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