Why Most Seller Finance Notes Are Legally Worthless w/ Sohail Badruddin | Real Estate Notes Show Ep 161

Welcome back to another Real Estate Notes Show. I'm your host, Dave Putz. Alongside me, as always, Mr. Nathan Turner. What's up? Doing really well, man. How are you doing? Good, man. This show is quite interesting, but before we get started, we haven't done a show in a while. It's the end of the summer. Hopefully, it's been really good for you and things have been just great with the family. Yeah, great summer. Really good stuff. A nice, chill summer. It was awesome. We did our big trip in May, so that was awesome. And then just two days ago, both my girls are out the door, so that's something else.

Yeah. 16-year-old son at home, and that's it. And then life moves on. Here we go. Yeah. I don't know if we're looking forward to it or not. That whole MTS is real. It's amazing. Yeah. You know, it's funny during these times. Yeah. Things kind of slow down, and as fall comes, things start ramping up. Yeah. You know, emails don't stop. I think that's one thing we both agree on, and we struggle with because emails are important to us, but at the same time, we have to balance between family and that. Yeah. Just to transition quickly into the topic, we get emails from note sellers, note creators that I think think we're crazy.

And note sellers, I promise you, our parents have us tested, right? Yeah. We're not crazy. When we give you some advice, we're not trying to shit you down, but we get these quite often where it's like, no. And it's not in a matter of opinion. It's a matter of experience. And then I get nothing's happened to you yet. Doesn't mean it's a good situation. Yeah. And that's kind of how it goes, right? Everything's fine until it's not. And if your note isn't written correctly. Exactly. Yeah. And that's kind of how it goes, right? Everything's fine until it's not. And if your note isn't written correctly.

Exactly. Ah, you're going to be in so much turmoil because it's not done right, and it's going to cause all kinds of heartburn and problems and issues. He said, she said, because it's not written down properly, and it turns into a huge mess. So we come back to this. We've been nailing this for a long time. I'll give a quick plug. So this year, we are doing an online DME Between. So in between our two live events. We've got coming up November 13. So specifically, we're going to spend a little bit extra time on like, we want to talk to realtors and how realtors this is a great strategy for you, as this market is changing, and how you can help your clients understand what seller financing is and help write it correctly, so that you don't run into these problems.

So much more information coming out on that watch on social media stuff, emails, all that. We'll get it out to you. But something to look forward to. But we're going to keep you posted. But it goes right to this topic of doing it right. But we see this quite often. And I think people think we're crazy that, you know, they don't know our names. So who are you? And we, you know, we have credibility in the, we know, but people out there who have leaders and, you know, you know, they're teachers. I'm not looking to say they're wrong. They may have just interpreted wrong. It's just, you know, until they face turmoil, which we don't want, because we want them to do business.

We want to have relationships with everyone. It just becomes problems. So that's the, I guess, the run into. We see this really, really often in either through the show or through social media. We're just talking to people. They don't know what they can do. And there's some things they didn't know they could actually do. And they don't. Like adding servicing fees to your contract. Those kind of things. But I think there's a lot of things you can't do. And we're going to take the time today to actually go over some live notes. But I think there's a lot of things you can't do. And we're going to take the time today to actually go over some live notes.

That we've gotten back to as much as we can, right. Of things that are just not well done for whatever reason. We'll explain it. We encourage you guys that you can use attorney's documents. We encourage you to use the right attorney, right? We can't use an attorney who covers whatever. We need to use a credit attorney, someone who's well known in this space that maybe doesn't foreclosures or doc creations and things like that. Otherwise, you're going to be in a spot. Where that paper is not worth what's written on. It just becomes worthless. The family law person definitely is not going to work.

Yeah. The traffic. Yeah. They don't know what they're doing. Even the state attorneys, not all of them know how to write proper documentation. And we've seen examples of that. Well, he's a real estate attorney. Okay. But he's never written a note, has he? And just because you told your attorney you want this in a document you'll cover doesn't mean it should go in. Right. It doesn't matter. So welcome to the show. Sohail from Provident Loan Servicing is one of our staples in our groups. Very knowledgeable, very experienced. For those who don't know you, Sohail, who are you? How'd you get started real quick? And tell us a little bit about your loan servicing.

Yeah, absolutely. Thank you. And thank you for having me on the show. I'm Sohail Badruddin. I'm with Provident Loan Servicing. I've been in the industry originating servicing, running loans. I've been doing foreclosures for very large lenders. I've been doing this for 30 years. And I've seen everything across the board. Nothing surprises me, but it does amuse me when I see these unusual provisions in the notes. And many are just head scratchers. It's like, why would you put that in there? Or some of the things that are just unusual where the lender may seem to think, And many are just head scratchers.

It's like, why would you put that in there? Or some of the things that are just unusual where the lender may seem to think, that they're protecting themselves, but they're actually, they could be hurting themselves. Because it could not, it would not hold up in court. And then, you know, like, just different scenarios. And I forgot the example that you used, Dave, just a few seconds ago. But it's just weird. And I'm happy to go over it. My team just sent me another one. Okay, we'll see what you can do. So that's another thing, guys. One pagers, I'm not going to say you can't make the font, small enough to put everything on one page.

Typically, a one-page note is not going to fly. And we're not saying that that note is bad. We're just saying it doesn't capitalize everything you shouldn't need. So in case you need to enforce it, there's your problem. Enforcement, right? I hear everyone talk about the fact that these docs are, you know, a couple hundred dollars to do, whatnot. That's one thing Sohail can actually help out with. So reach out to Sohail, because he actually can create documents for you, right? So the big thing here is that when you go, and I encourage everyone to use a loan servicer, you try to board a loan with a loan servicer, they can and will reject your note because of problems.

And they're not trying to be rude, crude, or whatever. They're protecting themselves from audits. That's a key thing. So how often do you guys come across these notes that are just, either not well-written, not supported, a problem? What's that look like? The frequency is at least a couple of notes a week. And they're usually written in a format that is not 100% compliant. Now, are they, we do come across ones that are just blatantly out of compliance. And those are the ones we will reject. are they, we do come across ones that are just blatantly out of compliance. And those are the ones we will reject.

