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Loan Acquisitions – A Basic Due Diligence Checklist for Buyers
Recently I received a request for a list of basic due diligence items that a buyer should consider when purchasing a real estate loan. Here is a short list to help you get started:
- Loan Documents – You’ll want to review each loan document to know what your rights and obligations will be once you acquire the loan. Your attorney will also determine if they are enforceable, how difficult it will be to enforce the documents, and whether you will be adequately protected.
- Loan File – Review the bank’s loan file and be sure to ask them if they withheld anything for any reason. Banks will often withhold certain information, such as anything that is protected by attorney-client privilege. Be sure to get a list of the information or types of information withheld from the file.
- Payment History – Confirm the status of the loan, payment history and amount of any escrow or other deposits.
- Notices of Default – This should be a part of the loan file but, if not, make sure the bank gives you any default notices they’ve sent the borrower.
- Foreclosure Notices – In addition to default notices, you will want to review any foreclosure notices the bank may have sent the borrower.
- Foreclosure Process – Make sure you’re familiar with the foreclosure process and typical timelines for the state(s) where the underlying collateral is located. You should understand this process early on since the difficulty of getting to your collateral will affect how to price your bid.
- Title – You should conduct the typical title review that you would for any real estate purchase, including, a review of any liens that have been filed against the property. You will likely not be able to get a new survey, but the bank should have a survey in the loan file that you can review.
- Taxes – Are there any delinquent taxes that you need to price into your bid?
- Asset Due Diligence – Finally, you’ll want to conduct as much due diligence as possible on the underlying collateral. Unfortunately, many times this is not permitted by the lender or not possible under the circumstances. At a minimum, review whatever information the lender has in its file such as appraisals, environmental reports, property condition reports, soil studies, etc… Even if you cannot conduct a full property investigation, see if you can at least walk the property or view the property from the street….curb appeal counts.
You may even discover a potential foundation issue…
Is there anything else you think we should add to this list?