by Lorelei Stevens
When I was young and just starting in the note buying business, I went to a lawyer to get some advice. The first thing he told me was this: “Always remember, Lorelei, every note seller is a liar and a crook.”
I was shocked to hear him say such a thing. I couldn’t believe it.
I read the same advice in George Coats’ excellent book Smart Trust Deed Investment in California:
“Experienced TD [Trust Deed] investors often claim that the best approach to the investigation of any TD is to assume the other fellow is a crook, and then work backward from there. Depressing as it may sound, there is considerable justification for this attitude.”
After nearly thirty years in the note buying business, I understand exactly what my lawyer and George Coats were saying. They weren’t saying to treat your note seller like a crook. They were saying not to trust anything the note seller says without backup documents. I treat my note sellers as if they were perfectly honest. But I keep them honest by carefully checking out everything they tell me about the note they’re trying to sell.
You shouldn’t treat your note seller a like crook, but why should you think of them as a potential crook?
The Two Reasons People Sell Cash Flow Notes
There are only two reasons why anyone would sell you a note:
1. To get cash. 2. To get rid of a problem.
Let’s examine both of these reasons to see how they could affect you.
First, your note seller wants cash. What is it about wanting cash that could make your note seller act like a crook?
Think of the note seller’s situation. They want the cash as fast as possible. And they are willing to take a discount, to lose money, on the note in order to sell it for cash. That tells you something right away.
A note seller is under pressure. It could be something as simple and innocent as needing to buy a new car or sending a kid to college. It could be something as complex and serious as paying off a gambling debt or delinquent taxes to the IRS. The pressure is there in either case. Such a note seller may not volunteer any bad features of the note because they are afraid that each bad thing will devalue the note.
This is the kind of note seller that will tell you the payor has never been late, and then you find out that the payments are always at least three weeks overdue. This is the kind of note seller that will tell you the payor keeps the property in picture-perfect condition, and when you drive by to inspect it you find junk cars, garbage and children’s broken toys all over the yard. When you bring such discrepancies to the note seller’s attention, they always have a justification ready:
“Well, they do pay, eventually.”
“Well, I haven’t seen the place since just after I sold it, and it looked good then.”
And it could always be an honest mistake. Maybe they haven’t seen the property for a long time. Maybe being a month late with payments is okay with them.
The cash-hungry note seller may not be deliberately lying, but they are more than likely to color the truth with rose-colored glasses in hopes of getting more money for their note.
As we have said in our office for many years, “people are funny with money.”
Second, your note seller may want to get rid of a problem. They could have an unhappy payor who has discovered defects in the property and wants expensive repairs. Or your seller might know that the payor just lost his job and can’t pay anymore. Or your seller may have been threatened with a lawsuit by the payor for failing to dig a promised new well. It could be any of dozens of problems. And your note seller is not likely to tell you about any of them.
The worst part of the whole thing is that the note seller doesn’t think there’s anything wrong with withholding negative information. They rationalize it in weird and wonderful ways: They think, Oh, well, you’re in the business, you know there are risks, and after all, you are getting a discount. If there weren’t problems, why would they sell their note at a discount anyway?
So, your solution to this all-too-human condition is to be a good detective and check out every feature of the note before you buy it.
ALL RIGHTS RESERVED COPYRIGHT 2011 WALL STREET BROKERS, INC.
Lorelei Stevens is President of Wall Street Brokers, Inc. in Seattle, in business for over 30 years. She would like to buy some notes from you. Please contact her at Phone: 206-448-1160 Fax: 206-448-8476, website www.wallstreetbrokers.com
Lorelei is the author of “LORELEI’S LEGAL LESSONS, THE ESSENTIAL GUIDE FOR SUCCESSFUL NOTE BROKERS. learn the little-known rules and requirements that can make or break you, written in a clear, concise and easy to understand style. For information, click here.