The truth is that for everyone who's not looking for a loan, we get what example you want. Education is butt. that's to consect and do something missing from the plan. Yeah. What's the best way to do that? think of it that way. Okay? Do you know anybody else have any ideas? there's a lot. pif misery. Shouldn't exist. Here's a very difficult one, chasing track and almost always seeking a loan. take them on but the ones that are you know mildly off we will review it we'll speak with the lender but we won't police it because it's still an enforceable note and so we can we'll still move forward with servicing those notes and before we get deep into it what can a lender who brings you a brand new note do to fix it can they fix a note that's like i do a deal with nathan and we signed it yesterday and i bring it to you is it done you're like oh there's this and this and this yeah yeah what can a lender do that goes oh no that they just created a note that's missing something that's key so material information um information that is part of the the terms of the agreement you know like interest rate for example or the payment amount the pni on on the note if those are incorrect then they have to go back and get it redone um if they're missing they don't necessarily have to go back they can actually do an addendum and have the borrower sign that document and that's good enough um things that are you know like the default interest rate on an owner occupied note that's a big no-no and and if it's in the note we will typically alert the lender saying look you can't enforce this you should not try to enforce this if the borrower defaults on the note and if it's in the note um so we'll we'll not build that into our onboarding which means it will be missing from the default and uh part and just to clarify if it's a owner occupied you can't but if it's a um so we'll we'll not build that into our onboarding which means it will be missing from the default and uh part and just to clarify if it's a owner occupied you can't but if it's a loan to a business of business you can yes business to business it's the wild west there's a lot that you can do short of being you serious you can there's a lot that you can build into the note and and still get away with it because it's not you know you're you're dealing with it you're dealing with it you're dealing with it you're dealing with it you're dealing with it a sophisticated uh investor or a borrower and with the homeowners oh i've never seen a case go against the homeowner it's always against the lender yeah so so so again just emphasizing that point this really matters you really have to do this correctly yes we get people coming over from real estate and including ourselves that's where most people start so you get into notes and you're like i just do this and this and this and this kind of yeah you know and it's so important to be able to learn the rules make sure you know what you're doing make sure you're doing everything correctly because it'll come back to bite you yes probably not the borrower yeah and i remember now the the point uh dave you had made earlier the with with doc prep correct when you if you're asking a title attorney to prep the note for you well guess what title attorneys do not represent any party they will follow your instructions as a lender so if you stay tell them to put in the note i want the borrower to pay on the first with no grace period and a hundred dollars a day late charge guess what they will do it but it's completely not in compliance it's not even legal in many cases so it's always good to engage a professional that has that does doc prep for note closings loan closings many of my lenders um or many of my lenders are not in compliance with the lenders that i've spoken with in the past um what they'll do is they'll use an attorney to prepare a note template and then they'll use that same note for their subsequent closings lenders that i've spoken with in the past um what they'll do is they'll use an attorney to prepare a note template and then they'll use that same note for their subsequent closings that's a great idea but here's the the bad part about it many of the states are attorney review states which means each time you prepare a note and a mortgage or a deed of trust it has to be reviewed by an attorney every single time and if you're not using attorney to review it you just review you know you used a document that was attorney prepared the first time and now it's a template that you continue to use that actually can get you in trouble and a lot of lenders don't know this don't understand it but just engage an attorney engage a doc prep attorney that can give you the correct documents every single time that's right or use us we'll do it so yeah so what's the typical cost for that cost it really depends um your standard note deed of trust the complete closing package will cost you about with the attorney review about 350 to 400 if you're yeah it's not a lot of money yeah not a lot of money if you have a wrapped note then it's about 600 to maybe 700 and can the bar can can it be charged back to the borrower it's usually charged yeah you it's not a lot of money you don't actually pay for it it'll keep you compliant in the law like it's just a good idea just before we dive deeper in this what happens if something is wrong with these documents what could and we've talked about this on the show before what could happen in court what could the judge do would it ask that that's either not underwritten or poorly situation what could what could a judge do so best case scenario it could be just as simple as getting it corrected and and then uh going back to court it could be as bad as nullifying the contract along with a rescission where you're paying back everything the borrower had paid to you you know for five years for example and that means you now are refunding nullifying the contract along with a rescission where you're paying back everything the borrower had paid to you you know for five years for example and that means you now are refunding everything that you received but then you're waiting for the property to be vacated so you can take it back and that could take months so now you've lost significant amounts of money and if this is a wrap note most of your proceeds have gone to the underlying note yes yeah ouch yeah so let's jump into this thing if you can bring up the first document that we got going on here and share it and guys we want to go through this we're doing our best to kind of um show you some examples of what you shouldn't be doing right things that are just mistakes um things that we we would advise you to kind of correct um just be aware what's happening here as best you can let's see if you just did the uh maximize so we can zoom in a little bit more on it on the bottom nope the bottom right oh yeah yeah that works all right rock all right here so first of all this is here go ahead and show what's going on here yeah this was a note that i was sent um a couple of months ago uh beginning of the summer initially all the numbers look great uh property value about two hundred thousand sale price 145 down payment 30 000 like all these numbers sound great 10 interest rate 30 year amortization on the surface looks like a really great deal and then you open up the paperwork and you're like oh shoot so let's just scroll down here a little bit and just see some of the right now i see a payment per month looks great 10 interest rate that's awesome yeah all good stuff yep all good stuff in uh this one is in north carolina all really good things um here's my very first clue i'm going to show you a little bit of a list of the things that i've done in the past and i'm going to show you what's in the first one of the notes and the first thing we do is we the first thing we open up is the promissory note and without even reading a word i scroll down to the bottom that's the signature block right there at the bottom of the note like this is it's less than a page for a promissory note so i'm like oh i didn't even have to read a word i already know this is not gonna be good yeah um the the promissory note it contains all of the information this is not gonna be good yeah um the the promissory note it contains all of the information about like how much has been spent on this right so this is like the first thing we do is we open up being how much is due what's the interest rate frequency date all those different things that just on the surface and then all the terms and conditions that go along with that stuff so there's it can't be just one page like there's way too much information to try to squeeze into just that one page um so hell just as an example like what as a promissory note like what's a normal length the term just the promissory note itself yeah oh usually it's between three and four pages yeah yeah so it's a page it's just not gonna cut it you know so well could i compact everything i need that typically is a note into this creation in a short manner yeah it's just no not possible no you're not covering uh some of the important you know covenants that should be in the in the note right and this is very compact and very short there's one other thing i just noticed and this may be my lack of knowledge in north carolina when you do a land contract like this is is it a note and a land contract is that how it works most of the time the way that it's done is just a land contract um but usually you just keep naming it so i i like dc i like this like and i use it for good things for the land contract yeah but it can't be that if you pocketed this until 12 million dollars and youistibrary is good right it can get your title and your account and your basically your title which will collect all of your experience as well which will save you time so a big note on your lining size for your contract and the course what iWi know you got to keep track of the placement in terms of layout you got to see the standpoint of the scroll, I'll show you that.

