Jackson MS. Note Investing: What are the pitfalls?

[Account Closed]

I have company who I was considering purchasing a 5 year note but since it is my first rodeo, I was looking for guidance as to what to ask the note company?

I asked some basic question and here was their response:

"All of our notes are handled by a closing attorney or title company who records the transaction at the county putting you in the 1st lien position. We are not pooling funds. You will be a single lender dealing with a single borrower. This is a non-recourse loan; which means it is 100% secured by the property.

Title insurance is absolutely required on every single property we deal with.

We have an automated payment system in place that facilitates bank to bank transfer for monthly payments. If a payment is late, we are notified by email and immediately inquire as to why. Additionally, we monitor property taxes to insure payment.

We haven't had a single default, but if one were to occur, we will act on your behalf to take steps including issuing a Notice of Default and starting the foreclosure process.

When we send initial information on the note purchase by email, you will receive an appraisal, after-rehab photos of the property and a Note Purchase Agreement (a non-binding intent to buy the note).

Once you sign the Note Purchase Agreement and return it to us, the closing attorney prepares the closing documents and sends them to us for review. After our review and approval, the documents are sent to you for review and approval.

The closing package includes the HUD-1 closing statement on the purchase of the property, original note and deed of trust (or mortgage), assignment of both, hazard and liability insurance showing you as the additional insured and the title policy in your favor."

Where could this go wrong? 

[Dion DePaoli]

The majority of this is fairly unimpressive.  Further, it has a tone to it (could be the way it is posted) which seems to box you into without, IMO, proper due diligence.  

It's not clear from the post what the purpose of the loan is nor the roles of the parties including the borrower and this company.  

To say you will get a "non-binding" and "purchase agreement" in the same sentence is an oxymoron.  

Some details illustrate a misunderstanding of the way a mortgage or deed of trust operate.  Example, again could be the way it was posted opposed to quoted from source, but there is not "both" (implying two things) when it comes to hazard and liability insurance.  Nor am I a fan of verbiage "additional insured and title policy in your favor"

To answer your final question, "Where could this go wrong?" - Everywhere.  

The origination structure, role of the parties and flow of your funds right now is more important than the percents of UPB. I suppose they are offering some form of return that attracted you to begin with, some not all of the percent of UPB can be set aside for the moment so we can understand the risk and then go back to price. This seems to imply a PAR loan sale. With a 5 year balloon, I am assuming, this is a Primary Residence for the Borrower. So, the rehabber here is also the originator and you are cashing them out. When a loan is sold, the whole loan is generally sold, so them implying they can some how monitor this Borrower's performance is also a concern. Do they plan to service the loan?

If you want to add any details to this, more commentary might be able to come forward.  Like I said, it could be the way the details are posted or passed from the conversation to the post loosing some proper reference and perhaps details.  All we have to work with is what was written.