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.
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.
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.
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.
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.
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.
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.