The one thing that really stood out was right there, Article 12. you got to keep track of the placement in terms of layout you got to see the standpoint of the scroll, I'll show you that. The one thing that really stood out was right there, Article 12. Buyer has the right to prepay with a 5% prepayment penalty the whole or any part of the balance remaining unpaid on this contract at any time before the due date. So what confuses me here is, number one, I don't believe North Carolina allows prepays, but that's a different story. But then again, it does not identify an end date to the prepayment penalty.

It does not identify what the due date is. Are we talking about every single month? So if the borrower pays a little bit more than what the principal is on the payment, does that constitute a prepayment? How much prepayment is it going to be? Before that penalty is triggered. It does not clearly identify that. It's just, this is weird. So if you pay 10 extra dollars, yeah, if you pay 10 extra dollars, is that 5% off that 10 extra bucks? Like, what are we talking? Exactly. Or is it for the entire balance? Yeah. Because I can read the part of the balance remaining. Like, could it be the unpaid balance, 5% of the unpaid balance? Reverse the payment? So these are the clarity things that a defense attorney could raise when you're in a default.

And you have to justify your situation. But Nathan, the one thing you jumped off the page here for you is the numbers are great, which is wonderful. But issues, issues, issues. So that promissory note to begin with, separate from the document, the fact that you have a promissory note, it's going to have to be an actual promissory note. If you're just going to combine it into one document, again, double check with the fact that you have a promissory note, it's going to have to be an actual promissory note. If you're just going to combine it into one document, again, double check with the right attorney for your state to make sure you can do that.

But if it's going to be a separate document, it has to be the whole thing. It can't just be a snippet of what it could be. This was another thing that jumped off for me. I redacted this, but there's the signature. There's the notary portion. The notary portion was blank. The signatures were there, but there was no, it wasn't notarized. But it can't be enforced, right? Right. The court of law says it's not notarized. It never happened. Yeah. Yeah. And it's just blank. So separate page, other things just with the payment history. Two things I saw with the servicing was they were including the principal and interest and taxes insurance as the payment.

So they were, in other words, collecting all of that. Instead of setting aside the taxes and insurance, that should be going to escrow. That's not your money. As the lender, you don't get to keep that money. That's the borrower's money that you're holding for them and then making the payments on their behalf, but it's not your money. So you don't get to keep that. That's why it's called escrow, guys. That's why it's called escrow, right? Big, big no-no. Let's slide over to the Texas, the example Texas note that we got here. Sure. A couple other, just real quick. This one, it wasn't recorded. Why is recording a bad thing, Nathan? Because when they do these type of things, these conspire deeds, they're typically kind of done just backyard stuff.

And for those who don't know, conspire deeds, like a loan for a car, right? Once you pay off the debt, you get the deed. When you finance it, you get the deed upfront and you own the home. Why is a conspire deed not recorded a problem? Again, it comes back to that enforceability. So you're going to go to court. They quit making payment. Now you're going to go to court and say, hey, they didn't make a payment. And the court's going to say, didn't make a payment on what? What are you talking about? problem? Again, it comes back to that enforceability. So you're going to go to court. They quit making payment.

Now you're going to go to court and say, hey, they didn't make a payment. And the court's going to say, didn't make a payment on what? What are you talking about? And so if you haven't recorded that, it doesn't exist in the judicial system. It has to be part of that system in order to be recognized. So if you haven't recorded it, it doesn't exist. So what are you trying to enforce? There is nothing there. So it's, again, a huge deal. Last thing on that was in that servicing information. From what I could tell the last three months of payments had been missed. So on top of everything else. It's actually a non-performing node.

So many problems. So I went back to the seller and just said, you know what? On the surface, it looks great, but here's some of the issues I saw. If you can get this tuned up and fixed up, then maybe we can talk. But as is, I can't even touch it. Not sure. And they didn't fix it. Nathan, before you move on, there's one more thing I wanted to ask about. Sure. Article 8 on page 6. Okay. Right here. Fire. Insurance. There. Existing encumbrance. Oh, what does this mean? So the way I'm reading it, and it's very clear, you know, it says, especially the second paragraph, the seller may, during the life of this contract, place a mortgage on the premises above described, which shall be a lien on the premises superior to the rights of the buyer herein.

So this person who's buying. This house, the contract for deed to get the deed back, but there's a lien above theirs. So they're in second position in a house that they own. Right. So I understand wraparounds and stuff like that. You know, we do that all day long. Sure. But to bring a more having the ability to bring in a mortgage after the fact, after you've actually contracted with a homeowner. So I understand wraparounds and stuff like that. You know, we do that all day long. Sure. But to bring a more having the ability to bring in a mortgage after the fact, after you've actually contracted with a homeowner.

And what if the amount is, you know, like you said, what if the amount's higher? Yeah. And now the borrower wants to pay it off so he can have the deed in his name. And what if the seller doesn't have the money to pay it down? Right. Like this is a nightmare scenario for anybody. Yeah. Problems, problems, problems. So reading it through and actually understanding what you're reading, that's a big deal. And then oftentimes, and I still do this, I will actually hand this over to an attorney, a foreclosing attorney and say, Hey, I'm looking and buying this note. Can you just read. I'm going to review this.

Is this enforceable? If it's a note that I'm not familiar with a seller I'm not familiar with, is this enforceable? What do you think? And they'll, they'll go through and catch something like that, that I didn't see the first read through. Awesome. So let's switch over to the example, Texas note, right? Well, this is a wraparound, right? The wraparound for those who don't know is, and this is different phrases, right? There's a loan that you either took over or you own, and you've now sold it to a third party buyer as a new loan. And it wraps the first lien into the new deal. So as you can see here, so I think this is yours, you brought up, right? So this, this loan, can we walk through this and help Nathan kind of scroll? What do you want to look at first here? So let's go to the financing terms.

