Anatomy of a worthless note

[Ellis San Jose]

Here is a brief summary of a real deal that ended up being a possible scam and most likely a worthless note for sure. It's a real time account of I note I did due diligence on for the last few days.  

Moral of the story: Learn the ropes before you rush in and write a check.

Day 1: Got a lead for a note secured by a "1st Trust deed" (at least that was the claim by the buyer)

Contacted the seller, and informed them I was a serious buyer & requested a copy of the note.  If everything was in order I could close quickly.

Received copy of note, pretty standard boiler plate format. Security was a trust deed on a condominium (or so it appeared) in a city close to where I live. 12% interest only monthly payments, balloon in a few months (the maturity date had expired a few years ago).

Looked at the signer of the note (borrower) , it was a corporation signed by an officer of the corporation.

I'm leaving for a family camping/fishing trip up in the mountains, so I don't have much time to dig deeper until I get back.  Asked the seller if he has received any monthly payments and if the note is current.

Seller replies, no payments received.

Then I ask, how much do you want for the note? He replies, send me your bid, he has a closing attorney that can handle the transaction once it is accepted.

Day 2: After a several days off the grid (no cellphones or computers) & in the great outdoors I am ready to get back to work.  I run the property information on the note & I can't find a match for that condo unit #. Hmm, strange, maybe the condo map hasn't been updated into the county database yet.  

After more digging...hmm something I don't see frequently, looks like the property is a co-op.

Call up seller again and ask a few questions, ask about the co-op situation etc.

Ask him why he just doesn't foreclose.  He says because it is a family member, he would rather take the loss then cause any more grief. Sounds reasonable.

Major red flags are going off in my head as I speak to him. 

Do more digging & find out that he actually tried to foreclose last year & the trustee eventually cancelled the foreclosure, hmm weird.  Luckily, I know the trustee & email him to see if he has some time to chat about foreclosing on a note secured by a co-op.   Trustee actually calls me up the same day & gives me the scoop. Turns out that this note could very well be unsecured.

As I look at a copy of the trust deed, there is no title insurance on the note transaction.

The owner of the property does not match the borrower of the note in question.

The borrower is a corporation & I find out that the corporation is suspended by the state.

Lesson 1: Just because there is a recorded document, doesn't mean it is valid or legal.

Lesson 2: Take your time and do a thorough due diligence. Don't forget what is important.

The old me would have obsessed over this & would have either postponed my vacation a few hours or maybe a day, at least until I got to the point of getting an offer out, or I would have been on the computer and phone during my vacation preoccupied with this note. In the old days I would have potentially ruined my vacation time with my family.

BTW: Had a great time fishing & camping. Hopefully next time I will do more catching than fishing.