The 411 On Real Estate Note Investing Collateral Files

You might be interested in pursuing note investing as a career to earn yourself a passive income, or as a stepping stone to dig deeper into the world of real estate. If so, then note investing is perfect for you.

Once you begin your journey in note investing in real estate, you will come across the term “collateral files” a lot. If you are just starting out, you might get overwhelmed, so allow me to break down the term for you and give you an idea of what it is, and what it is for.

What the heck is a Collateral File?

A Collateral File in note investing is literally a set of documents that are used for analysis, and later, as your security for your investment. It consists of all the original and necessary documents that were put in place at the time the loan was originated. Some examples of these documents are the actual promissory note, and the mortgage or the deed of trust to name a couple.

The two types of Collateral Files:

The version, the Electronic Collateral File version consists of all the scanned copies of the original documents of the note that you are looking to buy. You get this before you actually buy the note. If your purchase price offer is accepted by the seller, you’ll get these digital files that pertain to this note.

The documents generally are in the form of PDFs. The best thing about acquiring the electronic version is that you will have access to extra scans of documents that may not be provided in the Hard Collateral version. Such files may include a BPO (Broker Price Opinion), letters or correspondence, statements of accounts, pay history, and collection notes (written log of communications between servicing company and the borrower), among others.

The second version is the actual Hard Collateral File – a physical file with all the original documents that are wet signed. These physical files are kept to a minimum because of storage space. Imagine how thick the file would be if every single letter or piece of correspondence was kept in the physical file! You will get the Hard Collateral File after buying the Note, containing all of the documents concerning your purchase. You want to keep this in a very safe, fire proof place (often with a third party custodian) because THIS file is the security for your invested dollars! If anything happens to the original documents, it may end up voiding your claim to the debt that is due to you, so BE CAREFUL!

What’s important to remember..

In the Hard Collateral File, you should have all the wet stamped documents. If you don’t, as I mentioned above, it can nullify your ability to foreclose or collect the debt on the Note you just bought. Both of these files are paramount to your note investing career, so be sure to get both complete versions to be successful in your journey.