A note sale agreement is the contract under which the seller agrees to transfer a note to you and you agree to pay for it. From the buyer’s side it pins down exactly what you are getting, puts the seller’s statements about the note in writing, and sets out what you can do if one of those statements proves false. Some sellers call it a note purchase agreement or a loan sale agreement.
What the agreement covers
| Section | What it does for the buyer |
|---|---|
| Description of the note | Identifies the note, the payer, the property, the balance and the next payment due, so there is no doubt what is being sold |
| Price and payment | States the price, when it is paid and through whom |
| Due diligence period | Gives you time to check the file, and a right to walk away or reprice if it does not match |
| Seller’s representations and warranties | The seller’s written statements of fact about the note |
| Closing deliveries | Lists the documents the seller must hand over |
| Cut-off date | Decides who keeps a payment that arrives around closing |
| Remedies | Says what happens if a seller’s statement was untrue |
| Servicing transfer | Sets out who tells the payer and where payments go next |
The draft reaches you once a price is agreed, whether you found the note yourself or it was sent to you after you chose to join the buyer list. Read it against this table first, and note any section that is absent.
Representations and warranties
A representation is a statement of fact, and a warranty is a promise that the statement is true. They matter because the file cannot show you everything about a note, and the agreement is where the seller commits the unseen parts to writing. A buyer will want the seller to state that:
- the seller owns the note and has the right to sell it,
- the note has not been sold, pledged or assigned to anyone else,
- the balance, the rate and the payment history are as shown,
- the note and the security instrument are genuine and have not been changed, except as disclosed,
- the lien is in the position stated,
- the payer has no claim or defense against paying, as far as the seller knows,
- there is no bankruptcy, foreclosure or lawsuit the seller has not told you about.
Look closely at the phrase “to the seller’s knowledge”, which shrinks a promise to whatever the seller happened to know. That is reasonable for matters the seller cannot be sure of, such as the payer’s finances, and weak for matters the seller ought to know, such as whether the note has already been pledged.
Documents due to you at closing
- The original note, endorsed to you. An endorsement is the signed transfer written on the note itself or on a page attached to it, called an allonge.
- An assignment of the mortgage or deed of trust, in a form that can be recorded in the county records.
- The original or a recorded copy of the security instrument.
- Every earlier assignment, if the note has changed hands before.
- The title policy, insurance details and payment history.
Together these make up the collateral file, and the agreement should name each document in it so that a missing one is the seller’s problem to fix before you fund.
If a statement turns out to be untrue
A written promise is only as useful as the remedy behind it. Look for a clause requiring the seller to cure the problem or buy the note back at your price, less the principal you have received, and check how long that right lasts, since an agreement can end it soon after closing.
Then ask whether the seller could pay. A buyback right against a private individual who has already spent the money is thin protection, which is why the agreement backs up your due diligence and cannot take its place, and why you verify the note seller as well as the note.
Notes sold as is
Some notes, non-performing ones especially, are sold as is, with few representations or none. The price ought to reflect the missing promises, and a buyer who accepts those terms is relying entirely on what can be verified before funding.
Reading your first one
Put the agreement beside our due diligence checklist for note buyers and mark which check each clause backs up, then list any check that has no clause behind it. Among the documents in the purchase the investor guide follows, this is the one that records what the seller promised, so the gaps on that list are worth raising before you sign.
Contract law and recording rules vary by state, and a single sentence can move a risk from one party to the other, so pay an attorney who works with notes to review the draft before you sign, on your early purchases at the least. This page raises the questions and does not give legal advice.
Related questions
Is the note sale agreement the same as the assignment?
No. The sale agreement is the contract between you and the seller. The assignment is a separate document, recorded in the county records, that transfers the mortgage or deed of trust into your name.
Who writes the note sale agreement?
Either side can supply the first draft, and the other side comments on it. Whoever writes it, have your own attorney read it before you sign.
What is a buyback clause in a note sale?
It is a term that requires the seller to repurchase the note if one of the seller's written statements about it proves untrue. Check how long the right lasts and whether the seller would be able to pay.