from financial instability and an uncertain retirement — consider these articles written for you, too!
Understanding the Stability of a Partial Note Investment
Investing in Partial Real Estate Notes can be a lucrative venture, but it's essential to ensure the stability of the investment before diving in. One critical aspect of this process is conducting thorough Due Diligence on the following attributes:
1. Exterior condition of the home
2. Value of the property
3. The Title Report
4. Accuracy of the chain of assignments and allonges
5. Status of property taxes
Your ability to evaluate these crucial factors will signal the health and potential of your investment. Keep in mind that you typically have only two weeks to conduct your investigation.
Let’s break down the Due Diligence process.
Partial Note Due Diligence: A Step-by-Step Guide
Dissecting the myriad layers of a Real Estate Partial Note sale demands meticulous attention and an analytical approach. Thankfully, there are vendors to assist you with the right tools.
Step 1: Assemble Critical Documents
Initiate the process by obtaining the following:
1. An External Broker Price Opinion (BPO) from Dickie Baldwin. This delivers an unbiased appraisal of the property's exterior and comparative market value, ensuring your investment is anchored in real-world figures.
2. Title Report from ProTitle USA. A comprehensive and authoritative resource that affirms the clean lineage of the property's title by uncovering any hidden liens or discrepancies that could cloud your investment's future.
3. A Collateral Review from KC Wilson. By spotlighting potential risks or exceptions, this service enables you to scrutinize the integrity of the physical and legal ties binding your investment.
4. Tax Status from County and City Property Tax Collectors. Find their contact information online and inquire into the property’s tax information to confirm fiscal responsibility and safeguard against unforeseen liabilities.
Together, these resources build a robust framework for understanding your investment's viability.
Step 2: Evaluate Key Reports and Findings
Once you’ve gathered the essential documents, you must assess your potential Partial Note investment meticulously.
1. Analyze the exterior condition of the home.
This is your first glimpse into the property's care and overall marketability. The external BPO should affirm the absence of structural damage, reinforcing the property's integrity and ensuring the Partial Note's value far outweighs the home's market price.
2. Discover unexpected liens attached to the property.
Moving beyond the surface, gauge the value of the property not just as a number but as a resilient investment with growth potential. Use the Title Report to affirm a diligent recording of mortgage and assignments in the county. This proves the property's unblemished legal standing, free from encumbrances that could jeopardize your stake.
3. Unravel the chain of assignments and allonges.
Referencing the Collateral Review, trace the history of the note's ownership to guarantee its legitimacy. To ensure you have a strong foundation upon which to base your investment decision, confirm that no significant or major exceptions have come up in the report.
4. Find out the status of property taxes.
Reach out to the County and City Property Tax Collectors and check if the homeowner is current with taxes as it reflects on the fiscal responsibility towards the property. This is a critical aspect that could impact your investment's stability.
Together, these factors attest to the solidity of the Partial Note you intend to invest in. They will guide you toward making a decision grounded in diligence and insight. Though rigorous, the process sets the stage for addressing inconsistencies and ensuring they are methodically resolved.
Step 3: Addressing Discrepancies and Negotiating Terms
Due Diligence reveals insights critical to fortifying the foundation of your investment. When disparities emerge, as they sometimes do, you have the opportunity to delve deeper and ensure that every aspect aligns with both expectation and reality.
This phase is collaborative. You must discuss with the seller to examine and resolve any deviations from the anticipated outcomes. Trust is your objective, transparency is the key, and astute negotiation is your tool in laying the groundwork for a mutually beneficial agreement.
Below is a sample scenario of a buyer raising concerns with the seller and the latter’s actions to resolve them.
1. An assignment in the collateral does not appear in the Title Report. Seller provides proof of the missing assignment. Buyer follows up with ProTitle USA. They confirm that the report missed the assignment and update the report.
2. Some exceptions in the Collateral Review - are they a big deal? Seller confirms the exceptions are minor and wouldn't stop foreclosure if needed. Buyer asks KC Wilson to confirm. They concur.
3. Is the seller aware that the homeowner still needs to pay last year's taxes? Seller follows up with the homeowner who acknowledges that they missed the payment and commits to doing so in the next two weeks.
Such interactions are vital, not merely for the resolution of present concerns but as a proactive measure against potential future complications. They are instrumental in a successful transaction and set a precedent for diligence and thoroughness.
Now, it’s time to explore the steps involved in closing the sale of a partial note.
Moving Forward with Closing the Sale and Funding the Investment
This is it! The culmination of your meticulous planning and the commencement of a potential growth trajectory for your portfolio.
The Seller must hand over the following documents to you:
- Purchase and Sale Agreement (PSA)
- Amortization Schedule for the Partial
After signing the PSA, you may initiate the process of transferring investment funds from your Vanguard IRA account to your CamaPlan account (recommended). Follow these steps:
1. Get instructions from CamaPlan on how to do the rollover.
2. Call Vanguard for help to roll over funds to a different custodian.
3. Vanguard will take your information and send the check to CamaPlan.
4. Two weeks later, CamaPlan should receive the funds from Vanguard. You will then ask CamaPlan to send the funds to the Seller of the Partial Note.
5. CamaPlan will wire the funds to the Seller.
You will now start receiving monthly payments into your IRA account.
Engaging with institutions like Vanguard and CamaPlan, renowned for their reliability and expertise in handling investment transactions, makes for a fluid and secure exchange.
Finally, your foresight as an investor, guided by a comprehensive Due Diligence process, is actualized into a tangible asset. You can look forward to a prosperous venture in Real Estate Note Investing.
The Bassy Property Associates team is here to support you! In addition to the resources I’ve provided above, the ones below will also prove helpful.
Communities
Creating Wealth Simplified through Note Investing
"Be the Bank" Real Estate Note Investing
JKP Real Estate Note Investing
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