Reasonable Replacement Notes
by Lorelei Stevens

It's the note seller's worst nightmare. You need cash and want to sell your seller-financed note, but you can't find the original. There may be a photocopy, but the real note is nowhere to be found. It is lost, stolen, or destroyed. Now what do you do? The best option is for you or us to contact the note payor and ask the payor to sign a new note, assuming the payor was the original signer on the note. Even though this is the best available option, it is not always possible because the payor has no obligation whatsoever to cooperate. Many times the payor will refuse to cooperate and you may have to undertake a lengthy court action which could result in you being required to post a sizable bond to protect the payor.

However, if the payor proves to be agreeable and will sign a new note, you have the best chance of completing a reasonable transaction. A cooperative payor is often an indicator of a smooth note sale. Even though creating a new replacement note offers basic solutions, it also comes with a number of unavoidable problems. You must be most concerned with the fact that a replacement note may not give you the same legal or financial protection as the real note.

Someone else may actually have possession of the real note without your knowledge. A lost or stolen note may fall into unscrupulous hands and the illegitimate possessor may later be able to claim rights to the real note. The simple fact of possession is a crucial factor. You should also be aware that by signing a replacement note the payor assumes a risk. If the real note appears at a later time, the possessor may be able to force the payor to pay the real note. Duplicate notes could mean "double trouble" for the payor. A knowledgeable payor, recognizing the risk and vulnerability by signing a replacement note, may require a bond, or at the very least, an indemnification, from you before signing a replacement note.

How do you construct a replacement note? You need three documents to cover the major risks. First is the replacement note, and second and third are affidavits from you and the payor, each separately affirming certain facts.

The replacement note should look identical to the original in all respects but two, and those are: (1) the date beside the new signature of the payor should be the date of actual signing and not the old date of the original note; and (2) language should appear on the note stating something like: "This note supersedes and replaces the original note which has been lost, stolen, or destroyed." To be fair to the payor, you should always include this notice on the face of the replacement note, which is a warning to you and others that there is a potential problem.

Your affidavit should describe all the circumstances surrounding the absence of the real note. Your affidavit should also affirm that the replacement note is identical to the real note, and describe in detail your due and diligent search for the real note. The affidavit should also include your warranty that the real note has not been sold or otherwise transferred or assigned. We will require you to indemnify us and hold us harmless from any claims, and promise that if the real note is ever found, you will immediately endorse it and deliver it to us.

We also need the payor's affidavit, which should state that all of the terms of the real note have been and presently are in full force and effect and have not been changed. Also, the payor should verify the exact mathematical calculation of the remaining balance due, the interest-paid-to-date, and the next payment due date. The payor should also confirm that there are no claims against you, and that the payor has no claims, defenses, rights, or offsets against the note. The payor should state that he or she understands that we are relying on the statements made in the affidavit. Finally, the payor should state positively in the affidavit that the payor has had no demands about the real note from any other person, or communication with any other person concerning rights to the real note, and that the payor has no knowledge that anyone other than you has ever had possession of the real note.

Because circumstances may vary, we will work with you or your attorney to draft the required affidavits. These affidavits must include a description of the security document, its recording numbers, and the legal description of the property securing the note. We may, at our discretion, record these affidavits in the real estate records if the recorder will accept them.

But you must understand that a replacement note is not as reliable as an original note. A replacement note is sometimes worth less money because of the risks that go with it. Even so, we may decide to accept the risks of a replacement note and pay a normal price. If the risks seem too great, however, we may offer you less money for the replacement note than we would for the real note. The major risk is that the real note will unexpectedly appear at a later time and cause trouble. Possession of the real note by an unforeseen person is a powerful position that could cause us to lose some or all of our money. Important legal rights go with the real note that may not go with the replacement note. Consequently, our possession of the replacement note leaves us without the legal strength and advantages that we would ordinarily expect if we had the original note.

Lorelei Stevens
Lorelei Stevens is president of Wall Street Brokers, Inc. in Seattle, Washington. She has been a licensed real estate broker (Washington State Real Estate Brokers License WA-LL-SB-*275LD) and a discounted note buyer since the 1970s. She has worked her entire adult life with Wall Street Brokers negotiating millions of dollars of paper and is a nationally recognized expert.

Lorelei has taught Legal Continuing Education seminars and has written numerous articles for legal, real estate and other professional publications on the subjects of seller-financing, managing, reinforcing and buying paper. She is the author of two books, one on seller-financing and another on note buying. She also writes a monthly column for Noteworthy Newsletter and is a frequent contributor to The Paper Source. Her web site is

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