Interesting Case Study - Note Investing - $100k Loss mitigated

[Chris Seveney]

We were deep into due diligence on a loan purchase, and everything looked solid. The initial title report came back clean—no liens, no encumbrances, no red flags. But as part of our SOPs, we always verify title details using additional sources. That’s when we spotted something our initial search didn’t pick up—a recorded contract for deed that had been filed after the prior owner sold the property.

We immediately went back to the title company and had them recheck. Sure enough, the results revealed a serious issue. A previous owner had sold the property but continued collecting payments from buyers under a contract for deed. These buyers had nearly paid off their purchase when they were suddenly told they were being evicted—despite having proof of payment and an agreement that should have protected them. Their attorney was already preparing to file a lawsuit, meaning any purchase of this loan would immediately become a legal battle.

To make matters worse, the seller was trying to structure the contract with no reps and certs, which meant if we had proceeded, we would have taken on the full risk with no recourse. Title insurance wouldn’t have covered the lender policy based on their exclusions. That could have been a $100k mistake. 

But experience teaches you two things: Always have a solid contract agreement and understand it (which we did and why we did not sign a contract with no reps and certs) and that due diligence isn’t just about relying on vendors—it’s about knowing when to dig deeper. This is why having strong processes in place is critical. If we had simply accepted the initial report, we would have walked into a financial disaster. Instead, we protected our investment by following our SOPs, verifying everything, and never assuming the first answer is the full story.

[Don Konipol]

Quote from @Chris Seveney:

We were deep into due diligence on a loan purchase, and everything looked solid. The initial title report came back clean—no liens, no encumbrances, no red flags. But as part of our SOPs, we always verify title details using additional sources. That’s when we spotted something our initial search didn’t pick up—a recorded contract for deed that had been filed after the prior owner sold the property.

We immediately went back to the title company and had them recheck. Sure enough, the results revealed a serious issue. A previous owner had sold the property but continued collecting payments from buyers under a contract for deed. These buyers had nearly paid off their purchase when they were suddenly told they were being evicted—despite having proof of payment and an agreement that should have protected them. Their attorney was already preparing to file a lawsuit, meaning any purchase of this loan would immediately become a legal battle.

To make matters worse, the seller was trying to structure the contract with no reps and certs, which meant if we had proceeded, we would have taken on the full risk with no recourse. Title insurance wouldn’t have covered the lender policy based on their exclusions. That could have been a $100k mistake. 

But experience teaches you two things: Always have a solid contract agreement and understand it (which we did and why we did not sign a contract with no reps and certs) and that due diligence isn’t just about relying on vendors—it’s about knowing when to dig deeper. This is why having strong processes in place is critical. If we had simply accepted the initial report, we would have walked into a financial disaster. Instead, we protected our investment by following our SOPs, verifying everything, and never assuming the first answer is the full story.

 Thanks for the very valuable information, Chris.  You said that the coverage of the loss and I assume the cost of legal defense was an "exclusion" to title coverage.  Is it possible to remove this exclusion (obviously by paying additional) like it is with a "shortages" exclusion?

These are a number of "scams" out there; not all involve title reports.  back 20 years ago when I was doing residential deals I went to see a property on a cul de sac.  when I arrived I saw that the house in question was right next to a house that had partially burnt down. As I stared at the number sequence of the houses in the circle, something seemed off.  Later, utilizing plats, surveys and past history through the appraisal district, I was able to. determine that the seller had switched addresses between the burnt house and the house next door, attempting to mislead a buyer into thinking he's buying the undamaged house.  for those buyers who don't check these things, and not using an attorney, it very possible they could have bought the burnt house and thought they were buying the undamaged house.