Okay. Number two. Yeah. And you know, the amount financed is great. The interest rate is done correctly. The payments, the due date, and then the 15th day of each month. Okay. So this is, this is in the unit, the unit of the year. It doesn't clearly identify if, if that's the grace period, but that's okay. What stands out is the direct deposit part, which was unnecessary. Because you can't technically require your borrower to be on a direct deposit. And like in our case, as a servicer, right? Because you can't technically require your borrower to be on a direct deposit. And like in our case, as a servicer, right? all.

It's either cashier's checks or VSL. So that itself changes the term of the agreement because now the borrower cannot be on direct deposit with a servicer. So these are things to be aware of not to add into the contract when it's not needed. If you give them the option to do it, it becomes easier to complete the contract. Outside of that, I think the agreement is expressly subject to the existing lien and promissory note held by such and such bank. Sellers shall continue making timely payments should seller declare or should the underlying lien declare the underlying loan to be due in full. Buyers shall be obligated to immediately satisfy.

the outstanding balance. So let's just make this a little bit, right? So you have party A, which is Nathan, who I took over his debt, right? He's the owner. I take over his debt and I sold to Sohail to make payments to me so I could pay off Nathan's debt, right? So now what this is telling me to the layman person is that Sohail, not me, is obligated to make payment to Nathan's original loan if they default. They're obligated for the whole balance. Is that correct? No. So the way I'm reading it is basically I, as a borrower, am going to be making payments to you. Yep. You're going to continue making payments to the existing mortgage company.

But at any point, it doesn't matter if I am your ideal borrower. Yep. You're going to continue making payments to the existing mortgage company. But at any point, it doesn't matter if I am your ideal borrower. But if the underlying lien or the existing senior debt— But Nathan's lien has now been called by the bank saying it's due. Yeah. Not— So I am out of luck as a borrower. Yeah. And this note has nothing to do with me. It's just a disclosure required by the state of Texas, for example. And I should not be held to their terms of the agreement because my terms of the agreement are in the note outside of this particular piece.

Yeah. And so five years, let's say, I've been making payments on this mortgage and then the underlying lien becomes due. I can't— Yeah. I can't just jump through hoops to qualify for a traditional mortgage to pay this off, which means I'm going to have to let the property go to foreclosure. And no fault of you. Wow. Didn't default, right? Exactly. What happened was that the original lien was called due by the original bank, Nathan's Bank. Mm-hmm. In that scenario, who is responsible to make that original loan payment fall? The seller. And this note will not hold up in court. I can guarantee you.

For sure. Because— Yeah. One has nothing to do with the other. It's holding Sohail responsible for something that he's not related to in the least. Exactly. Yeah. I didn't guarantee it. I didn't do anything about it. Most likely the agreement is between me and Nathan to say if that loan gets called, I will pay off your loan in the fall. Yeah. But that's an agreement between me and Nathan. All right. What's the next thing we got going on here? So in the same item, last sentence, which— It says, failure to keep the underlying loan in good standing is grounds for refund of interest from the buyers to the sellers upon foreclosure.

So in the same item, last sentence, which— It says, failure to keep the underlying loan in good standing is grounds for refund of interest from the buyers to the sellers upon foreclosure. I have no idea what that means. Yeah. Because it's—you're obligated to keep a loan that you're already paying on in good standing, which you are making payment. But it's not your loan you're keeping in good standing. It's Nathan's and mine. Yeah. And you're keeping in good standing. And then refunding the interest, like, it's mixing words together? Yes. It's written sort of backwards. It shouldn't be there in the first place, but it's written backwards.

And the way I think I understand it is not only am I losing the property, but any accrued interest on the existing mortgage is to be paid by me. Ah. So here's the property. So I don't lose the property. I get free money from you because of the call due. Yeah. So that's just— It's a big no-no. Yeah, it's a big no-no. I wouldn't— That's really messed up. What's the next thing on this thing? I see tax insurance, property condition looks good. Mm. Right? And then— Go back up to the taxes. I think A says, failure to maintain insurance constitutes default and immediate foreclosure. Oh, wow. Why? So does—if the buyer— If you don't pay your insurance or your taxes, I can foreclose on you for not making the escrow payment, right? I think the problem here is that it can't be immediate.

There is no immediate—it's not a forfeiture contract. Yeah. I got to foreclose on you in that process because you haven't made escrow payment. Correct. We have to be careful with that. And you have—you must give the borrower time to cure. There is no immediate—it's not a forfeiture contract. Yeah. I got to foreclose on you in that process because you haven't made escrow payment. Correct. We have to be careful with that. And you have—you must give the borrower time to cure. Yeah. And— Yeah. Because if you're not giving them the due process, the time to cure, then this is just a—it's more of a monopoly money than real monies.

Is he failing to pay March 1st? I mean, that's a deadline that they're giving him, but the law says there is some wiggle room with escrow. Yeah. I think that phrase, immediate foreclosure, like, probably shouldn't be included any time. It should not. We don't have to put this because typically the escrow has to be paid by the borrower. That's part of the contract, right? Mm-hmm. Yeah. And if you're using a servicer, we can certainly force this on the borrower and make sure it gets collected. Yeah. This is not a reason to foreclose if avoidable. Right. Yep. If they don't pay, then you can foreclose.

Correct. Correct. So I see the next one, number six. I see forfeiture and possession. Forfeiture and possession. Mm-hmm. The seller may elect to declare the agreement forfeiture. So in Texas— Yeah. —is contract for deed something that's allowed? Because that's forfeiture of contract, right? Yeah. Contract for deed is sort of allowed, but nobody does it because it's very restrictive. And it's— This says forfeiture of contract agreement. Correct. So I'm assuming what they've done in the back end, which is not disclosed here, is they probably have some sort of a deed in lieu signed at closing from the borrower.

So what does a deed in lieu mean, for those who don't know? So a deed in lieu will typically be a document that would be executed if your borrower is in default of your loan, doesn't have the ability to pay, doesn't want to go through foreclosure, but wants to turn the property back over to you. And so in that particular scenario, the ideal situation, if the title is clear, would be to do a deed in lieu of foreclosure and take control of the property. And so in that particular scenario, the ideal situation, if the title is clear, would be to do a deed in lieu of foreclosure and take control of the property.

