Buying a note with no existing servicer

17 Replies

Hi all -

I"ve come across several seller-financed notes where the seller/note holder is "self-servicing" the note vs boarding it with a servicing platform. My initial thought is this would be a deal killer since you want to know it's been properly serviced, but does anyone have experience working around this? Aside from making sure title is clear and insurance/taxes are being paid, are there any other important items to look out for? Is it just a matter of finding a new servicer (e.g. FCI) who would be willing to take it on?

Thanks!

I never recommend self servicing of your notes. You just have to make sure all the numbers make sense in various exit strategies. If you are getting it at a good discount then you will be secure. 

Things that can happen: 

-seller says its performing when its not. Does not matter at this point if you are getting it at a discount leaving you with enough equity in the property and a good LTV.

-home is vacant. Again i wouldnt care, now i can get a new borrower in there and board the loan with my servicer and start fresh. I would not go with FCI by the way, try Madison Servicing.

-You buy it for a too high of a price. This can be avoided if you do your homework. Market values, AIV/ARV etc. vs what your buying the note for.

These are just some things to think about. There are other things  that can go wrong. At the end of the day for me what matters is how much of a spread i have on the value of the property compared to what i am buying the note for. 

Another thing i personally do not buy already performing notes due to the fact that someone has already done the leg work on getting it performing etc and now they are selling to you at a higher price. 

I rather buy non performing and do the leg work, get it performing and later sell it as seasoned to someone else if thats what i choose to do or i would just hold on to it depending on my ROI etc.

This is just a quick response to you, many other factors involved. Hope this helps! Good luck.

Thanks Varinder - just to confirm, I would have a servicer once I own the note. Just asking what special considerations to keep in mind when purchasing it from someone who hasn't been using a servicer

@Varinder Kumar do you also have the servicer negotiate the terms with the home owner once you purchase the note? I imagine that is something you would want to do yourself. Or am I way off base and negotiating the terms isn't even a service servicers include?

(not that I would want someone else negotiating for me)

The important thing regardless if it is professionally serviced or self serviced is to verify the timely payments. Ask the seller to provide copies of the checks, bank statements, etc to verify the borrower did in fact make timely payments. You also want to be sure that thevoroperty taxes and insurance are current and up to date. Other than that, the due diligence on the asset itself.

@Joshua Howaniec

Either attorney or servicer can play the middle man in negotiation. You can reach out to them your self also. I believe serivcer will facilitate the terms for you. And its really what makes sense for you investment. So you should have you terms etc already played out in mind prior to purchasing note, terms, interest rate, down payment etc. 

@Abel T.

scenarios i mentioned previously are the special considerations you need to keep in mind. just have to double check everything. Title search etc. 

If the loan was originated after 2013, make sure that there was impound set up at origination for T&I, especially if the rate is over 5%. Do a search for HPML or High Priced Mortgage Loans. We bought a seller carryback which did not originate with impounds and our servicer would not board it since it is not CFPB compliant.

https://www.consumerfinance.gov/ask-cfpb/what-is-a-higher-priced-mortgage-loan-en-1797/

http://www.scotsmanguide.com/Residential/Articles/2014/11/High-Cost-vs--Higher-Priced-Mortgages/

Bob

@Abel T.

I looked at a Texas seller finance deal that was self-serviced recently, and the servicing records/pay history was a hot mess. What if you buy the note and the borrower disputes the UPB, payment history, etc?

The solution here is to have the borrower sign and notarize an estoppel agreement that stipulates as many of the terms of the loan as possible.  The issue is getting the borrower to cooperate, but I would not buy it without.  

Also, I would recommend having an attorney who specializes in seller finance deals review the file before purchase.  I have a recommendation if you need one.  

How about sharing some of these leads with us?  I love Texas seller finance deals!

@Varinder Kumar @Bob Malecki @Will Barnard @Eric S.

Thank you for the feedback guys, these are all great suggestions and very helpful! So to summarize - it looks like the due diligence is mostly the same, however there needs to be even more caution taken when checking and verifying the payment history, so make sure to do things like obtaining bank statements and even an estoppel like agreement. And Bob's example shows that you want to get a new servicer involved as early as possible to check for any unintentional CFPB (or equivalent) issues, particularly for loans originated in the last 7 years.

I was able to find a smaller servicer who boarded it, perhaps they were not subject as much to audits and did not have a problem. 

Thanks Bob

@Jay Hinrichs - they were owner occupied notes (the borrower was living in the home). Didn't end up buying them from the current owner of the notes (he's the one who self-serviced them), but was helpful to get everyone's view above. 

By investment purpose notes I take it you mean hard money/private loans to investors? I haven't come across those notes for sale, but would take a guess and say many times those are done without a servicer since the borrower is typically an investor's LLC and there's less compliance risk involved?

@Abel T.   yes those are the kind of notes I deal with.. much less red tape to the point of none.. that's why I like them .. plus I like them for multiple repayment sources... IE the trustor.. the tenant and my right as bene to grab the rents in worse case scenario..

@Will Barnard hit the highlights.  Ensure the payments and accounting being reported to you are accurate.  The borrower could be in arm's length and that could mean some collusion on accounting - or not.  

I would be a little concerned if the borrower had setup impounds with the seller finance folks.  Impounds are a touchy concept and if it was setup through the seller servicing on the loan, get your intended servicer involved prior to purchase to make sure you don't run into a snag with being able to board it.  Similar to what @Bob Malecki mentioned.

Occupancy - what @Jay Hinrichs was inquiring, would be a concern since the note seller sounds like they have many deals in their portfolio.  Selling property with finance in place to borrowers who use the subject property as a primary residence will quickly become an act requiring a license in all states.  In some states, if the property is purchased as an investment, as opposed to primary, licensure may not be required.  ("may")

@Varinder Kumar - it is a little dreamy to think a note investor pursuing an NPL can have an idea of what modifications to make to an existing note.  The note seller wouldn't have contact, there would likely be no income or asset documents to understand if there is an ability to repay.  An attorney would not typically be involved in a modification since that act would require them to be a licensed RMLO.  

The thing to remember is that math is absolute.  2+2=4.  As long as you can confirm the payments, then the amortization schedule can be formed and followed.

There is no need for an estoppel letter.  The security instrument and note are the contracts to which the borrower is bound.  By way of due diligence on the note seller you are verifying the accounting.  Even if the note seller has a messy book, math is still math.  

@Dion DePaoli - I do have a question about your statement that math is absolute. It's been my experience that these seller serviced owner financed notes don't have the best record keeping when it comes to accounting. When buying a note from the individual what do you do in the instance that neither one of you, nor the payor can get a true accounting of payments made? Do you make your offer to purchase the note based on what the UPB should be if all payments were made assuming the loan is performing? What balance do you tell your servicer to start collecting? Do you waive a portion of the balance in the payor's best interest just to have a starting point of what to collect going forward? Would also like to know if you apply the same method for a performing loan and a nonperforming loan in terms of determing the balance going forward? Would love to hear from several of you on this as I do feel this is a really relevant and applicable topic in the seller self serviced arena