Once an owner carry transaction closes, most note holders do a pretty good job of “managing” their note situation. But, over the years, I have seen some really bad business practices that you must avoid. Here are a few examples:
- A note holder allows his buyer to maintain payment records – he does nothing.
- A note holder keeps a handwritten, hand calculated payment record that we cannot reconcile using a computerized amortization schedule.
- A note holder takes his buyer to court. Why? He allowed his buyer to choose an attorney to draft a rent to buy agreement. A few years later, it is discovered that the agreement had mathematical errors that favored the buyer. The note holder was owed thousands of dollars which the buyer refused to pay, then stopped making note payments.
- A note holder has no idea that it is his responsibility to notify his buyer – and the IRS – the yearly amount of principal and interest paid and received.
All these misfortunes can be avoided by hiring a professional servicing company. This third party firm will hold the original signed Promissory Note and Recorded Deed of Trust. They can collect fire insurance premiums and escrow property tax payments. They can file the required forms with the IRS and provide a computerized, accurate accounting for both parties. The note holder can have his buyer pay the monthly fee or agree to share in the cost.
Either way, this is money well spent.