But having that pre-signed, you can't do that. You can't, because if you are signing that at closing, did the property really transfer to the buyer? Right. It didn't. Yeah. And you can't, you know, you've got the document signed, you're just not recording it, so you're not announcing it to the world that this property belongs back to me. But it really does come back to you immediately because the buyer is not going to be able to take control of the property. The buyer is no longer the owner. Yeah. Can a, and this is in a document too, can someone put an escrow with an attorney to be acted on at that different time? I have heard stories about that.

There are attorneys who say it's doable, but I would like to challenge them to see if they can actually execute this and then get away with it. Right. So the problem, guys, if you're listening is this. Dean Lewis signed five years ago and I'm acting on it today. It's agree upon between me and Sohail in 2020 and today I'm acting on it. It doesn't work that way. That had to be signed much recently. Dean Lewis signed. Today I'm filing it and move forward. It's transferring the deed back to the lender. And we're going to show that in another document in a minute. But that's the point of it. I've done Dean Lewis.

Nathan's done Dean Lewis. Dean Lewis is great when there's no other liens on the line. I've done Dean Lewis. Dean Lewis is great when there's no other liens on the property and we don't want to go through foreclosure and they just they don't want to hit their credit and all stuff. I can do a Dean Lewis. Great. Wonderful. But you can't force the borrower to do it. Believe me, we could have. Me and Nathan did a lot of these modifications over the years. We've done stuff because I tried to find every way to doing it. It doesn't work. So let's scroll down a little bit more here. I don't understand why.

Why can I. So I sold this property to you. So how? Why are you restricted to anything with the property that you own? It doesn't work. So let's scroll down a little bit more here. I don't understand why. Why can I. So I sold this property to you. So how? Why are you restricted to anything with the property that you own? I have no idea. It's like, do I really own it? So do you own it or you not own it? Right. Exactly. It's it. I've seen a few lenders and where we don't have those notes, but I've had these discussions with lenders where they say, if I'm owner financing the property, then when my buyer wants to sell the property, I put in a loan.

I put a provision in the note saying I want the first right of refusal if they want to sell or refinance the loan. It's in my opinion. That's a great idea. But is that really ethical to do that? You know, your your borrower may be at 10 percent wants to refinance. You want to get the first right of refusal. The borrower can get a 5 percent interest rate. For example, and you will take a look at it. You can drag your feet on this and they may lose the opportunity to refinance out of your note. And that's happened. I've seen it where your lenders have held off on issuing payoff statements. They've dragged their feet on these first right of refusal provisions and the borrowers have lost the opportunity.

And these people have worked very hard to build that payment history. So they can get out from under the higher interest rate. It only benefits the lender to just let them go. But to to this Kevin, it makes no sense. It's you cannot be listed for sale. The user transferred to any third party without written permission of the. This is a note. You're a lender. You're not. I see the next thing and jumped out of me on this page, too, is I don't remember the last time my bank knocked on my door to inspect my property because they don't have the right to do that. Versus what a commoner would do. It would be like that.

You're a lender. You're not. I see the next thing and jumped out of me on this page, too, is I don't remember the last time my bank knocked on my door to inspect my property because they don't have the right to do that. Versus what a commoner would do. It would be like that. Wouldn't be a закон. What my Roth point is about an angle. The time of debt transfer. Or can I leave it on a leased and the leased price will begin to Glend Square's Muriel. So my guess is. it and i have a i have a concern for my investment having the right to entry is a landlord tenant scenario or a contrary deed scenario it's not so i i can say no no i i would argue that if the buyer agrees to this is it there is it against the law no it's just very weird wording for you guys out there is it something that will not stamp in court it probably will it doesn't change that just be aware that we're mixing terms here and understand what it is yep yeah it's yeah and it's just weird as a note buyer i'm gonna look at that and be like wait what why what's that all about like it's just it makes it weird so it's gonna make it strange all this stuff here the property must be in good condition response for issues for the home these are rental clauses right not no your mortgage never did this for your own house yeah right you it's kind of crazy so scroll down some more here electrical stuff that's it that's it that's it so let's go to the doozy note this is something that so how sent over to me that i was kind of like what awesome let's see what this looks like right so we're in texas again which is the country which is wonderful this is so sweet yeah i see a 3.3 the country which is wonderful this is so sweet yeah i see a 3.3 i'd ask the first thing i'd ask here which is kind of crazy is can i borrow money from this guy like the three no right right um whoever created this i understand you're making a good deal just be very careful because there is a rate where actually a loan becomes a gift not a loan so it can transfer i think two percent's that number where if someone gives you if i gave nathan loan for two percent the government sees it as a gift not alone because it's too low 3.3 listen that's why it was wonderful bank loans don't need to do that in this world this is an advertised wrap as well which means that you're wrapping a loan of someone else's which is probably above 3.3 a math right there it's kind of funky and listen if you're going to try selling this note no note buyer is going to pay you anywhere close to upb the two factors that make a big deal no buyers just for numbers is your interest rate and your term and then the very next line under the 3.3 amortized yeah so it was it was it was like the иногда where they had little bit of a pop or something i can get my hands on the first thing or two where one of the вашa was maybe because the and they brought them back said like why are you paying this 180 you don't have time to spend 500 on someone else's that you get to use so i mean if somebody gets so money and just their interest rate is because otherwise they can't do that it'll cost something to buy a house or there's one of those one that allows you to sell something you can take which is not going to cost for a thousand readers of money so there's a ten year конце balance one added layer of protection to the seller in case this investor does not perform you know your traditional sub two purchases are where the sellers have no protection so this was at least a smart seller but you'll see that the the attorney drafting this note was not that smart all right let's go to the next one it's the annual interest payments on maturity payments now which is great uh maximum offer rate for adam that's fine here we get to terms right monthly payments of 34 and let's go to the next one it's the annual interest payments on maturity payments now which is great uh maximum offer rate for adam that's fine here we get to terms right monthly payments of 34 and 96 76 he and i is there uh plus current tax in the escrow uh of 828 i like the fact they put the fact that it just right it's plus the whatever the current tax is escrow guys if you are creating these notes make sure you don't make the escrow fixed number the fact that he says plus is fine but don't ever say you the tax interest is x then you can't fluctuate it's his current taxes right which is wonderful and then the or more should have been in the parentheses not outside if if if he put the number then the the or more e uh should be in the parentheses and then the other thing that you know stands out in this is the balloon this is a balloon note yeah and and they actually have an amount of interest in the tax interest and then the or more should have been in the parentheses so the number example a different principle is something that i've shown in a few other videos listed but you kept the borrower at a fixed amount but you're holding the borrower at an Government although what if the borrower pays more right or just based on the timing the amount could be different but you're holding the borrower to a fixed amount tracked based on the timing the amount amount yeah problematic yeah yeah so i see servicing payments is great i see the servicers job of me pay the first lien i don't understand why they're making a note that tells the servicer what to do here so how can i tell you guys how to handle what to do what to pay nope absolutely not no the servicer tells me and i i like it that way i don't want to try to figure that out and tell the servicer to pay what's one's first right and and it says servicer shall immediately pay the first lien note the challenge for me as a servicer is when a payment comes in we have to wait three to four business days before we know that the payment has cleared so it immediately cancels out the immediately part in this note because we can't be held to this note they're technically three to four business days before we know that the payment has cleared so it immediately cancels out the immediately part in this note because we can't be held to this note they're technically trying to hold us or make us party you this note which we're not we cannot be um then it says no later than fifth day of each month um and shall make a payment and shall make a separate payment directly to pay as at pay's address for the pay equity portion of this note so they're literally dictating us the terms which we could cannot be held accountable for and what happens if they pay a thousand for that month right they don't pay the full amount of money they don't pay the full amount of money they don't pay the full amount of money they don't pay the full amount of money they don't pay the full amount of money they don't pay be held because the payment wasn't full exactly guys listen this is not against i'm going to say it's not against the law to do you're not gonna have a problem in court just be aware that servicers reject this loan and you're gonna have to service yourself and you buy by your own rules if you choose to right which can lead you into trouble as well what if you weren't servicing incorrectly and and there's yeah issues with that as well potential.

