Steps to a Note Transaction
Wondering how the note buying process works?
Note Process
What steps do I need to take as a note investor?
How can I acquire my next note?
Here the 7 steps you must take to complete a note transaction:
1. Locate Note Holders
The first step is to locate current note holders that may be interested in selling their note for cash. This may be through direct mail, referral networks, online marketing and various other methods. An interested note seller will then contact the buyer via their website, email or phone number for more information on selling their note.
2. Compile Information
After the note holder initiates contact, the next step is to compile the necessary information using the Note Analysis Worksheet. This will give the note buyer an understanding of the current status of the note and insight into any potential risk. It is critical to obtain accurate numbers, as this will determine the viability of the deal.
3. Verify Information
In this stage, the note buyer performs a series of calculations to determine the loan to value (LTV), investment to value (ITV), number of payments, interest rate, payment amount, and balance due on the property. This is to independently confirm the numbers the seller has provided. If there are any discrepancies, the seller must be contacted to determine the accurate numbers.
4. Determine Pricing
After all calculations are performed and information is verified, the next step is to determine the pricing of the note. The note buyer must be aware of the potential risks of the particular deal. Furthermore, the buyer must establish their minimum discount, minimum commission and minimum yield for the deal. Once these baselines are established, the buyer can structure multiple ways of acquiring the note, including a full purchase or a partial purchase.
5. Negotiate Acceptance
Once the note buyer has determined the best strategies to acquire the note, it is time to present the offers to the seller and determine which option will best suit the seller’s needs. It is important to understand the reasons why the note holder is looking to sell their note at this time and provide the optimal solution to their unique situation.
6. Due Diligence
At this point, the seller has accepted the offer. The seller must sign the initial purchase agreement and commission agreement. Once the contracts are finalized, the note buyer will conduct the necessary credit check, property appraisal, and title review.
7. Closing and Funding
After the credit, appraisal and title have been approved, the buyer will proceed with the closing and funding process. The seller must provide the buyer with notarized documentation of the note, including the original deed of trust. The buyer must compile a complete closing package with document checklist. Once the buyer has secured the documents, the title assignment and transfer will be recorded and the deal will be funded via check or wire transfer.