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Avoid the 7 Deadly Mistakes Sellers Make When They Carry Paper (III of VII)

October 7th, 2009 by Dawn Rickabaugh

Deadly MistakeDeadly Mistake #3: Lose the original note

The original note is the “green stuff,” it’s the currency, it’s “the thing you’re selling;” it’s a negotiable instrument.  A copy just won’t do!  The original John Henry (signature) of the Buyer/Payor, even if it’s not very attractive, fluid or sophisticated, is the silver lining in your paper.

Losing the original note is akin to committing Original Sin all over again, and do you really want that on your conscience?  Won’t you have enough to worry about on Judgement Day?

And it kind of makes sense, doesn’t it?  Would you be able to pay your mortgage by sending in a nice photocopy of your check to Bank of America?  Or the Federal Government? (Wait, they don’t own all of the real assets in the country yet, right?  Sorry, got ahead of myself).

I was recently working with a probate attorney in Los Angeles who is liquidating an estate holding a $500,000 seller carry back note, secured by a commercial property.

I was able to offer the estate more than the Payor on the note was offering, so we were ready to open escrow, but none of the heirs/beneficiaries could find the original note.  And that put the estate/note holder in a very awkward position.  The Payor could potentially cause problems if he found out and wanted to contest the loan.

So, instead of alerting the Payor that they couldn’t find the original note and asking him to sign a new one, (which he probably would have refused to do) they just decided to go the path of least resistance and let him refinance them off at a lower price than they could have gotten if they’d had all their ducks in a row.

Steroid ManSmart tip:  Keep your ORIGINAL note in a safe place . . . and while you’re at it, place all the other important note documents right alongside it:

copy of the deed of trust or mortgage
buyers credit application (1003)
buyers credit score
escrow instructions
escrow closing statement/HUD-1 settlement statement
title insurance (you should have a lender’s policy)
hazard insurance documents (you’re the Loss Payee, right?)

If I’m buying your note, I want to be the legal holder of the note, so I need the original note in my possession, and the note properly endorsed to me: (”For value received, Pay to the Order of Dawn Rickabaugh” and it must be signed and dated by the Note Seller).

If the original note is in my possession, and is properly endorsed to me, then I am a holder-in-due-course, which gives me some substantial protection should any legal issues arise.

In some cases where the original note cannot be found, you can purchase a bond, but it’s expensive.  In essence, a third party company may be willing to insure the payment on a note that can’t be located, but they’ll charge you through the nose for it.

This excerpt is taken from “Seller Financing on Steroids: Pumping Paper for Power, Peace and Profits,” a guide that can be downloaded for free at: www.NoteQueen.com.

Always consult with your CPA, tax attorney and/or financial advisor before selling property or paper.

Dawn Rickabaugh is a RE broker with expertise in seller financing and RE notes (trust deeds).  www.NoteQueen.com  626.641.3931

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