Business Management

How Mortgage Servicing Compares To Property Management

Expertise: Business Management, Mortgages & Creative Financing, Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate Deal Analysis & Advice, Commercial Real Estate, Personal Development, Real Estate News & Commentary
228 Articles Written

Since many people consider me this note guy, I’m often told that I must like investing in notes more than in real estate.

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And to be quite honest, nothing could be further from the truth. I still love investing in real estate; it’s just different than investing in notes. They’re different investment vehicles.

Related: Real Estate or Residential Notes—What Makes a Good Deal?

One is a paper asset (notes) and the other is a hard asset (real estate), sticks and bricks. They both can be used to build wealth, and they both have different tax treatments as well.

Sometimes, when I’m first explaining the note business and the idea of mortgage servicing to people, I use the analogy that mortgage servicing is like property management for a note and mortgage.

The reason I say that is because the role a servicer can play for a note investor is very similar to that of a good property manager for a piece of real estate. For example, a good property manager will assist the real estate investor in many ways. They’ll help find a tenant, screening them by running a credit, criminal background, and eviction history report.

They’ll collect monthly payments, send late notices, and even assist with eviction. Some managers will even make mortgage payments.

When my brother was stationed abroad, his property manager did everything for him while he was away, including taking care of the normal maintenance and move out repairs.

How Is A Mortgage Servicer Similar?

If a loan is performing, or re-performing, the servicer will collect monthly payments, send late notices when necessary, and will have online access not only for the borrower for the investors as well.

Not only are they compliant and licensed, but they’ll send the proper letters and privacy notices as well as abiding by the CFPB (Consumer Financial Protection Bureau). Besides monthly statements and ACH capability, they also do any escrows that may be required, as well as any year-end accounting that’s necessary for the borrower and investors, such as 1098’s.

The cost for such services is very reasonable. Servicing setup is typically in the $40-$60 range with monthly fees of approximately $15- $18/month. This flat fee is the same whether the note payments are $300/month or $3000/month. This is much different than property management, which can run from 8% to 10% on a normal rental.

Vacation areas can be as high as 30% of gross rent collected, and you may see volume discounts, but it’s rarely lower than 6%, regardless of the number of units. This is probably because mortgage servicing is much more automated and scalable than property management for real estate.

If a loan is non-performing, a servicer's monthly fees can be much higher (e.g. $90-$95/month), or instead of a flat fee, it may be a percentage of money collected towards arrears and payments.

The biggest expense for non-performing notes is usually legal, and the fees are in addition to that (approx. $2K- $3K for an uncontested foreclosure). This may sound high, but keep in mind that it’s comparable to a property manager in real estate managing a full-blown rehab project. Most property managers won’t take that on.

Why Consider Outsourcing These Services?

When I think back on my own experience in real estate and note investing, the hardest thing to give up was what I had done for myself.

Related: Do You Feel Like You Are Drowning In Your Business? Start Outsourcing!

For example, after college I have my own painting company and I had renovated hundreds of houses. So, naturally the hardest contractor for me to hire was a painting contractor.

I was a perfectionist, so I struggled to find someone to do the job as good as I would. The same thing went for property management. At that time, I was an investor-realtor, who did property management at RE/MAX and that was my specialty, so to me, no one did the job quite the same as I would myself.

But, an experienced investor told me a long time ago that if you can find someone to do the job 80% as well as you, you need to think about giving it up.

For example, if you’re a high-income earner, is it really worth you doing the property management? It was these realizations that eventually got me to outsource these tasks, and I’ve been able to make more and more money since doing so.

I felt the same about outsourcing loan servicing. Years ago, I serviced my own loans. Today, I realize how penny wise and pound foolish that really was, especially with all of the new compliance regulations and the ease of using note servicing software.

So, even though it's easier to outsource all of these tasks for both investments, if you asked me which one was easier (not necessarily which one I like better) I would have to say loan servicing. This is something banks figured out long ago. If you notice, they don't own millions of properties, but they do own millions of mortgages. It's much more scalable.

So tell me, which one do you like better, and more importantly, why?

Be sure to leave your insights and comments below!

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.

    Replied over 5 years ago
    A bank nearly always has another company service the loans. It makes sense, the servicer can do it easier due to the volumes that they process.
    Dave Van Horn
    Replied over 5 years ago
    I agree Eric. Thanks for your comment!
    Sharon Tzib
    Replied over 5 years ago
    I think it depends on your skill set. Since I’ve done PM myself and been a customer of PM, I’m quite comfortable with that. Notes, however, are something I have no experience with and so if considering purchasing them, I would be very relieved having someone with more expertise than I managing the process. Having said that, you still have to manage the manager, always!
    Sharon Tzib
    Replied over 5 years ago
    I think it depends on your skill set. Since I’ve done PM myself and been a customer of PM, I’m quite comfortable with that. Notes, however, are something I have no experience with and so if considering purchasing them, I would be very relieved having someone with more expertise than I managing the process. Having said that, you still have to manage the manager, always!
    Dave Van Horn
    Replied over 5 years ago
    Hi Sharon, You’re absolutely right; you do have to manage both a mortgage servicer and a property manager. I’m utilizing both services right now, but I will say that managing my servicer is much more automatic, especially with performing notes. I own many more loans that I own units now (wasn’t always the case), but I receive more frequent, high-stress calls from my property manager and less frequent, purely financial calls from my servicer. Best, Dave
    Chad Carson
    Replied about 5 years ago
    Dave, Thanks for the article. How do you recommend searching for good note services? I have less than 10 notes and contract for deeds and would be interested. And what are some of your most important screening criteria for hiring servicers?
    Dave Van Horn
    Replied about 5 years ago
    Hi Chad, Thanks for reaching out! I may not be the best person to ask for that, as I’ve pretty much been with the same servicer for the last seven years, and I’m happy with our arrangement. Although there are hundreds of servicers, a lot of them want more volume, so there could be limitations based on the size of your portfolio. Back in the old days, a lot of it was price driven. Obviously, you’ll want a servicer with a good reputation that provides good service and has integrity with their data and reporting. But, today, with the new regulations, compliance is really a key factor with servicing as well. Feel free to message me if you want any further info. Best, Dave
    Dmitriy Fomichenko from Anaheim Hills, CA
    Replied over 3 years ago
    That’s an excellent comparison. I liked the tip to outsource something that the selected service/contractor can do with 80% efficiency if I am right. In my opinion, it is important to delegate tasks so that you can use your time towards more productive activities. Thanks for sharing!
    Dave Van Horn from Berwyn, PA
    Replied over 3 years ago
    Thanks for commenting Dmitriy! I couldn’t agree more. Your time is your most valuable asset. Best, Dave