What Questions Do You Ask Before Buying A Note

[Tracy Z. Rewey]

Hello BP Note Investors!  We all have our "go-to" list of questions we want answered before buying a note.  I recently put together a Baker's Dozen of 13 questions I like to ask as part of due diligence (because I couldn't keep it to a dozen).  Wondering what you would add?

1. How long has the buyer been making payments and are they current?
2. What is the current value and condition of the property?
3. How much equity is there (LTV & ITV)?
4. What is the creditworthiness of the buyer and are there any bankruptcy filings?
5. Is there a servicer collecting and validating the payments?
6. Do the documents match the terms presented for sale?
7. Are the real estate taxes paid current?
8. Is the Property insured for fire and other hazards?
9. Is there a title policy and updated title report?
10. What is the lien position and what else is owed on the property?
11. Who is the current holder or seller of the note being purchased?
12. Where is the original note and will it be delivered at closing?
13. What is my overall risk vs reward for each exit strategy?

[Brandon Plombon]

As a commercial lender, I'd want to see the three main things: Cashflow, Collateral, and Guarantees.

- I'd like to see the financials from the supporting documentation.

- Calculate debt service coverage ratio based on the financials

- What type of guarantees are attached to the note?

[Tracy Z. Rewey]

Great input @Brandon Plombon Cash Flow is king on commercial and investment properties.  Started the list for bread and butter residential (which makes me realize I should put that to the description). An add-on list or commercial, investment property, and land would be a great addition. Thanks for the idea.

@Brandon Plombon

[Brandon Plombon]

@Tracy Z. Rewey you are welcome! Let me know if you would want to get together and discuss further 

[Chris Seveney]

Tracy

Great list. One item I would add is how was the property value determined? More I speak with institutional players the requirement for an appraisal (and not a BPO) is imperative.

[Tracy Z. Rewey]

@Chris Seveney So true.  When I was on the institutional side we would require a drive-by appraisal (since we couldn't get inside the property on an existing note). The BPO is so subjective and dependent on the quality of the agent performing the analysis, compared to an actual appraisal by a licensed appraiser.  A BPO can make sense if there's been some seasoning with obvious appreciation/value increases and you want to be sure the building is standing. However, it can miss the mark in other situations.