by Delbert Ashby
PROMISSORY NOTE
The note will tell you what you are buying. Some of the things it will show include payment amount, date first payment is due, date subsequent payments are due, face interest rate, the original amount & term of the loan, information on the balloon (if any), if the note is assumable, where the payments are to be made, who the note holder is, terms related to late payments, prepayment terms and possibly foreclosure terms. It will also reference the associated security instrument. You can see that in addition to the note you are buying, it would be useful to see the same information for any underlying senior debt.
SECURITY INSTRUMENT
The security instrument, usually a trust deed or mortgage, defines the legal rights and obligations of both the note payor and the note holder. This includes the circumstances under which you can recover the “security” (property) through foreclosure. In this document you will find:
the legal description and address of the property
the name and address of the trustees or mortgagee
the note holder’s name and address
the amount of the debt
covenants and agreements that apply to both the security and the note. These cover everything from insurance coverage and maintenance of the property to whether the note/security instrument is assumable.
The standard “Fannie Mae” Deed of Trust form often used has 23 “standard” clauses plus the possibility of Riders and Amendments. The really important thing with this document is to read it, understand it, AND LOOK OUT FOR CHANGES, AMENDMENTS, RIDERS, AND EXCEPTIONS. If you don’t understand the impact of what you have read, get help. FIND OUT.
Not to over-emphasize, but get copies of both the note and the security instrument and READ CAREFULLY. Then take the time to plan a strategy for your offer/negotiations. I will give you more on negotiating strategies in future issues.
SETTLEMENT SHEET
The third document mentioned above — the settlement statement — is often called a HUD-1 since that is the most commonly-used form. It is effectively a financial accounting or balance sheet for the transaction when the note was created. It contains a ton of good information. It will show a lot of financial detail but it will also identify a number of the parties to the transaction and other legal data. In most cases, the settlement officer must sign a certification that “the settlement statement is true and accurate and that funds were disbursed in accordance with the statement.” I feel a lot safer using this information than the “approximates” the seller wants to give you over the telephone. Take the approximates but give out no numbers without the actuals. The settlement statement statement will usually show:
The actual sales price of the property
How much cash the property buyer has in the deal
Whether title insurance was purchased and who issued it.
Information on senior debt including who holds it, current balance, etc.
Reports ordered including credit, termite, appraisal, survey
Names including buyer, seller, trustees — if any, casualty insurance underwriter and agent, title insurance agent, the real estate sales company — if any, and anyone else who gave or got money through the settlement process.
If you will look at your “mortgage evaluation work sheet,” you will see that most of the material facts that you need related to the actual transaction are in these three documents. What is not in these or usually any other document is the people aspect of things.
It is the people aspects — the motivations — that you must discover to successfully negotiate and conclude a satisfactory transaction. But before planning your negotiation, you must first evaluate the facts and hopefully the above clarifies the significance of these three documents. If you do not have copies of any such documents for study, you can get copies of blank settlement statements from a settlement attorney or lender. You can get copies of real recorded security instruments from land records at the courthouse in your area.
Delbert Ashby is a veteran note investor and broker and the author of the book Make Money Trading Mortgages. For information: http://store.papersourceonline.com/best-beginner-book/
