Blindly trusting Escrow Co? Don't!
When buying a note simultaneously, at closing of RE P&S, a note buyer is advised that he/she had better carefully oversee & double check the whole deal.
An escrow officer (limited practice officer, or LPO) knows that he/she is to follow the "escrow instructions" that are contained in the Purchaser's and Seller's P&S Agreement, and so far as I know, they do a pretty good job doing so.
However, I just learned (in time fortunately!) that Escrow might not pay such careful attention to the Note Buyer's escrow instructions, to make sure that NB is getting exactly the note he/she has contracted to purchase at closing.
When seller is carrying back a note on sale of the RE, and has made a deal to sell that note to the Note Buyer, the NB is clearly expecting certain exact terms in that note...and if he doesn't get them, he's not going to buy that note.
If he doesn't get that exact note, he's not going to be buying the note and the whole deal is likely to collapse.
In a note purchase I just closed, I did send the LPO an "escrow instruction" letter, with the exact terms of the note I am buying, and the form of the note and the Assignment of Note to be used by escrow in completing the deal..
However, l learned when I looked over the note & assignment that were to be used, that the LPO had apparently not even looked at or read MY escrow instructions...and was going solely on those instructions contained in the P&S Agreement...and which contained an erroneous desription of the note.
The RE Agent who'd done the P&S Agreement had put in a different monthly payment than that which I was requiring.
I immediatly notified the LPO that this was NOT the note I agreed to buy, and she made it clear to me that she hadn't even read my escrow instructions or the note & assignment forms I had provided.
As the note buyer, you have the right to demand certain terms in the note you're buying, and that the note & assignment be on YOUR chosen forms.
YOU need to proof the note & assignment as well as the other docs too, to make sure the deal is EXACTLY what you are expecting, with certain down payment, other financing details, etc , and the right form for the note and its assignment to you.
To put this into perspective, imagine any lender, such as a Bank, blindly trusting escrow to close their deal, with their money, without an advance proofing of all the docs to be used. Obviously this would never happen.
You & I need to be equally demanding and careful when it's OUR money being used.
I must admit almost all of my purchases of notes created at time of sale, have been at or after the close of escrow. I usualy buy at discount in an attempt to produce an interest earned usualy equal too or surpassing the amounts achieved during the Hanseatic League. You remember when Banker Fuger
bankrolled Charles and saved the Holy Roman Empire. This is the interest rate that he excused Charles in exchange for making Money Lending legal, he was the first. . I try for a 20% return over life of note. Just like him.
I always insure that the note and Trust Deed are on acceptable forms and that there is a clause allowing a substitution of named Trustee, If things go wrong I do so love to conduct the foreclosure sale and earn all of those fees and costs. Also in the past I have further assigned notes to lenders who are satisfied with a lesser rate of interest in exchange for my offer of total recourse. Now that is fun cause if things go wrong you take the note back and you get the property. I also always handle my own evictions. This holds down costs and gives me a chance to make it a friendly occasion with in many cases the prior tenant moving onto better premises and lower monthly rental costs. I think my crowning achievement is when I moved a non paying tenant into a really lovely Condo, paid a third of the rent for six months so his payment would be less then before. Damned if he did not pay me back for my advances. The Rehabilitation of dead beats, thats my secondary MOS. But here in LaLa land there are so many. Most of whom are friends.
This is a good article glad John wrote it cause these are things you must be aware of. Also you avoid those terrible latter discoveries, like the hidden subordination clause which moved you from second position to third. Yip, that hurt.
Cheers, Lucius