Vetting Your Loan Seller

Before you analyze a single loan, pull a single credit report, or order a single title search, you need to know whether the person sending you the tape is worth your time. Seller vetting is the cheapest due diligence you will ever do -- it costs nothing but a few pointed questions, and it can save you thousands in wasted effort and outright fraud.

There are four questions every note buyer should ask before engaging with a new seller. Get satisfactory answers to all four, and you have a counterparty worth working with. Get evasive or incomplete answers to any of them, and you should walk away -- or at minimum proceed with extreme caution.

Question 1: Do You Own the Loans?

This is the most fundamental question in the entire transaction, and it is the one most new investors forget to ask. The person who sends you a tape may not own the loans on it. They may be a broker marketing someone else's assets, a broker marketing another broker's assets, or -- worst case -- someone with no connection to the actual owner at all.

Why this matters:

• Pricing accuracy. Every intermediary between you and the actual owner adds markup. If you are three brokers removed from the principal seller, the price you see has been inflated at each step.
• Execution speed. When you have questions about a loan, every layer of intermediary adds communication delay. A direct relationship with the asset owner means you get answers in hours, not days.
• Transaction certainty. Only the actual owner can sign the assignment of mortgage and allonge that transfer the loan to you. If the person you are negotiating with does not control the asset, they cannot guarantee the trade will close.

If the answer is "no, I'm brokering these for another seller," that is not automatically a dealbreaker -- but you need to understand exactly how many layers exist between you and the principal. One broker with a direct relationship to the asset owner is normal. Two or more layers is a daisy chain, and daisy chains create problems.

How to detect a daisy chain: Ask the seller to name the entity that currently holds the assignments of mortgage. If they cannot answer, they are not close enough to the asset to give you a reliable trade. Ask for the seller's LPSA template -- the actual owner will have one. If your contact needs to "check with someone" on basic loan details, there are layers you are not seeing.

Question 2: Are the Assignments Recorded? Into What Entity?

The assignment of mortgage is the public record document that shows who owns the lien on the property. When a loan changes hands, the new owner should record an assignment in the county where the property is located. This creates a clear, public chain of title from the original lender through every subsequent owner to the current holder.

Ask the seller: are the assignments recorded into your entity? If the seller is ABC Fund LLC, the most recent recorded assignment should show ABC Fund LLC as the assignee. If it does not, there is a gap in the chain that will need to be resolved before -- or as a condition of -- the sale.

Why unrecorded assignments matter: they create ambiguity about legal standing to enforce the mortgage, they show as breaks in the chain on title reports, and they can become your post-acquisition problem -- getting them prepared, signed, notarized, and recorded at your expense and on your timeline.

Question 3: Where Are the Original Collateral Files?

In note investing, you are buying paper. The four documents that make a mortgage note enforceable are the promissory note, the mortgage (or deed of trust), the assignment chain, and the allonge chain. The originals of these documents -- particularly the note and allonge, which require wet ink signatures -- must exist and must be deliverable to you.

Ask the seller: where are the original collateral files right now? Acceptable answers include:

• "In our office." The seller has physical custody, which means they can ship directly to you or your document custodian after closing.
• "With our document custodian." A third-party custodian holds the files on behalf of the seller. This is standard for larger operations and is actually a good sign -- it means the files are inventoried and managed professionally.
• "With the servicer." Some loan servicers hold collateral files for their clients. This is common and acceptable.

Answers that should concern you:

• "We'll get them from the bank after the sale." This means the seller does not have possession of the documents. There is a risk that the files are incomplete, missing, or that the bank will not release them promptly.
• "We can provide copies." Copies are not sufficient for the promissory note. You need the original with wet ink signatures, or a lost note affidavit if the original is truly missing. A seller who only offers copies may not actually have the originals.
• "I'm not sure." Walk away.

The collateral question also reveals how professional the seller is. A seller who knows exactly where the files are and how long delivery will take is a seller who has done this before.

Question 4: Can We Fund Through Escrow?

Escrow is a third-party arrangement where your purchase funds and the seller's collateral documents are held by a neutral intermediary until both sides have fulfilled their obligations. The escrow company verifies that the documents are complete and correct before releasing your funds to the seller, and verifies that funds have been received before releasing documents to you.

Ask the seller: are you willing to close through an escrow company?

For a seller you have never worked with before, escrow is the single most important protection in the transaction. Without escrow, you are wiring money directly to a counterparty and trusting that the documents will arrive, that the servicing transfer will happen, and that everything the seller represented is accurate. With escrow, a neutral third party ensures the exchange happens simultaneously.

A legitimate seller should have no objection to using escrow. They may prefer not to because it adds a step and a small cost to the transaction, but they should be willing. A seller who refuses escrow outright is telling you something -- and what they are telling you is that they do not want a third party examining the documents before they receive your money.

Red Flags Beyond the Four Questions

The four questions form the foundation, but keep watching for these additional warning signs: pressure to wire funds immediately or skip due diligence; inconsistent information between the tape and verbal conversations; no LPSA template (a professional seller has one ready); and unwillingness to provide proof of ownership such as a servicer screenshot or recorded assignment. Any of these signals that the seller is either inexperienced (which requires more caution) or not acting in your interest.

How FIXnotes Handles Seller Vetting

One of the core value propositions of the FIXnotes marketplace is that seller vetting is done for you. Before a seller can list assets on the platform, FIXnotes verifies their identity, confirms ownership of the assets, and reviews the collateral documentation. This does not replace your own due diligence on individual loans, but it eliminates the most dangerous risk in the acquisition process: transacting with someone who does not own what they claim to sell.

For deals sourced outside the marketplace -- through brokers, networking, or direct outreach -- these four questions are your first line of defense. They take five minutes to ask and can save you months of headaches.

Building Seller Relationships Over Time

Vetting is not just about avoiding bad actors -- it is about identifying the sellers who become long-term deal flow sources. When you find a seller who passes all four questions and closes cleanly, invest in that relationship. Close on what you commit to, respond to tapes promptly (even when you pass), and be transparent when due diligence reveals issues. The note investing community is small, and your reputation as a reliable buyer earns you access to better deal flow over time.

What Comes Next

Once you are confident in your seller, the next step is understanding what they are selling. The data tape is the document that describes every loan in a pool -- and reading it correctly is the difference between smart offers and wasted time. The next lesson breaks down how to read a loan tape, identify the columns that matter, and filter a portfolio down to your investment criteria.