How to Endanger the Sale of Your Seller Carry Back Note: Lose the Original
June 5th, 2008 categories: Note Holder Tips, Seller Financing, Selling Your Note
I guess you can always say the dog ate it, or a tornado snatched it into the sky when you were in Nebraska visiting Aunt Dorothy and Uncle Toto, but the truth is, you may not be able to sell your note if you can’t produce the original.
The original note is the “green stuff,” it’s the currency, it’s “the thing you’re selling.” A copy just won’t do! The original John Henry (signature) of the Buyer/Payor, even if it’s not very attractive, fluid or sophisticated, is the silver lining in your paper.
And it kind of makes sense, doesn’t it? Would you be able to pay your mortgage by sending in a nice copy of your check to Bank of America? Or Bear Sterns, or Lehman Brothers? (OK, maybe the last two . . . they’re used to losses these days and probably wouldn’t notice).
If I’m buying your note, I want to be the legal holder of the note, so I need:
- the original note in my possession
- the note properly endorsed to me (”For value received, Pay to the Order of Dawn Rickabaugh, with recourse” and it must be signed and dated by the Note Seller)
If the original note is in my possession, and is properly endorsed to me, then I am a holder-in-due-course, which gives me some substantial protection should any legal issues arise.
Right now I am working with a probate attorney in Los Angeles who is liquidating an estate holding a $500,000 seller carry back note, secured by a commercial property in Redondo Beach. I was able to offer the estate more than the Payor on the note was offering.
When I last spoke with the attorney, he said all the beneficiaries/heirs were scrambling to find the original note. No one knew where it was. Perhaps the escrow company still has it in their file, but they really need to find it, or things get a lot more complicated.
Do yourself a favor, when you carry back paper: keep the original note, deed of trust, Buyer’s credit application (1003) and credit report all together in a very safe place. And keep a very good payment history to be able to prove that you have a performing asset.
- I’d Like a Professional Note Appraisal
- I want to carry paper, please help me create a valuable note
- If I Carry Paper, How Much Will I Get Each Month?
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Related Reading:
- Other Note Holder Tips You Might Want to Know About
- How Does the Market Determine the Discount I Take on My Note?
There are insured safekeeping companies who will hold the documents for the note owner….much like a stock brokerage offers to hold your stock certificates. Pretty cool, cuz note ownership can change hands while the note can stays in the same place.
“Real” mortgages, funded and then sold by financial institutions, have to be “certified” by the safekeeping company….this means an inventory list of all documents associated with the MIQ (”Mortgage in Question”) file has to be accounted for and signed, thus Certifying that the mortgage, note, and associated documentation are, in fact, in the vault of the safekeeping company. Somebody goes to jail or writes a big check if they lie about what’s in the vault.
Alan,
This is great information! It makes sense and I’d never thought of that for private note holders. My questions is this:
To be a holder-in-due-course, I need to have possession of the note. If I don’t have physical possession, I wonder if I am jeopardized in any way? I heard of one situation where the “possession” was challenged because the note servicer had the original note, not the note holder. Doesn’t make sense, though, because if I put it in a safe deposit box, someone could argue that the bank had possession, not me, which is ridiculous!
Great contribution. Thanks!
Hello Dawn,
As the Seller Finance Evangelist for the largest 3rd party long-term escrow servicer in the US maybe I can shed some light on this question.
Being a Holder-In-Due-Course (HDC) has less to do with physical “possession” and more to do with the fact that you purchased (otherwise defined as taking possession - not necessarily physically) of the instrument (in this case the note) without any apparent defect in the instrument nor any notice of dishonor (Black’s Law Dictionary 2nd Pocket ed. 2001 pg. 322).
Per most servicing agreements with the note servicer you can have access (physically) to the note at anytime - effectively giving you possession (just like you would have if you kept the document in a safe deposit box).
The “challenge” you mentioned was probably the only way the attorney involved could justify their fees.
Doug Bertram
Seller Finance Evangelist
NoteWorld.com
Doug,
Thank you so much for your insight and information. I really appreciate the clarification.
One of the great things about blogging is that you often have the opportunity to attract people who know a lot more than you do, just by starting a conversation!
And I love your title… Seller Financing Evangelist, that’s perfect!