Want to receive as much as possible when selling your real estate note?
Payment histories increase a note’s value
Here’s a point we at Porch Swing Funding can’t emphasize enough: Telling a potential note buyer or investor about your borrower’s payment habits is one thing. But, having documented proof takes it to a whole other level.
Presenting a note buyer with a verifiable payment history can significantly increase the value of your note.
There are two ways to keep track of seller-financed real-estate payments:
- 3rd party serviced
- Seller direct
Professional Mortgage Note Servicing
The best choice is to let a professional handle it.
Your borrower will make payments to a licensed loan servicer who will accept their payments and forward proceeds to you. They keep payment and balance records, collect late fees, send statements, and send annual 1098 mortgage interest statements that are required for tax purposes.
In many cases, your servicer can provide safe storage of original loan documents, establish an escrow account to make sure property taxes and insurance remain current, and offer automated ACH transfers for payments and deposits.
Some title and escrow companies provide these services as well. Monthly fees range between $15 – $25/mo. If negotiated in advance, it can be arranged for your borrower to pay all or a portion of the fee.
Trust us when we tell you that any potential note buyer will appreciate knowing that a licensed 3rd party is providing the loan’s payment history and has been on top of the servicing particulars. It’s a sure way to increase your note’s value.
The DIY Approach to Collecting Payments
If you choose the “Do-It-Yourself”’ method over using a professional, you’ll need to follow these steps:
1. Place original note and other original documents in a safe deposit box or fire-proof safe.
2. Make a copy of each check or money ordered received. Accepting cash is not recommended since it is hard to verify the payment history without a paper trail.
3. Deposit payments regularly and keep a copies of the bank deposit receipts. It’s best to deposit each payment separately rather than combining with other checks. If you dislike the idea of sharing your general purpose bank account records, you could open a seperate account solely for this purpose.
4. Create a ledger or spreadsheet reflecting the date and amount of payments received.
5. Calculate the amount applied to interest, principal, late fees (if any), and the resulting principal balance. An amortization schedule or financial calculator can be helpful. Once calculated, record in the ledger.
6. Send out an annual statement to the buyer or payer along with the IRS 1098 mortgage interest statement.
7. Verify the real estate taxes and property insurance are being kept current. Consider establishing a tax and insurance escrow where the buyer pays 1/12th of the annual amount into a reserve account each month.
8. Send collection letters as necessary for late payments, lapsed insurance, or delinquent real estate taxes.
Why Buyers Want Note Payment Histories
When an investor agrees to purchase a note they’ll request a payment history. Verifiable payment history can improve the value of a note as it provides proof of timely payments. A payment history is considered verified when it is either provided by a third party or is backed up by the documents and records outlined above.
Unfortunately, many sellers fail to keep track of the payments received. When they go to sell the note, contract, or trust deed they try to recreate the history from memory. Without proof of payments received, a note buyer has to go on faith. Sometimes a payment history affidavit signed by your borrower can substitute for a payment record but it still doesn’t add the value of verifiable proof.
If you haven’t already, set up a payment tracking method to increase your note’s value.