A note investment can be a wonderful addition to your real estate investing portfolio or retirement account. Depending on the type of note you buy, it can be a passive or active investment that relies on different tools, techniques, and management practices to maximize its profitability.
If investing in real estate mortgages notes is completely new to you or you’ve recently purchased your first note investment and aren’t sure what to do next, we’re going to cover what you need to do after buying a mortgage note.
Active or passive note investments
Non-performing notes are active note investments that require more hands-on management by the investor to get the borrower paying or to ultimately resolve the delinquency through the home itself (retail sale, short payoff, short sale and foreclosure are all possibilities). Performing mortgage notes are passive note investments, requiring little to no ongoing management beyond accepting payments after the loan has been purchased.
But there are certain steps that must be completed when you add any mortgage note to your portfolio.
1. Establish loan servicing
Mortgage servicing refers to the day-to-day operations involved in managing a note investment. This includes:
- Communicating with borrowers.
- Receiving borrower payments.
- Allocating payments correctly into principal, interest and escrow accounts.
- Issuing monthly statements to borrowers.
- Managing year-end tax information and generating tax forms for both borrower and lender.
- Meeting legal requirements for borrower notices, disclosures and mandatory timelines.
Note investors can choose to complete all of these tasks themselves but it is generally not recommended. Not only do individual investors not have the systems to reliably execute each task, they do not have the time to continually train on the nuanced changes that continually occur on the local, state, and federal level.
That’s why most note investors hire licensed mortgage servicers to handle these tasks for their portfolio.
2. Notify the borrower
Legally, the borrower must be informed that their loan has been sold to another investor. This notice is part of the Truth in Lending Act of 1968. This “TILA” letter is generally issued by the lender and must be sent to the borrower within 30 days of the loan sale.
If you will be moving your new note investment to a different servicer, the borrower must also be notified of this change to avoid delinquency by using an old payment address. This notice is part of the Real Estate Settlement Procedures Act of 1974. While this is often called the “RESPA letter,” it requires both a “goodbye letter” from the previous servicer and a “hello letter” from the new servicer, both sent to the borrower within 30 days of the loan sale.
3. Record the assignment of mortgage
The last thing you need to do after purchasing a note investment is record the Assignment of Mortgage with the appropriate county office. An Assignment of Mortgage confirms the transfer of ownership of the mortgage and once recorded, is a part of the county’s public records. Assignments of Mortgage must be recorded in order so if your note seller is not the original lender, their Assignment, as well as any Assignments from sales prior to their ownership, must be recorded before yours.
4a. Performing loans: start collecting
If your note investment is performing, there is little work to be done after you’ve completed the previous steps. You should periodically check that all of your borrowers continue to make their payments on time and that your servicer is managing your investments well. But these tasks, as well as confirming that your monthly deposits have been made to your account, are almost inconsequential. If all goes well, the borrower will continue to pay your servicer until the loan is repaid in full
4b. Non-performing loans: start loss-mitigation
If the loan is non-performing, there are additional steps you need to take to protect your investment while you work to maximize return.
Protect the property
If the borrower is not paying their mortgage, chances are they aren’t paying their property taxes or for insurance on their home.
While the process varies by county, unpaid property taxes are resolved through tax foreclosure and result in the sale of the house to a third party to recoup losses. The debt will still be owed to you but it will now be an unsecured loan which vastly limits your options for collection and your odds of being paid at all.
And fires, floods and other costly damages happen to homes regardless of the status of the mortgage. So the very first thing you should do when buying a non-performing note is to pay the seriously delinquent property taxes and purchase insurance for the home.
If you know that the house is vacant, you will also want to secure the property. Property preservation companies will change locks, board windows, secure doors, plow snow, mow lawns and other services that will reduce your exposure to liability, theft or municipal fines.
Outgoing correspondence to a delinquent borrower (after the legally required TILA and RESPA letters) is a matter of choice. Many note investors choose to discuss solutions with their borrowers before pursuing foreclosure. Options include a retail sale, short sale, short payoff, forbearance plan, loan modification or a deed in lieu of foreclosure (often called “cash for keys”). This often takes considerable time and effort to find the borrower and to get them to respond but it is a key element of a “get loans reperforming” action plan.
To avoid these delays, other note investors immediately hire an attorney and begin the foreclosure process. The first step is a demand letter which includes the status of the delinquency and a recommendation to contact the servicer to avoid foreclosure. If the borrower does not respond, there has been no delay in the sometimes lengthy foreclosure process. If the borrower does want to resolve the problem, they often respond more quickly to attorney letterhead than lender correspondence and negotiations can begin.
Manage your vendors
Although you’ve hired highly recommended, well respected vendors to help you manage your new note investment, you do have to monitor their activities. Communication is key so that tasks are completed, deadlines are met, updates are received and your investment goals are met.
Knowing what to do, when to do it, and who to work with are key elements of success in note investing. The best investors pursue a comprehensive note investing education and build a network of reliable investors, note sellers and vendors when they begin their journey because each element is crucial to their profitability.
Want to learn more about note investing?
Even as the economy heads into rough waters, note investors are positioned to do very well during these uncertain economic times.
If you're interested in learning how we are able to invest and profit by creating, buying, and selling mortgage notes regardless of the economic climate, visit our website, where we show you how you can become a note investor through our online note investing education program, Note Investing Academy.