Investor Notes and Loan Servicing

[Bill Gulley]

The topic of loan servicing came up in another thread here on BP and to more fully respond, I thought it was best to do so as a new topic.

I strongly advocate the use of a loan servicer for any installment contract or note carried back or made by a real estate investor. In fact, if a selling investor is unwilling to have the deal adminstered by a loan servicer, that is a BIG RED FLAG! To me, it indicates that the seller is waiting like a vulture on the only tree limb in the neighborhood wrenching his hands for the opportunity to take the property back.

Did you ever think that a note holder could simply throw a check in the trash and never deposit a check, just declare default after thirty days and foreclose? I know it has happened!

The loan servicer actually represents one or both parties, depending on the servicing agreement, to act as an escrow for the obligation.

They basically do for investors what a bank does on its loan, collect payments, ensure taxes and insurance are current, apply payments to the obligation, provide statements, submit 1099/98s as required. They will also send out those friendly reminders and those voicing concerns or notices. While it depends on what the Servicing Letter requires, the servicer can do all things required by the note holder, including foreclose of the collateral.

Servicing in the industry usually costs 25 basis points of the loan amount or a quarter point (1/4 of one per cent). But investor deals are usually thin on the loan amounts compared to conventional financing and minimum charges will usually apply. usually there will be an account fee, the initial fee to set up the account and this can range from about 25 to 150 bucks, some might want more!

Fees and charges is really where a servicer makes money. $10.00 fax fee, $25.00 account report fee, $50.00 payoff statement, $150.00 assignment fee, etc. While there are more ways to fee an account than rides at Six Flags, just because you have a servicer doesn't mean you should not tend to your business, at least a little bit.

You can negoiate what services are to be provided, in the Servicing Letter or Letter of Instruction. This is an agreement that spells out what the servicer is to do, how, when and with whom as to the proper adminstration of the obligation. You can save some money by doing some things yourself!

For example, it's not rocket science to call the borrower and say pay the insurance....NOW! Depending on your note or contract, some services may not be required by the servicer.

Bottom line is that you need to have payments sent to an escrow and those payments need to be cleared in a timely manner.

Flat fee servicers will charge more if escrows are collected and disbursed for taxes and insuarnce. If your deal is a Sub-2 and the bank is escrowing, don't let the servicer provide sub accounts and account for these items, have them treat it as a lump sum due the bank, the bank will account for the items and send out statements to you and you can forward anything applicable to the borrower. That might save you a hundred or more a year.

I always retained the "rights" to foreclosure. Where I conducted and adminstered my own foreclosures, this is a local action. What a servicer will do, after notices etc., will be to hire a local attorney, you can do that and that alone can save you serious money in the process. A servicer might charge $65 or $100 for a Letter of Demand.

Now, as a seller, you can pass on the servicing fees to the borrower/buyer. It is a nominal amout really, for payment collection and disbursement you should be able to find that for about $15.00 a month, maybe less, but review all the fees and provide instruction for only those services you really need.

Selling the buyer on paying for servicing shouldnot be hard. It really is cheap insurance for them.

For one thing, individual investors are not members of a credit reporting agency and therefore may not report. While you might go through another system to ultimately report payments made as agreed, there will be a cost and that would be, generally, on the note holder.

If you borrower can not have payments reported, they will need to show cancelled checks as proof of payment. Even if a simple mistake was made by the note holder, like the dog ate it and it was not noticed for 30 days, the borrower can be dinged with a late payment over thiry days which puts them out of luck obtaning a conventional loan. That alone is worth the price of servicing, IMO!

Maybe this should have been made as a blog rather in the forums, so let me ask for comments on loan servicing or any questions???

Anyone have a servicer that they are using and any comments on the arrangement?