President Ronald Reagan famously used the phrase Trust But Verify when discussing United States’ relations with the Soviet Union. What he meant, of course, was that while a public declaration by the Soviets might be considered reliable, one should perform additional research to verify its accuracy.
I remember very well one of the first deals I ever worked on in the note business. The concept of Trust But Verify was front and center. This man told me he sold a house that he used to live in and that the buyer gave him $100,000 as a downpayment. He was very convincing in our conversation and I was brand new to the business. My funding source and I were scheduled to meet at the property to look it over, but I received a phone call cancelling the appointment. My funding source said his preliminary research showed this house was a mobile home – not a house. He asked me to request a copy of the closing statement, which the seller provided. There was NO downpayment shown on the statement. I called the seller and he explained that to him, a house was a house and he did not differentiate between a home and a mobile home. He said the $100,000 was given to him outside of escrow. When I asked for a bank deposit receipt or statement that would reflect this amount, he was silent for a moment, then said he got $100,000 cash and never deposited any of the money!
Ooops! Red flag! Sorry, we can’t help you. Trust But Verify.
This was my shocking introduction to the note business. A lesson learned. Occasionally, when I am talking to a seller, I will hear “Why are you asking me all these questions?” Some people are really upset that I am trying to find out as much as they know about their transaction. They feel if I know the note terms, they should get an offer. Sorry, but it doesn’t work that way.
When you sell a property and offer an owner carryback, there is an element of risk. The more you know about your buyer and the stronger the terms of your note, the less the risk. When a note buyer is considering giving you a lump sum of cash, the risk escalates, and proper due diligence confirming the information you provide is mandatory. Just good business.
Trust But Verify.
