This week’s tip covers the essential due diligence steps for note investing, designed to sidestep costly pitfalls without needing a fortune upfront. In brokering seller-financed notes, skipping these can turn a promising deal into a headache—think unpaid taxes or shaky collateral that erodes your fee or investment.
Start with the basics: Verify the note’s existence and terms. Request the original promissory note, mortgage or deed of trust, payment history, and any assignments. Cross-check the borrower’s credit report for red flags like recent bankruptcies. Then, assess the collateral—order a broker’s price opinion or appraisal to confirm the property value exceeds the note balance by at least 20-30%. In 2026, with rising interest rates potentially pressuring borrowers, this buffer is crucial to avoid underwater deals.
Next, dig into title: Run a preliminary title search for liens, judgments, or HOA dues that could claim priority. I once brokered a $45,000 note on a modest Texas home; due diligence revealed a $3,200 tax lien, which the seller cleared before closing, saving the buyer—and earning me a clean $2,800 fee. Without that step, it could have been a loss. (This is illustrative; results vary. Consult professionals.)
Don’t overlook servicing: Review the servicer’s track record for accurate payments and escrow handling. For quick math on yields, plug numbers into a TVM calculator to project cash flows.
To source deals efficiently, tap established lists. If brokering appeals as a zero-capital entry, explore our broker opportunity for structured guidance.
These steps aren’t glamorous, but they’re your safety net. Approach them methodically, and you’ll build confidence in turning connections into steady income streams.
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