What Is Due Diligence On A Note?



Due diligence, due diligence…what does that mean in relation to a note? Well, there are certain things that need to be analyzed and vetted before you make the commitment to buy a mortgage note. Sometimes even before an offer is made on a note you can perform some preliminary due diligence. You’ll see many investors selling notes directly, on online platforms, by hedge fund managers and even banks. Outside of yield, how do you determine if the note is good to buy for you?


There is no catch all answer, however there are some fundamental things that should be done as part of your due diligence in determining if the note you are about to buy is a viable investment. There are different actions to consider depending on whether the note is performing or nonperforming, or in first or second position.


Let’s start with this… it’s been said that when buying first position notes the focus is on the asset, and when buying second position notes, the focus is on the borrower. Now throw in whether the note is performing or nonperforming! Let’s start with first position. Some of the things you’ll want to check are if there are any liens on the asset, is it vacant, does it need renovation, is it going to auction, is it in foreclosure already and what kind of neighborhood is it in?


That’s just to start. Do you want to foreclose on it? Do you want to get the borrower paying again? Do you want to do renovations on it? Is the title chain good? These are just some things to consider. What about if it’s in second position? If so, and it’s an occupied asset, do you want to get the borrower repaying again? Is there enough equity to cover the second mortgage after the first mortgage lien? Is it able to be underwritten by an RMLO?


This does not cover everything that should be included in due diligence when buying notes, but they are important things to look out for and should be included in your due diligence analyzation. There are some companies that will perform due diligence for you, however I recommend you at least learn what is required of you to conduct your own due diligence first, so that you know what to look out for when buying your own assets.


For more information on notes or if you have notes to sell, reach out to Zee at Awanna Holdings, LLC (571)659-5005. ©Awanna Holdings, LLC (Feb 2020-10), zee@awannarandh.com/www.awannarandh.com

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