Real Estate Notes

[Ken Bucho]

I am buying a partial on a note and we are finalizing the agreement does anyone know where I can get a contract that is already written for this transaction.

[Bill Gulley]

Ken, welcome to BP.

I'm sure the above comments concerning compliance were meant for @Dion DePaoli and not so much at me, (LOL)!

You may or may nor have Dodd-Frank issues. A attorney should be able to tell you.

I agree that the seller not having an agreement is a red flag. Your thinking in a participation may sound good, but how you structure it may not be so sound.

I have not heard of your community, I don't know if you're part of LA or if you're in a rural area, if you're in a rural area finding a good finance attorney might be difficult, regardless, find one or brace yourself in the future.

There are several ways to buy payments or participate. You can share in all the payments remaining or buy any part of a certain number of the payments due, you could assign payments first due after settlement, some future payments during the note term or the last payments due. Each approach has different considerations as to the secured collateral, ability of the borrower to pay, collateral value, default risks and the annuity streams will have different values. You can have different yields assigned as well under certain events, any increase to you as to a required yield under, say any event of default could earn additional payments.

You can purchase the note with a repurchase agreement, buying only the future payments to be received. I don't recommend this for individuals but in corporate structures with perpetual life or that beyond the term of the agreement can be done. You can assign the note and security agreement. You need the note endorsed and delivered, an assignment filed for the note and deed of trust, you need to have the note seller give notice of the assignment to the borrower with new payment instructions for amounts due, you'll need an accounting much like a HUD-1 settlement transaction along with tax filings for 1098/99 and reporting requirements. Escrow must be transferred or credited (I suggest transfer them, if any) under the agreement. You'll want the loan file including all documentations, tax receipts paid as well as insurance binders. You also need change the lien holder's name and address on any hazard insurance policy.

As mentioned, see an attorney.

Probably the easiest way for an individual is by separate contract, to "buy" say 60 payments at a discounted rate, doing so as a commercial loan and taking a security interest in the subject note. This is known as "hypothecation". The issue is the creditworthiness of that note holder, how the note is held and ability to repay above the collateral assignment of your note and deed of trust or mortgage with a UCC filing. It might be good too to have a full assignment made with the original note being endorsed (just like endorsing a check to another payor) held in escrow. Your attorney may want the bases coved for a full assignment as mentioned above to be escrowed as well.

Hypothecation allows the note holder to continue servicing the loan and make separate payments to you, thus avoiding your servicing, to some respect, under Dodd-Frank, but servicing requirements may apply to you depending on the note secured.

You can also structure it as a hypothecation and assign servicing, this allows you to collect payments from the maker of the secured obligation, again, without having to assign the note to you with an obligation to sell or assign the note back at the end of your rights to payments.

You need to go through the due diligence of a full assignment and deed of trust even in taking only part of the payments.

Any purchase arrangement for the buyer should be done with recourse. This can be agreed so that in the event you fail to receive the agreed number of payments that it becomes an obligation of the note seller to make up any difference. Usually guarantees carry a different yield to the note buyer but it can be anything from the return of the discounted capital invested to the full yield expected by the note buyer. Events of insured losses, bankruptcy or payments not received after a certain date may play on who guarantees what, for how long, under what conditions and to what extent.

Sorry, I wrote my own assignments and don't have access to one, you might beg one from a broker that has such agreements, they could probably line out any unique issues used by them. These would not be for you to use as much as to give to an attorney for them to fine tune saving you some money. These contracts are more involved than a standard RE contract, depending on the collateral and terms they can be as involved as you want to make them, meaning you could have a few thousand wrapped up with your attorney. The hypothecation route will probably the cheapest way, IMO.

See, not but a bare mention of Dodd-Frank..... LOL! :)