Awesome. So I see the next one is the, you know, the fact additional payments, uh, first payments be negative amount covered by the payee reimbursed, blah, blah, blah. This seems like additional details that to me is not need to be in the note, right? It could be additional information later. Um, whatnot. So, so what's the next thing that catches your eye here? The, the part where it says at any time that maker or servicer make a late payment to the payee, the payee reserves the right to cancel servicer and require all payments be made directly to payee. Um, this is a very restrictive way of doing business.

And, and the attorney who drafted it obviously has a patented or trademarked system on how they do this. But like as a, as a servicer, I would not accept this. No, I did not accept this note because it's just, and the attorney who drafted it obviously has a patented or trademarked system on how they do this. But like as a, as a servicer, I would not accept this. No, I did not accept this note because it's just, uh, it holds us to a standard that we cannot ever fulfill. Yeah. And, and then additional payments due to delay of the first two payments, there will be a negative, like these are things that don't need to be in the note.

Yep. Yeah. Um, do no secure by vendors, liens, pure title, like listen, all that is, is only different from the patient. Was there anything else that stood out in this, in this note that you wanted to bring up? Um, no, I think that was it. All right. Let's go to our fourth and final note. They want to go over, uh, our South Carolina situation, right? Uh, 27,000, three 11 looks good. Right. Small, little tiny note that looked really cool. Zoom in a little bit. Yeah. Zoom in a little bit. You can, if you can zoom in just a little bit, Nathan. Oh yeah. Sorry. All right. All right. So we have a situation.

We have a great opportunity. First thing, just, just to notice, this was one of those. I got the three 11, 20, 26, the date of the note being drafted or signed. What do you call it? But then if you look at the bold, the commencing date, the last sentence shows four, one, 20, 21, 21, um, which did you draft this note after or be like, I'm lost on that. So how, I don't understand. I don't understand how I can date it for 2026. Do I think it was 2021 and just the typo and 20, maybe it is a typo. Yeah. They've used over and over and over again. And I would think that there'd be 2021 at the top, not 2026.

Do I think it was 2021 and just the typo and 20, maybe it is a typo. Yeah. They've used over and over and over again. And I would think that there'd be 2021 at the top, not 2026. Yeah. So one's probably a sort of a dynamic year and the other one's a fixed year that remember, you know, I talked about the templates, right? Yes. Yeah. This is what happens when you use a template. Yeah. Yeah. You miss little things. You miss things like that. So that kind of stood out. So, um, the next thing we saw here, uh, I think was the, this whole paragraph. Yes. Odd. If the default be made in the performance of clients with any of the covenants, um, or any other instruments carrying the note, then in any of said events, the principal sum with all the accrued interest there on shall become due and payable.

What, how much interest? Yeah. All, all the interest doesn't, that doesn't say anything that just says there should be interest, but it doesn't specify how much that interest rate is or when it's charged or any of the particulars of what that means. And so that's missing. And is there a definition of default in there as to like, have they expanded on? Well, hopefully we'll get there. Hopefully. Oh, okay. Yeah. Um, so guys, this is some of the things in ladies, this is some of the things that we catch, right? And you say, well, gosh, you're being nitpicky. Your attorney. Is going to be the nitpicky one.

They'll find more than we're going to find. Yeah. Um, the next thing we get into is the more we talked about prior. If you get to that next paragraph, Nathan, probably a third line down a third line from the bottom. If debtors, yep, right there become more than 30 days in the rears. So my deal, it, so how I sold in the house, he's more than 30 days in the rears, which night is the fault at the option of the no holder. Me, the note becomes known void. So my deal, it, so how I sold in the house, he's more than 30 days in the rears, which night is the fault at the option of the no holder. Me, the note becomes known void.

Wait a minute. Yeah. Wow. It's immediately defaulted. And like we talked before, now that asset is mine without court involvement, which is not happening. This is what happened here. The debtor agrees to deed the property back. That is deed in lieu. The no holder by deed in lieu of foreclosure. You can't do that. This is the agreement that we thought before. You can't do this. Do that. And I'm not sure which date we're not allowed. 26, 2021, but you can't agree to something prior to it happening as much as we'd like it to happen. The borrower, even if they sign it is not obligated to uphold in greed of this term.

No matter what happens. So right there is a big no, no, believe me, we'd love to be able to do that. Right. As creditors, we can't do that. It would save a ton of time. It would save all kinds of expense, all that. Yes. Yeah. You just can't do that. Right. You can't evict somebody like this. You can't do a lot of this stuff. Right. This is at will, like, you know, firing somebody. Yeah, actually, that's a good point. Like even in a rental situation, if somebody is 30 days late, it's not an automatic you're out. Like just for something that maybe more people can relate to. It's the same thing. Just cause they're 30 days late.

