June 02, 2010
Have You Taken Credit?
In what are beginning to sound like broken record conversations, last week I asked three different note holders the same question: Did you check your payor’s credit before selling your property to them? Every answer started the same way: “No, but…” One said he assumed the payor had good credit because of the large down payment he made. Another said she was confident enough in the property that she didn’t care if the payor made the payments or not. The last one said he was receiving the payments on-time, but found out after the sale that the payor’s credit “wasn’t any good.”
It is important to run a credit check on any payor for the following reasons:
1) You’ll know right away whether the buyer presents an acceptable credit risk. Despite your comfort with the property, do you really want to go through the hassle of taking it back via foreclosure if your buyer defaults soon after the sale?
2) You will have the buyer’s social security number in the event a potential note investor looks to purchase your note in the future. The buyer’s SSN is also needed for year-end interest-reporting for their taxes.
3) Scouring a potential buyer’s credit report can uncover some surprises. Those with a history of delinquent child support, IRS tax liens, bankruptcies, and/or prior foreclosures should be avoided at all costs. Wouldn’t a $20 investment in a credit report pay for itself dozens of times if it kept you from selling to an unworthy buyer?
Most Americans don’t know how to read a credit report. The attorney helping you close the sale or a representative from the title company can help you. Watch for recent delinquencies on credit cards, auto loans, or mortgages. Ask your buyers about judgments, collections and charge-offs. Were they medically-related? If so, they may not be as indicative of a looming problem than if they just lost their prior home to foreclosure.
Remember, you are the underwriter. Make sure you have a complete picture of your buyers before you sell your property to them. That bit of advice probably doesn’t help if you’ve already sold your property, but you now have a clearer picture of why a potential investor will want to know these things.
Protect yourself and your interests by thinking like an investor would. After all, they are looking to walk in your shoes if they buy your note: By that token, you both share the end goal; buyers who make their payments on-time, every time.
Make it a great week.
Our efforts stay focused on note holders. If you are a note finder, a note
broker, or anyone other than the actual note holder, please do not contact