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 unsellable, or at least for a discount they can accept. Below are the 4 biggest mistakes I see on a daily basis.
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.
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.
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.
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 the note worth more money if you ever need to sell it.
