Protecting Your Mortgage Note Investment
You've sold your property with owner financing and now own a promissory note and mortgage. The monthly payments you receive from the purchaser will provide an excellent source of income. Especially for people who don't feel comfortable investing in the stock market, but want to earn a better rate of interest than the banks are paying. Just like any other investment, however, it is important to know how to protect the value of your note.
Unlike most other investments, the note created when you sell property is backed by specific collateral. Protecting this collateral is imperative to maintaining the quality and health of your investment. As a mortgage holder, you have the ability to protect your collateral built into the mortgage document. Once you begin collecting payments however, it becomes your responsibility to monitor and enforce these provisions. In the remainder of this section, we present some important steps you can take to help protect your mortgage note investment.
Promissory notes are negotiable, transferable documents. Safeguarding this document is extremely important. Many times the attorney that handled the property closing for you will keep these documents in their files and provide you with a copy. This can be satisfactory if you are going to maintain an ongoing relationship with that attorney. If not, or if you prefer to keep them yourself, store them in a safe, fireproof box or in a safe deposit box at your bank. Be sure to keep copies of the originals at home for your records.
After being recorded at the county recorder’s office, the original mortgage or deed of trust will be returned to you. It is a good idea to keep this original document with the original promissory note.
Maintaining an accurate history of when you receive each of the monthly payments is essential. It will help prevent any misunderstandings between you and the borrower. It may also help the borrower refinance the mortgage if you have included a balloon payment. Most importantly, taking this step will help you receive the highest cash price for your mortgage should you ever decide to sell it.
Along with updating your payment record each month, you should always deposit the payment into your bank account. This will provide you with a verifiable record of when you received each payment. Another suggestion would be to keep a copy of each check or deposit slip in a file with your payment record. Finally, in the event that you receive a payment after the grace period has expired, keep the envelope the payment was mailed in to help provide proof that you are entitled to receive the late payment penalty called for in your mortgage.
Making sure the property taxes are paid is an important step that you should take to protect your investment. This will be easy if you are collecting escrow for the taxes. One thing you should do is to make sure that the tax bills are sent to you directly from the tax collector. From that point on, you only need to make adjustments in the escrow payment for increases or decreases in the amount of the tax or insurance.
If you are not collecting escrow it is important that you verify the taxes have been paid. In order to do this you will need the tax parcel number, the phone number for each of the tax collectors and the date that each of the tax bills is due. With this information, you can call the tax collectors directly each year to verify the tax status. If the tax payments are overdue, contact the borrower right away to demand they are paid in full immediately.
Having an adequate amount of homeowner's insurance is essential for protecting your investment. Always make sure that you are listed as Lender or Mortgagee on the insurance policy and that the policy is written for at least the balance of the mortgage note. From that point on, watch for the renewal notice that will be mailed to you each year. If the renewal notice does not arrive prior to the expiration of the current policy, call the insurance agent to check on its status.
If the insurance policy on the property does lapse, you can still protect your interest by either purchasing a new policy, or adding this property to your existing homeowner's policy. After protecting your investment, you will have the right to demand payment from the borrower and add the cost of the policy to the balance of the note.
It is the Purchaser's duty to protect the value of the property he or she is buying until it is paid in full. This clause is important because the value of the property is what keeps the Purchaser making payments. If the Purchaser ever defaults and suffers foreclosure, it is the value of the property that should enable the mortgage holder to re-sell without suffering a loss. It would be a good idea to drive by the property you sold on an annual basis at minimum. If you have moved out of the area, have someone you know do this for you. Fundamental changes to or deferred maintenance on the buildings on a property can seriously diminish the value of your investment.
If the property you sold is a home being used as the Purchaser's residence you must report to them the amount of mortgage interest they paid you during the year. The IRS requires that you provide them with this information by January 31 of the following year. You can generally determine how much of the payments you collected during the year was interest from the amortization schedule of the mortgage.
If a payment is ever late, we recommend taking the following steps: (1) Check the mortgage note to see if a "grace" period exists; if so, you must honor it. (2) If no grace period exists or if it has expired, phone the Purchaser and ask about the payment; insist upon payment; make a note of the date and time of the call and keep this information with your mortgage. (3) On the same day as the above phone call, write a letter that identifies the default and summarizes any action the Purchaser has promised to perform and mail it, certified mail, return receipt requested. (4) If the above steps do not produce the desired results contact an attorney. If mismanaged, trying to cure a default by yourself can cause problems.
A failure to enforce any clause in your mortgage can, over time, establish the precedent that the clause is not binding and has no effect. In other words, actions speak louder than words. Consistent conduct over a period of time, in fact, can take precedent over the actual wording on your contract in a court of law! In short, stick to the language in the mortgage or be prepared to find it difficult to enforce in court. Declaring a contract to be in default and starting the foreclosure process is a serious matter and should be handled by an attorney familiar with the laws of the state in which the property is located. The biggest mistake made by mortgage holders in this area is (1) trying to take matters into their own hands, and (2) delaying the exercise of their rights. Begin to think in terms of foreclosure when the Purchaser is one month behind, not three or four months.
If the Purchaser fails to perform any significant part of the mortgage, the mortgage holder may have the right, after notifying the Purchaser in writing of the exact nature of the default, to declare the remaining balance due and payable. Then, if the default is not the cleared up or the mortgage note is not paid in full, the mortgage holder can begin steps to regain possession of the property. Improvements made to the property by the Purchaser then become the mortgage holder’s property. Defaults by the Purchaser may include failure to make timely payments, failure to properly maintain the property, failure to adequately insure the property, or failure to pay taxes on the property as they become due.
Remember, you are not the "bad guy"...the Purchaser is the one not making payments. He or she can sell the property, refinance the property, or bring payments current. The ball is in his or her court, so to speak. Advise the Purchaser of the available options and of the fact that you are prepared to bring legal action. After an initial phone call and a certified letter, only swift and decisive action taken with the assistance of legal counsel is likely to cause the Purchaser to act. Be honest, firm and considerate. Don't harass and don't delay!
Keep records of all written and spoken conversations with the Purchaser, including dates, times, and what was discussed. You will never know how or when these records will come in handy until you need them but don't have them. Then it's too late! Also, because your attorney will be required to appear in court, it is best to hire one who lives near the property in question. This will save you from paying travel time and other unnecessary expenses.