Creative Due diligence and contingent staged funding
(By John D. Behle)
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.
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