What to Avoid When Managing Owner Financed Note

Getting a mortgage became very difficult after the crisis hit the real estate market

. This pushed many sellers to resort to owner financing in order to quickly move properties. A successful sale brings good fortune to sellers as they acquire valuable properties.

Unfortunately, owner financed notes are very difficult to manage. Not many sellers have the right skills to properly manage mortgage notes. The skill cannot be learned in business schools or formal trainings.

For highly experienced private note buyers, they are often deluged with calls from note sellers offering to sell improperly managed notes. If you are into this business, then there are four serious mistakes that you need to avoid. If you commit mistakes, your mortgage note can become worthless and unsellable or cheaper. So here are the mistakes that you must always avoid.

1. Failure to Monitor Property Taxes

If you fail to monitor the borrower's current property tax, then you are committing a serious mistake. You can lose the property in case it will be foreclosed due to tax debts. There are real cases where the note holder suffered total loss because of foreclosure.

Worse, a local municipality can sell the foreclosed property on the auction block without the knowledge of the note holder. So if you want to avoid this scenario, you need to closely monitor if the borrower is current on his or her property tax.

2. Failure to Monitor the Homeowner Insurance and Coverage

If you will not ensure that the homeowner is current on his insurance, then you can lose big time from the transaction. It is also best to know if the homeowner has sufficient insurance coverage.

For example, if the borrower fails to update the property insurance and the policy lapsed, you can lose big money if a disaster strikes. If a fire razed the property, you will be left with a worthless note. Aside from the updated insurance, the note holder should also monitor the specific coverage of the insurance.

3. Failure to Monitor the Condition of the Property

You should also check the physical condition of the property. A typical seller usually does not live in the locality where the property is located. If the property is neglected by the owner or those who are currently living in it, then the note you are holding will eventually become worthless. That is because non-owner occupants of the house have very little interest in maintaining the property's physical condition. Your note will become very cheap which could cause big losses for you.

4. Allowing the Borrower to Pay the Mortgage in Cash

This is another big mistake because the note you are holding can become very cheap or worthless. That is because you will not have any proof of servicing the note. It is also not enough to issue a simple receipt to the borrower.

These four common mistakes can bring your business down. You need to avoid them through proper management of your private mortgage notes. You need to protect these notes especially if you intend to sell them in the future.

What to Avoid When Managing Owner Financed Note

By: Rob Blake

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