owner financing tips

Managing Private Mortgage Notes - Tips On How To Manage Notes Created From Owner Financing A Home Sale

4 Mistakes To Avoid When Managing Your Owner Financed Mortgage Note

With the crash of the real estate market and complete pendulum swing in requirements to qualify for a mortgage, many home sellers are resorting to owner financing in order to move their property. Once the sale is completed, the seller now has in their possession a valuable financial asset. But managing an owner financed note is hardly a skill most home sellers possess or is taught in school or anywhere else today. As a private note buyer I get calls daily from note sellers wanting to sell a note that haven’t managed their asset as well as they should. Some of the mistakes can make a note un-sellable, or at least for a discount they can accept. Below are the 4 biggest mistakes I see on a daily basis.

1. Not monitoring whether the borrower is current on their property taxes – In a worse case scenario, this mistake could result in a total loss if the home were foreclosed on my the local municipality and sold off before the note holder even knew it.
2. Not insuring that the buyer is current on their homeowner’s insurance as well as has sufficient coverage – If the borrower let their insurance coverage lapse and had a fire, the note holder could again end up with a worthless note. Note holders should not only monitor the borrowers insurance coverage but should be sure they are on the policy as the mortgagee.
3. Not physically monitoring the property – Many property sellers no longer reside in the city the property they sold and owner financed or they live across town. As a result, they rarely if ever drive by the home which is the asset supporting the note they hold. What can and has happened on many occasions is that the borrower may have moved out and is renting the property out to a friend or family member who has a lot less incentive to maintain the property. This could also cause problems if a major insurance claim were made since the property is no longer owner occupied, requiring a different insurance policy.
4. Allowing the borrower to pay their mortgage in cash each month – If the note holder never needs to sell their note, this may not be a big deal. However, if the note holder ever needs to sell their note, they will not have proof of the servicing of the note. This makes a note worth much less and giving the borrower a receipt will not suffice.

There you have it, four mistakes to avoid in order to a) protect the value of a private mortgage note and b) make a note more valuable when you sell a note.


Tips For Managing A Private Mortgage Note

If you are a holder of a private mortgage note, following are some key tasks that will help minimize the risk typically associated with this asset class..

1. Monitor the buyer’s hazard insurance to be sure it is current. If the buyer has not paid their homeowner's insurance and it has lapsed, you should take out a policy yourself.
2. Review the buyer's coverage to be sure it will cover the mortgage and that you Mortgagee. This is particularly important in regions of increasing home values.
3. Review the buyer's property taxes just after they are due each year to be sure they are paid. If the buyer gets behind in property taxes, you could find yourself in the middle of a tax lien sale. You would want to pay the taxes in order to avoid this unpleasant event.
4. Monitor the home from the street a couple of times a year, looking for significant signs of deterioration. Some mortgage note holders have discovered that the buyer is not even living in the home any more and is renting it out to a friend or relative.
5. If the buyer shows a pattern of late payments, check to see if they are still employed (Check with your lawyer to see if you can contact the buyer's employer). If the buyer is self-employed, go by their business to be sure they are still in business and are not advertising a going out of business sale. This is particularly important if these tough economic times with thousands of businesses going out of business each month.
6. Go by the county tax office once or twice a year to check for any new liens on the property. There could be a new second mortgage, which might not be permitted under the mortgage agreement, or there could be a tax lien, federal or state.
7. If the buyer defaults on the mortgage note, contact a good real estate attorney right away. Do not try to work this out with the buyer without the advice of a real estate attorney.
8. Lookout for a pattern of late mortgage payments even if the buyer is not technically in default. If you experience a pattern of late payments, immediately research for underlying problems as mentioned above and take whatever action necessary.
9. Always keep detailed records of payments on the note, including date of payment, check number, copies of checks, and an amortization schedule. You will need this documentation in case of a dispute or a mortgage default. This information will also be needed should you ever want to sell the note.
10. If you didn't purchase a title policy at closing, you might want to now. To protect your asset.
11. Lastly, if you are considering creating an owner financed note to help sell a home, consult with a mortgage note buyer first in order know if the terms will get top dollar should you ever need to sell the note. If I wanted to ever sell a note, I certainly would. Also be sure and check the credit on the buyer. If the buyer provides you with the report, be sure it was pulled within the last month.

There you have it, some suggestions to protect your private mortgage note.

US Note Buyer