|Creative Due diligence and contingent staged funding
The key to being able to move quick SAFELY is to be able to use alternative sources for due diligence
if the standard ones are not available. This doesn't mean to cut corners on due-diligence, just to speed
up your steps in the buying process. Sometimes you can progress with an approximation or less than final
check on something and in many cases you can be open to accepting an alternative verification of facts
other than the "normal" process.
Establishing Integrity of Title
For example - Let's say it would be a few days to get a policy of title insurance from your title company.
1) Get a PR or preliminary title report - which is the research without the insurance. The title company
could then issure the insurance later.
2) Do your own title search through an employee, yourself or a third party. I have a friend who does his
title searches for $10 by paying one of the county recorder's employees to do it at lunch time or on a
break. In some areas it is internet available. As long as you know how current they are, you may be able
to pull an abstract in seconds. For example, in one of our counties it is available in seconds, but not
necessarily current. You can always pull what they have available and research the last few weeks or
months (the time since the last entry).
3) Move ahead based on a recent Title Report. You may want or need your own report later on. Or an investor
may want one. When a note is created much of the time there was a title report and insurance in the sale
of the transaction. In some, but fewer cases, there was actually a "Lender's policy" on the note itself.
This doesn't tell you the current status as far as loans being current, etc. but can help to move a
transaction along. Sometimes you find the problems with the title that they found at that time in the "P.R."
that were to be straightened out. Many times someone slipped up and didn't finish the job, yet you may
find the required documents in the title company's file or when it is pointed out to them, they finish
clearing up what they originally had agreed to. No need to pay twice for work to be done.
CAUTION! - In this or any form of "due-diligence" on a note purchase - NEVER - rely long term on any
representations of others or documents they have provided. There was a good example a few years back when
Broker A brought a note to Broker B. Broker B and the funding source relied on title company documents that
Broker A provided to fund the note. Guess what? Broker A ran away and Broker B and the funding company
ended up in a lawsuit when it came to light that Broker A had worked for a title company and fabricated
the documents. Please read the first of a series of articles on
"Risk Management" that will help you know
the cautions. In addition, no note buyer is fully dressed without a copy of "Lorelei's Legal Lessons" in
their back pocket.
Establishing Property Values
The value can be the same way. If you need an appraisal, but it is going to take a while, you can:
1) Get a drive by. An appraiser may be able to give you a pre-liminary estimation of value quickly while
they work on a more precise value.
2) Have a non formal appraisal. An agent, broker, employee or someone else can do a drive by and gather
comparables so that you have a good estimate of value. You can then follow up with an appraisal.
3) Do your own appraisal or comps. You can learn the process to be able to establish value yourself. With
the internet or MLS access, you can do this in seconds.
Even if I am getting a formal appraisal and title insurance, I do these things anyway. It saves time if
the deal has problems as I can back out early if the deal is un-doable. It saves costs as I don't have
to follow through on a bad deal. It gives me the ability to "audit" the professionals. I do not trust or
rely on appraisals and title reports even if I have them. I will not risk my money or that of an investor
on the representations of others.
The same steps also give me the ability to close safely without the professionals.
If problems appear, we can do "contingent staged funding". We can always fund a lower amount with the
agreement to fund more when and if certain conditions are met.
For example, years ago we had a very hard time getting a credit report on the payor. This note deal went
on for months because the institution couldn't determine exactly what the buyer's credit looked like.
Amazingly the LTV ratio was about 10% and the note had been seasoned for 20 YEARS. I hadn't really given
much thought to the contingent funding yet, so we waited.
So let's say a note is worth $45,000 if the credit turns out as good as represented, yet only $40,000 if
the credit were poor. Could you fund 35-40k with an agreement to fund the balance when and if the credit
turns up ok? Yes.
Title problems can be the same way. You could always hold back money to deal with the problems in a
"Worst case scenario" like to pay off a lien that is supposedly cleared up. Then you fund the balance when
the deal is clear.
Actually the contingent staged funding cases are rare, but it really opens up your options. The main thing
that helps is to be able to do the due-diligence quickly. I can check out a note and be comfortable enough
to buy it in just a few minutes. IF I were to broker it (I don't broker), I could then follow up with their
required due-diligence over the next few days or weeks that it might take.
© 2000 Cashflow Specialists. All rights reserved.
John D. Behle, is one of the premier educators and practitioners in the field of "Real Estate Paper".
John has an extensive background in consulting and coaching. In addition to the original "The Paper Game"
book published in 1982, he is the author of 7 other books, several home study courses and over 200
nationally published magazine and newsletter articles on paper investment. You can visit him on the web at
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