Are you concerned with protecting a seller-financed note? The buyer missing payments isn’t your only worry.
Many sellers focus so much on receiving payments, they fail to protect their note when it comes to others areas… property insurance and taxes.
Next to delinquent payments, the most common default by buyers is the failure to keep the property insured and the real estate taxes current.
Many buyers will make their monthly note payments, but fail to pay an insurance premium or real estate tax installment.
Think about these two scenarios:
- The property securing your loan burns down. There’s no insurance. The buyer still owes you money, but for a house that’s been reduced to charred remains. Think you’ll see another payment? It’s doubtful. Can you foreclose? Probabaly yes. Of course, you’ll incur costs. And, what’s left to take back?
- Your buyer has been making payments “sort of” on schedule. One month it arrives 15 days late, the next almost thirty days late. This goes on for quite some time until one day you receive word that the house is going to be put up for a tax sale, or that a tax lien has been filed and sold. In most states, the financial responsibility for county taxes takes priority over mortgage or trust deed note holders. In other words, the county will get paid first, and you’ll get what’s left.
What’s the solution? You or your loan servicer need to verify regularly that insurance and taxes are current.
For insurance – Require a copy of the policy declaration page. Confirm it shows the buyer as the insured owner and the seller as the insured mortgagee. Next, call the insurance company to verify the policy is paid and current. As the mortgagee on the policy, you should receive notice of cancellation. It’s safer to confirm on or before the date premiums are due from the buyer.
To verify taxes – Check county records using the property address or tax parcel identification number. Confirming taxes can be done with a phone call, a visit to the county tax assessor, or online (not available in every county). If you check the county tax collector website, it will show if there is a past due balance, but it won’t tell you who made the payment. For this reason it’s safest to call annually and ask who made the tax payment. If it was someone other than your borrower, and the property is is a tax lien state, there’s a chance a tax lien was sold to an investor who’s now making payments. That investor will be due reimbursement for all payments made plus a high rate of interest. Not good.
As the seller and note holder, you’re protected. But, you need to be pro-active.
Most loan documents require the buyer keeping taxes, and insurance current. Failure to do so qualifies as default. To protecting your seller financed note, you may demand curing the default immediately. Or you may begin foreclosure – even if payments are current.
As lien holders, sellers may also elect to pay the delinquent amount to protect their interest and add back to the amount due. It depends on the terms of the actual note, mortgage, deed of trust, or contract.
Some sellers prefer to avoid the headache by setting up reserves (aka “Escrow”) through a third party servicing agent. The buyer pays an amount equal to 1/12th the annual amount for taxes and insurance, establishing an reserve account.
Any potential note buyer will verify taxes and insurance are current. Keeping on top of these issues protects the value of your mortgage note, deed of trust, or land contract.
While protecting your seller financed note does take a small amount of effort, smart sellers know it’s importance, and avoid small problems becoming larger ones by staying vigilient.