4 Mistakes to Avoid When Managing Your Owner Financed Mortgage Note

With the downturn in the real estate market and the full swing of mortgage qualification requirements, many home sellers are turning to owner financing to move their property. Once the sale is complete, the seller is now in possession of a valuable financial asset. But managing an owner financed note is not a skill that most home sellers possess or are taught in school or anywhere else today. As a private note buyer, I get calls every day from note sellers wanting to sell a note who have not managed their assets as well as they should. Some of the errors can make a ticket unsellable, or at least for a discount they can accept. Below are the 4 biggest mistakes I see on a daily basis.

1. Not monitoring if the borrower is current on their property taxes: In the worst case, this mistake could result in a total loss if the house were foreclosed on my local municipality and sold before the owner of the property note I knew.

2. Not making sure the buyer is current on their homeowners insurance and has enough coverage: If the borrower lets their insurance coverage lapse and has a fire, the note holder could end up with a note again worthless. Noteholders must not only monitor borrowers’ insurance coverage, but also ensure that they are on the policy as a mortgagee.

3. Not physically monitoring the property – Many property sellers no longer reside in the city, the property they sold and the owner financed, or live on the other side of the city. As a result, they rarely drive by the house, which is the asset that backs the note they hold. What can and has happened on many occasions is that the borrower has moved and is renting the property to a friend or relative who has far less incentive to keep the property. This could also cause problems if a major insurance claim is made because the property is no longer owner-occupied, requiring a different insurance policy.

4. Allow the borrower to pay their mortgage in cash every month: If the note holder never needs to sell their note, this may not be a big problem. However, if the note holder ever needs to sell his note, he will have no proof of service of the note. This makes a note worth much less, and just giving the borrower a receipt won’t be enough.

There you have it, four mistakes to avoid in order to a) protect the value of a private mortgage note and b) make the note worth more money if you ever need to sell it.