Notes and Due Diligence

[Matt Waggoner]

Hey everyone.  I have been investing in options for years and want to expand into real-estate.  Note investing seems to fit my lifestyle the best.  As you can probably understand, I have many questions; but here is the one for now.

I get the discount rates, COC return, performing, sub-performing and NPN. I have a handle on arbitrage and will eventually use leverage to grow my business. Until I fully understand all the in's and out's, my deals will be mostly cash.

The question I have is:  What do you look for in a note while performing "due-diligence?"  Also, what is mean't by a, "conforming loan?"

Sorry if these are stupid questions, but I'm asking anyway!

Thanks!!

[Chad U.]

@Matt Waggoner

This is by no means an all encompassing list, but gives the basics of what to look for in your DD on a 1st lien note:  

Lookup unpaid Taxes

Check Bankruptcy status

Contact HOA management Company (if any) - back HOA dues owed?

Get O&E/Title Report Determine Tax Liens, Judgements & Junior liens (HOA, 2nd ,Mechanics Liens, etc.)

Verify FMV:

Get local Realtor CMA

Ask Realtor about neighborhood/local market details (gang/high drug use area?)

Verify occupancy status - vacant/owner occ/tenant occ.  Check with utility companies.

Order  drive by w/pictures if Realtors don't respond (www.wegolook.com, etc)

Check if Borrower's mailing address is different than property address?

Call County to verify Tax redemption period/back taxes owed/Tax sales/Tax Certs info

Review collateral file against Title report and confirm assignment chains match, vesting info matches, etc

As for conforming loans, it just means it fits within the parameters of Fannie Mae, Freddie Mac, FHA or VA guidelines with the biggest differentiator is the loan limit of $417K or less.   

If you are considering getting into this space, I'd highly suggest getting some good education 1st and/or JV'ing with someone that has experience to guide you along. This is a tricky business with a lot of moving parts and can quickly turn sour with a bad purchase.