Protecting Your Mortgage Note
With home prices continuing to drop, these remain challenging times for real estate investors and mortgage note buyers. You can make good money if you pay attention and know what you’re doing, but will lose your shirt if you’re not careful. The National Association of Realtors reported that third quarter numbers were again dismal. Median home prices dropped almost 5% nationally, and over 15% in cities like Phoenix and Salt Lake City. In October, foreclosures were up 7% over the previous month (Housing Wire, 11/10/11). It is hard to imagine home prices recovering any time soon.
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For mortgage buyers, as with property investors, you make your money when you’re buying. In a recent blog, I provided suggestions for buying a good note and protecting yourself.
If you already own a mortgage note (also called a real estate note), here are a few pointers to keep in mind:
1. Keep a close eye on incoming payments. If a payment arrives even a day after it is due (after the grace period), get on the phone with the payer. Let them know, in a nice and cordial tone, that they need to make their payments on time. Ask lots of questions so that you know whether they just forgot this one time or have deeper financial issues. If the latter, you may need to be flexible with their payment and even consider recasting the note. Either way, it is best to stay out in front of the problem instead of reacting later, when it may be too late.
2. Track closely all payments and record them accurately in your computer program or spreadsheet. Tied in with this is to keep copies of any communications between yourself and the payer, as you many need them later.
3. If you originally bought just part of the real estate note (e.g. purchased some of the payments instead of the full note) and are being asked to buy more of the payments, run an appraisal on the property first. A payer on one of my properties in northern California called me a couple of months ago asking me to buy another piece of her note. The appraisal told me that my investment-to-value ratio, while still safe, would be too high if I bought more of that note.
4. Monitor real estate trends and happening in the towns where the properties are located. One of my note properties has been near tornadoes and earthquakes in the past year. Fortunately, the house was unscathed, but it is always smart to check. Imagine if there was a default and you only then found out that a house had been destroyed or the property had lost significant value because of another event!
5. When note holders call me wanting to sell their mortgage note, they will sometimes say that if the payer was ever late, then they would “just take back the property.” At least in the states where I have had to foreclose, one can never do that. Rather, a foreclosure takes several months and thousands of dollars. If a payer defaults and we are forced to foreclose, we will be paying out a lot of money for foreclosure and repairs for a long period of time, with no income to offset those costs. Be prepared for those expenses.
None of the activities are particularly fun to do, but they are all essential for protecting your investment. Happy Investing!