Red Flags in a transaction.

In buying a seller-carry back note that was created on a property sale that went through escrow and was arranged by a real estate agent, it is normal that you get quite a bit of value documentation that supports the sales price. You may not even need an appraisal at all, other than to do a "drive by" and taking with neighbors. This can work so well that you find yourself breezing through a transaction.

There are however some pit falls that you may encounter know as "red flags" which make it vital to turn off the cruise control, stop, and proceed very carefully to obtain verification, detail by detail.

Red Flag #1 No Escrow: The buyer of the property and the seller handled all the paperwork themselves. It's possible that the may have messed up the deed and trust deeds. They may have skipped title insurance. It may be a bogus transaction. It's okay and actually beneficial to close your own note purchases without an escrow as long as the note was created properly. But "sans escrow' meaning "without" escrow, makes for risky real estate transfers and are mostly unsafe.

Red Flag #2 No Title Insurance: A trust deed that was recorded but was done against the wrong or non-existent property or not recorded at all. Subsequently, any judgements or other liens on the property, may take precedence. It's important to remember that title insurance guards against any mistakes or fraud. Never make a deal without it.

Red Flag #3 A trust Deed recorded after close of Escrow: This could mean that there was possible lender fraud against the senior lender meaning that the cash down payment was really small or no cash down payment at all. In this instance there is a probability that there was no title insurance and no possible recording of the transaction, resulting in miscellaneous senior liens and/or judgments that will gain priority.

Red Flag #4 The escrow documents are not available. If there are missing escrow instructions, closing statements, title insurance , or the original note, there is something the note seller is hiding and doesn't want you to see? Get the details. There are ways to get them so don't skip obtaining the facts..

Red Flag #5 The Escrow shows a down payment of cash: This could mean outside the escrow there could have been, possible lender fraud against the senior lender. There could have been a possible inflated sales price. Or it could have been a zero down deal, in disguise.

Red Flag #6 Is the note carry-back larger than the cash down payment: If this is the case you might have more invested in the deal than the property owner. This could or could not be okay.

For example: On a $200,000 dollar house, it would feel better if the buyer put $20,000 down and you bought a $20,000 dollar second rather than if the buyer put a $20,000 down and you bought a $30,000 second.

Lesson here is that if you notice any of the red flags listed above, ask for proof of the missing data or a correction of the problem. If the note holder is pulling a fast one he won't want to sell the note and won't return calls.