“For value received, I PROMISE TO PAY, etc.”
This is the typical language that begins a Promissory Note secured by real estate.
Please notice what it DOES NOT say – I GUARANTEE TO PAY.
So, the task for you and me, as potential note holders or note buyers, is to evaluate that Promise.
In the 1998 publication Owner Will Carry – how to take back a note or mortgage without being taken – the authors provide a checklist for us to use in our evaluation in order to avoid any surprises later on. Here is a partial list:
- Get a credit report.
- Get a current financial statement.
- Get a Preliminary Title report.
- Ensure Fire insurance is in place with you listed as Payee.
- Check annually with the County, make sure property taxes are paid and current.
- Understand the Foreclosure laws in your state.
If “we” do not have our own checklist to guide us, disaster may result. Let me share a personal story illustrating the RIGHT and WRONG way to do things.
Many years ago before I entered the note business, I owned a condo that was a rental property. Initially, I placed an ad in the local paper and began meeting and interviewing people. I finally met with a young couple, recently married. They told me their plan was to save for a big down payment so they could buy a home in about 5 years. I did a credit check, talked to employers, etc. I liked them – a lot – and they became my 1st tenants. Sure enough, 5 years later they called me, saying they were looking for a home and would probably be moving out in the next few months. I was happy for them but hated to see them go.
During this time I received a phone call from a friend who owned a condo near by. She told me a friend of hers who was a renter in the complex was looking for another condo to rent because his owner was selling. I knew this man for almost 10 years. We met, I made a few calls and he became my 2nd tenant. He was wonderful for 5 years +, dying of a heart attack at the end.
Since I was so good at finding quality tenants, I then made the surprising decision to “delegate” this responsibility to the property management company. After all, unlike me, they were professionals, do this stuff every day, so I could just let them do everything and send me a check every month.
Quickly, they informed me they found a young family. Without talking to or meeting them, I gave my blessing and they moved in. 4 months later they were gone!
Months 1 and 2 rent were paid, month 3 was very late, month 4 was not paid at all, and they were evicted. I then visited “my” condo and was shocked. The kitchen was disgusting. Garbage on the floor and in the sink. Refrigerator door open with rotting food inside. Back patio door open, broken door glass on the floor. The bathroom was disgusting. Upstairs, in the kids’ bedroom, crayon scribblings were on the walls, closet doors and windows. Same in the parents’ bedroom. Who does this kind of stuff? Where is the respect? I did not know whether to cry or beat myself up for being so stupid.
I did both and sold the condo!
This was not a note situation, but what a lesson for us noteholders and note investors. This was MY business and I did not treat it that way. Whether I owned 1 property or 10 was irrelevant – I became irresponsible by delegating my responsibility to someone else.
If you are considering carrying a note and would like my thoughts, please call.
