Beware Brokers Promising Sunshine and Guarantees

[Steve Hodgdon]

ust had dinner with an experienced note investor. Told me a story of a fairly well known broker/investor who sold him a contract for deed claiming asset value $70k. paid 35k. Note was current. Immediately went into default.

As he was hiring attorney for eviction, started getting big utility bills, fines from St Louis, then a warrant for failing to pay utility bills which had been accumulating. Seller KNEW this.

House was abandoned. flooded basement. 2500 water bill.

He was lucky he had just been introduced to a local flipper. Sold property to flipper for $25k on 2 year I/O 10% note.

total loss $8000 on a $35k investment.

COUNTER PARTY RISK is primary. NEVER TRUST the valuation the seller gives.

I have several personal stories that are like this. Why don't we ever check references? We're lazy, too trusting, greedy, forget past bad deals too quickly. Just takes a little time to dig through county records.

Seller promised to buy it back if there was a default. Of course that didn't happen. And isn't that creating a security anyway? My contract gives me the right, but not obligation to buy back @ 90% or make payments. I'm more concerned about reputation and honesty than quick profit. Still, it's only happened once. 

Anybody want to share their due diligence steps on sellers? I've bought from "big players" and have had the same misrepresentation problems as small brokers. 

[Jim Hartmann]

Thank you @Steve Hodgdon

That is a good reminder of doing our full due diligence.  I heard it said long ago "Trust, but verify".  As you mentioned though, we are usually wanting to be more trusting of others and their intentions than we should be.  

For us, we will look at note, property and buyer in as much detail as we can find.  Looking at county taxes is usually easier to find than other liens, but will check for other info on the property that we can find.  On the buyer, if we are keeping the note or selling to an investor we get the pay history or an affidavit stating payments were made if the pay history is in question.  We also have the right to check credit if needed, but we have found that if pay history is good, they are likely to keep on paying.  If we are not comfortable with what we are seeing in the pay history (late or no payments), we will usually just walk away.  If taxes are not paid or if we find other negatives on the property, we walk.  If we are selling the note to an institution, they usually pull a credit report and let us know what they find.  

There are no guarantees, but I appreciate the reminder to not skip steps and to learn to trust our gut intuition.

Jim