Three Big Tips to Keep Your Real Estate Note Healthy
If you're involved in seller financing, attention to detail is one of the two pillars you need to keep everything running smoothly (The other is solvency, but the idea that you shouldn't spend, lend or borrow out of your budget needs no explanation . . . we hope.) Whether you plan on selling your note or not, keeping your papers in order and explicitly defining the note's terms is a necessity. Of course, it's a little vague to just say, "Be detail oriented!" Here are three ways in which you should act on this big, broad principle.
Get the Original Note: It may be convenient to go with electronic copies and secondary documents, but if there's any trouble you should be able to immediately produce the original note. Don't be like the banks, which often lose track of their originals. In the midst of the housing bubble collapse, one of the most common tactics that people now use to avoid foreclosure is to challenge the lender to produce the original note. This delays proceedings for years. According to the University of Iowa, a study of 1700 bankruptcies linked to home foreclosures revealed that institutions lost the note more than 40% of the time. If you need legal recource and don't have the note on hand you're in for some pain.
Get Title Insurance to Record Priority: If the borrower goes out and gets another loan on the strength of his home ownership, how do you ensure that he pays off the loan you gave him first? You need title insurance to specifically define your loan's priority over any future encumbrances. This is especially important whenever the borrower owed money to a bank. The bank will usually have more resources at their disposal to compel payment and may even lay claim to the title if they don't know the borrower already has a loan with you. Less scrupulous borrowers who sense any confusion in priority may also exploit this to duck payments.
Keep the Property Paid, Legal and Above Board: Yes, it may seem like a no-brainer to keep property taxes and insurance premiums paid right up to the point where title transfer switches the onus to the borrower, but a surprising number of note holders get so preoccupied with the business of the note that they slack off. You should also personally ensure that there's a current property inspection, everything is up to code, and there is complete agreement on the condition of the property before it changes hands. Remember: You are the bank, so these miscellaneous matters are ultimately your responsibility. Don't assume anything is done until it passes muster with you and your lawyer.
Yes, these all boil down to details: the kinds of things that are largely invisible to sellers operating through the institutional system. Keep track of them, and you'll be able to freely choose whether to manage your own note or sell it down the line. If it's in good shape, we may be interested ourselves. Get a quote to sell your real estate note here.
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