You can be, you can't just, you know, say that's it too bad. You're out. It doesn't work like that. So next sentence. So how picked up on where we're going before a call was probably the fourth line from the bottom of the next paragraph, which it says any changes or a change or changes by way of release or surrender of any collateral held a security first note and will wave all in every kind of notice such extension or six sections change or changes agree the same, maybe without joint. Of the undersigner. We're not sure exactly what they're replying to here, but our insurance is that I don't have to give.

six sections change or changes agree the same, maybe without joint. Of the undersigner. We're not sure exactly what they're replying to here, but our insurance is that I don't have to give. So how any extensions on his payments, which you don't need to state that's law that if he doesn't pay in 90 days, I can start foreclosure and I don't need to give an extension if I don't feel it's in the best interest. Like if he pays up or fine, but are they using additional collateral for this note? They could be. I don't know. That's possible. Is that? Yeah, that's what I think it says, but I guarantee you that the template note.

So they didn't even think about removing this piece. And like a thing like that. So Dave and I have been around for a while and so he'll contest to this as well. Like your best exit on any note is to have a note. Have them continue to make payments. Yes, that's always going to be the best way to go. So you don't want to write in a bunch of clauses and different things that's immediately going to cancel the note. That's it's not in your best interest as the lender. It's in your best interest as the lender to help them get back on track and making payments. And judges don't like that by the way, right? Just like payments and borrowers that make payments and lenders that accommodate and do the best they can.

And if you can demonstrate that you have tried, and you've worked with this borrower over and over and over again, and then they have failed to perform. That's a different story. Then the judge can look at that and say, okay, well, I can tell Mr. Mrs. Lender, you have tried to make this work and the borrower is just not making it work. Okay. Unless you're one of those lenders who does this to foreclose people. So what's that phrase again? The slow flip, right? Yeah. That's a terrible way to go. Yeah. Don't do it. I think there's one more page here. Uh, So what's that phrase again? The slow flip, right? Yeah.

That's a terrible way to go. Yeah. Don't do it. I think there's one more page here. Uh, here. Property sold as is, is fine. Listen guys, we sell properties all as is. Just be careful. This is why we're talking to slow flip is that you can do this as is. Just don't be, you're going to get known by the judges. If you're doing multiple foreclosures, evictions, kick them out, put a new borrower in and over and over again, and they're constantly flipping or fixing up your property, which is fine. But if you're doing multiple foreclosures, you're doing it multiple times. The judge, you're gonna start seeing you as using your bar to fix up your property and flipping it.

And they're going to see a problem with it and that they're going to look at it and say, you're not putting this borrowers in the best possible way to make all their payments. And there's your problem, right? The biggest thing is making sure the bar is able to make payments. They continue to make payments. Yeah. Oh, I think that's it, Nathan. I think that's all that we had to talk about on that one. Well, it's my, my team sent me another note, but I, it's not redacted, so I can't share it, but I can. It looks very similar to your, if default be made in the payment of any installment, that's what it looks like.

It has biweekly payments, which is fine. It says the, it says if default is made, then if such default is not made good within 30 days, the entire principal sum and accrued interest shall at once become due and payable without notice at the option of the holder of this note, failure to exercise this option shall not constitute a waiver. And then any payment not received within 15 days of the due date shall include a late charge of 5% of the payment due. payable without notice at the option of the holder of this note, failure to exercise this option shall not constitute a waiver. And then any payment not received within 15 days of the due date shall include a late charge of 5% of the payment due.

You know, the first piece we already discussed, so I won't go back into it, but the second piece where it says of the payment due, I think a clarification is needed. The clarification typically would be, you can't do 5% of the total payment due. It would be of the principal and interest and not including escrows. Because if you, the moment you charge interest on the escrows just for being late, that holds you out of, that puts you out of compliance and could potentially land you in court. Again, that's not your money. That's you're holding it on behalf of. And maybe you didn't mean to, but, you didn't, that's not your intention, which is understandable probably.

But you got to clarify things. As you can see, we went through that document. We had no words of what defines defaults in there. And for most people it's 90 days, right? That's where it's at. That's what the note says, right? So you got to clarify what the submissions are. Now again, are so many things fixable? Yes. What is the consequence of, of writing these things up is if it things, if it pays off, okay, all this is nothing, right? If the borrower pays for the whole life, what we're fearing is that you get in a scenario where a borrower defaults, you're walking into problems. Your note buyers out there, the ones who know what they're doing are going to see these things and throw them out the window, either themselves or their attorneys get throughout the window.

Why? We know the fact that if we have to use this as collateral to person in the court of law, we're going to get a pushback of the court of law. We're going to get a pushback from the judge and we're not going to buy it. Now, can we buy a thing, fix it and make a new loan? We can work with your borrower and redo all this paperwork and get the borrower. Yes. Well, think about this. Why would a borrower do that? We have to give a really sweet deal for them to do. Now, can we buy a thing, fix it and make a new loan? We can work with your borrower and redo all this paperwork and get the borrower.

Yes. Well, think about this. Why would a borrower do that? We have to give a really sweet deal for them to do. All this comes back to say, or your loan, your servicer, they're going to usually go through everything and say, this is not something we can board because they are actually scrutinized more than we are audited by states. Okay. And they're going to go through everything. paperwork and they're going to go through all the documents to make sure that the paper they have is everything and they're correctly doing it. Well, they're not doing, they're not, you know, saying that you're bad. They're saying the collateral looks bad and you have to listen to them.

Yeah. Big. Yeah. And I've done that before where I bought, where the paperwork really wasn't great, but then we went back and, and fixed it with the borrower and, and re-signed some things. I actually bought some lease option contracts years ago and converted them over to contracts for deed. Cause I went there and I was like, I went through the lease option with them and said, look, this really isn't in your favor. That it's not a good deal for you. Why don't we convert this over to a contract for deed where you're making principal and interest payments instead of this weird interest rate that you've got on here that doesn't really apply.

They were going to spend far more money with this lease option. And they, and, and in my experience, the lease options here, just a little tangent, but the lease options often come with like a three year balloon or something where they're going to go back and refinance and do that. I have never seen one of those work. I have, that's been my experience. I've never seen somebody at the end of that term actually go back to the bank and get the financing and then be able to, to pay it off. I've just never seen it. Yeah. That, that leads to the thing is, well, I'm sure you noticed you complete, you've said this before our calls that any time you have an owner occupied note, really need to be extremely careful what you're doing.

