Congrats! You sold your home with Seller Financing! Your next big decision is who will be working with your borrower over the term of the loan (self-managed or third part servicer). Most people opt for self-managed to save cost, but I would like to share some great reasons why you should consider a third-party servicer! |
What is a Third-Party Servicer?
In the Seller Finance area, a Third-Party Servicer will provide a connection between you and your borrower. They will collect borrower payments, handle accounting, send reminders, handle escrow for insurance and taxes, complete annual reporting and serve as a trusted source of knowledge for the duration of the loan.
What are the benefits of using a Servicer?
- Borrower Communications – Servicer will handle all communication with the borrower, from the first payment to the last. Most likely, you will never need to talk to the borrower.
- Collecting Payments – Servicer has tools to collect payments monthly, to manage the money and most importantly reminders to borrowers. They will contact borrower if payment is late and will also assess late payments. Payments are electronically deposited to your bank account.
- Accounting Activities– Servicers have the tools to break out payments into interest and principal reduction. For annual reporting, Servicers will generate the necessary IRS-compliant reporting for both you and your borrower.
- Escrow management – Taxes and Insurance are two items that cause significant issues for Seller Financing. Servicers will follow up with borrower to ensure these items are paid for on time. If you are escrowing, then Servicer will work with borrower and tax/insurance entities to ensure payments are made and will adjust monthly payments amount for annual increases
- Knowledge Source– Issues occur over the lifetime of a loan. When they occur, how much knowledge do you have to handle every type of issue? Servicers have extensive experience with missed payments, loan modifications up to foreclosure and can provide insight into how to steer through the many pitfalls of Note ownership.
- Estate Management/Planning– Most of the people we work with are older and normally a single person is handling the Note. Who will handle the Note and borrower after you pass? Having a Servicer will allow you to pass on the benefit of owning a Seller Finance note without any hassle! Payments will continue to your beneficiaries with no interruption to your estate building wealth!
What does it cost?
Each Servicer charges a little differently but generally you will have a one-time set up charge (avg $150) and a monthly fee for payment collection and escrow management ($25 to 35). Some Servicers deduct fees out of the borrower’s payments while others will have you pay direct monthly.
What is the best practice for private lenders?
Hiring a loan servicer is considered best practice for managing private notes. Servicers will complete the following tasks:
- Handle incoming and outgoing payments
- Manage the collection of escrow and payments for taxes and insurance
- Monitor borrower compliance
- Contact borrowers about late payments
- Assist with issues, workouts, or payment problems
- Provides documents for tax reporting
- Tracks payment activities and account balance
In many cases, servicing fees may be passed on to the borrower if allowed under the loan documents.
Summary
Note ownership has some wonderful financial benefits with little effort on your part. However, the interaction with your borrower is the most important part of the long-term Note ownership. While you can be the primary contact with your borrower at a low cost, using a third-party servicer can lighten your load and minimize the risk of Note ownership. The many benefits of using a third-party servicer far outweigh any cost savings!
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Connect with Peak Notes Why not set up a meeting with a Peak Notes specialist to discuss how using a Third-Party Servicer can help you with your Note investment! Meetings are brief, cost nothing and can give you more insight into how you can maximize your investment potential! If your property is located in Florida, please click on this link and set up a meeting with John. Meeting with John . If your property is located outside of Florida, please click on this link and set up a meeting with Karen Meeting with Karen . |