Due Diligence on Notes: What a Broker Should Check First

Due diligence on a note is the checking a buyer does before funding: confirming the payments, the property, the paperwork and the payer. A broker who does a lighter version of that checking before shopping the note gets quotes that hold. A broker who skips it collects strong early numbers that fall apart a week before closing.

This post is about the broker’s role. If you are selling a note and want to know what the buyer will look at, read what a buyer checks before funding. If you are buying, our due diligence checklist for note buyers is the fuller list.

Why the broker should check first

A buyer’s first quote is usually based on what the seller said: the balance, the payment history, a guess at the property value. The buyer then verifies all of it. When the facts turn out worse than described, the price comes down.

From the seller’s side, that feels like bait and switch, even when nobody meant it. It is the single biggest source of distrust in this business. The fix is simple: verify the main facts yourself before the note goes out, so the quotes you collect are built on the same facts the buyer will confirm later.

A worked example of a quote that drops

Here is a typical example with illustrative numbers. Say a seller holds a note with a $90,000 balance at 8%, paying about $695 a month with 300 payments (25 years) left. The seller says the house is worth about $150,000 and the payer has never been late.

Investment-to-value (ITV) is the buyer’s price divided by the property value. A lower property value and a spotty history pushed the buyer to a higher yield, and the seller loses about $5,500. Nothing about the note changed. Only the facts did.

If the broker had pulled a payment record and a rough valuation first, the seller would have heard “around $71,000” on day one. Same outcome, no broken trust. Our page on why a note offer drops before closing covers the other common causes.

What a broker should check before shopping

You do not need to repeat the buyer’s full process. You need enough to catch the problems that move price.

1. The payment history

Ask for proof, not memory. A servicer’s payment history is best. Without a servicer, bank statements showing each deposit will do. Look for late payments, skipped months and partial payments. Seasoning, the number of on-time payments made, is one of the biggest price drivers, so get it right. See how to prove payment history on a note.

2. The balance and terms

Rebuild the balance from the original amount, rate, payment and start date with an amortization schedule. Compare it with what the seller believes. Gaps usually mean missed payments, extra payments or a misunderstanding, and each one affects price.

3. The documents

• The signed promissory note, ideally the original
• The mortgage or deed of trust, with proof it was recorded
• The closing statement from the original sale, which shows the down payment
• Any assignments if the note has changed hands before
• Any modification or forbearance agreement

Our page on what is in a collateral file explains what each document does.

4. The property

Get a rough, independent sense of value. Online estimates are a starting point at best. Recent nearby sales help. Ask whether the payer still lives there and whether the property is in reasonable condition. Buyers will usually order a broker price opinion themselves, but you want no surprises when it comes back.

5. Taxes and insurance

Unpaid property taxes can create a lien that comes ahead of the note. A lapsed insurance policy leaves the collateral exposed. Check the county tax record and ask for proof of current insurance with the holder named.

6. Title and other liens

Is there a bank loan ahead of this note? Any judgments or other liens recorded against the property? The buyer will run a title search. A quick look at county records can tell you early whether the note is really in the position the seller thinks.

Performing versus non-performing notes

For a note that is being paid, diligence focuses on the payer’s track record and the cushion in the property. For a note that has stopped paying, the focus shifts almost entirely to the property and the path to recovery: how long foreclosure takes in that state, what it will cost, and what the property will sell for afterwards. Non-performing notes are priced on those numbers, not on the note’s interest rate.

What to tell the seller

Share what you find, plainly. If the history has late payments, say so and explain the effect on price. If the property is worth less than the seller hoped, show them the numbers. Sellers handle bad news well when they hear it early and see the math. They handle it badly when a buyer delivers it at the last minute.

Also tell them what they can fix. A missing recorded mortgage can often be recorded. Proof of insurance can be obtained. A few more months of on-time payments can sometimes improve the price enough to be worth the wait.

Bottom line

Due diligence belongs to the buyer, but a broker who checks the payment history, balance, documents, property value, taxes and liens before shopping the note protects the seller from a late price cut. The quotes are more honest, the closings are smoother, and the seller trusts the next number you give them.