Yes. Yeah. That, that leads to the thing is, well, I'm sure you noticed you complete, you've said this before our calls that any time you have an owner occupied note, really need to be extremely careful what you're doing. Yes. Balloons. Balloons. Balloons. Balloons even past five years we're five years. Don't even talk about them. Right. Even past five years, I would encourage you not to even mess with balloons. You don't even at all. Yeah. Right. Arms don't mess with them. Don't even get into them. Right? Anything. And remember if you do an arm, try doing the bar has to qualify for the highest payment of the arm at the beginning.

Yeah. So you can appreciate, well, 10 years now they can afford it. They have to priest it or they have to value themself today to make sure they can have can afford it. Right. So, so else there's a big things we talked about on last call with you is there are certain things that owner occupies can't do and, you know, borrow lending to another business can, what would you say the top two things that is it balloons and something else that you see in these contracts that people come to you are the two biggest no-nos that they're trying to pull through with owner occupy properties. Interest only is one of the biggest ones.

Ooh. And don't do it. It's, it's not something it's not right to do it. Number one with, with an owner occupant, because if, if it's interest only, I've seen a few where the terms were not clearly defined. It's like, it's interest only for the first five years and then fully amortized for in one case, 25 years and then another one for 35 years. So it was like a 40 year note. Oh, wow. And then there was one, one where it had interest only with a prepayment penalty. And we didn't take that on because it, neither one is something we took on because it's just, it doesn't send the right message. Penalties are against the law with owner occupied.

If you don't know, well, And we didn't take that on because it, neither one is something we took on because it's just, it doesn't send the right message. Penalties are against the law with owner occupied. If you don't know, well, you can do it, but it's not how you would want, how we, you and I think, right. The kind of like saying balloons are illegal. They're, they're not illegal. They're frowned upon. Okay. And, and the, like if you're doing a five-year balloon, that's sort of okay, but always keep in mind that these borrowers for the most part are just like us. We're, we're all creatures of habit.

And if they couldn't qualify for traditional financing today, good chance, they won't qualify for it five years from now either. Right. And they'll be in their comfort zone. They'll be building their lives. They won't think about it too much until that time comes and then go, Oh my God, we missed it. Yeah. And we can't refinance out. So balloons don't do it. Interest only is don't do it. If you do arms, do it for a fixed rate for five years and then have limits to the changes. The, the arm notes we've seen do not have proper stop gaps or, or limits to the, the changes. It could be an annual change.

It's, it's, we've seen six month changes. And, and when you are not building in the max or the floor, you're really setting your borrower up for failure. Right. And so these are just some of the, the interest only was the biggest one. Balloons are the second ones that we've been seeing quite a bit of. If we see anything less than a five-year balloon, we'll just, we won't be even on. Yeah. Reject. Yeah. And is in the finalized question is that, you know, is this something you guys just don't like doing or is this federal law? Yeah. So it's, there's, there's some clarity provided in federal law, but there are, the prohibitions are not as restrictive, right? So balloons, there's a difference.

So it's, there's, there's some clarity provided in federal law, but there are, the prohibitions are not as restrictive, right? So balloons, there's a difference. You've heard of QM qualified mortgages and non-qualified mortgages, right? Yeah. So a 30 year term, fully amortized regular payments, typically that would fall under the law. So if you're a person that would fall under a qualified mortgage, there are some nuances to it, but if you're doing a note with a balloon, that's a non-qualified mortgage, a prepayment penalty is non-qualified. My recommendation is are on the side of caution and just go with a qualified mortgage.

I know that most note buyers will not worry about the fact whether it's a qualified or a non-qualified mortgage, but it just becomes easier if you end up selling to a bank, guess what? You'll get paid more if it's a qualified mortgage. Absolutely. If at all. Yeah. Yeah. Correct. Yeah. We typically, Nathan, I don't know how to ask your final question, you know, so I know it's coming. I got an idea for that. So you've been on the show before, so you, you know, we're going to ask you for some kind of prediction. I'll frame it this way. Like maybe the importance of doing a non-qualified mortgage, but also the importance of doing loans correctly.

I think we're in the same camp where we're seeing a downturn. We're seeing, you know, correction in the market. Can you speak to that of the, the importance of doing this paperwork with that kind of an outlook? Good question. And a very difficult one. I, you know, paperwork's important, doing things right is important. And, and my message is more, the note buyers are, in my opinion, very diligent and what they purchase, right? So my message would be to those that originate seller finance notes is not only should the paperwork be right, but think about when you originate the note, you know, we're seeing taxes go up.

right? So my message would be to those that originate seller finance notes is not only should the paperwork be right, but think about when you originate the note, you know, we're seeing taxes go up. We're seeing insurance go up. Look at the overall, when you're looking at the borrower's overall picture, be, be ready to sort of assess how that note's going to perform two years from now or three years from now, because the taxes and insurance could potentially go up significantly and how that impacts your asset. Many of these same lenders are also buying the property in majority of the cases, but they buy the property, they'll fix it up probably.

And then we sell it. Don't market up to where, you know, even with the borrowers 20% down, the real LTV is 95%. Right? You know, it just impacts your ability to sell the note. If it defaults, you end up, you will end up with the asset. It's not going to get, it won't sell at foreclosure sale. So be mindful of those things. Think about some of the other things right now, we're seeing declining markets in certain pockets of the country. You know, right now, Midwest, I think is gangbusters. It's growing. So, but if you look at Texas, Florida, these states are considered declining markets. It's a buyer's market.

So if you oversell in these markets, you're only hurting yourself and you're hurting your cash flow. And it's not going to be pretty when things go south. Well said. Hopefully another incentive for people to just do it right. Just be aware. Yeah. Texas and Florida are leading the country with foreclosures. So just be aware of that little, little tidbit. So awesome. So once again, thank you for joining us. You're always amazing information. Sharing information is always key here. Yeah. Texas and Florida are leading the country with foreclosures. So just be aware of that little, little tidbit. So awesome.

So once again, thank you for joining us. You're always amazing information. Sharing information is always key here. Thank you very much for everyone else. We will be back soon. We have some awesome topics coming up in the fall. Make sure you check out the DME diversified mortgage expo. That's coming up in November and we'll see everyone soon. Take care, everyone. Have a great day. Thanks guys..