Hello, I'm new to this forum and also new to notes. Seems like an investment I might be able to get into. I already own a rental and want to diversify our investments. For those of you who had bought notes in the past, how to manage "the day to day". Does the tenant send you a check directly to you, or are there servicing companies out there that handles that for you. If so what's their typical price?
You want to go with a servicing company. They will keep records, send out the 1098 at the end of the year, and can help deal with the owner if something starts to go awry. They run about $20/month for a performing note. There are several out there and I've named a few. There are pros and cons about each of them.
I'm not an expert here, but I do own a note. I have a servicer. Almost everyone says you need a servicer to keep everything legal. They charge from $20 to $65 per month.
Hello @Account Closed and welcome to the forum! Yes, you will want to use a loan servicer, and you will quickly find that they will become one of the key vendors for your note investing activities. The servicer will play a critical role in your compliance, handling of day to day activity, and taking care of the accounting and tax reporting on your note. I do see that there have been some good referrals made that you will be able to check out. Good luck!
I haven't used Paperstac, but I've heard good things (the founder/developer is a member of BP).
NotesDirect is great in that the collateral files are there for you to review, so you can practice reading through them. The downside with them is that the price is the price. I have not purchased from them, but do have access to the site.
Those are the only 2 main sites I know about. I get my notes primarily through the Note Assistance Program, which is also where I got some of my training. They have a podcast called Naked Notes which has a lot of valuable info. But they have an exclusive trade desk and to get access, you either have to join or JV with someone already in the community. Happy to talk further about the program or JV'ing if you're interested.
As people mentioned, you will want to have a 3rd party servicer. Other team members you want to have is an attorney and /or someone to review the collateral file to make sure it is done properly. The collateral review individual can also record the assignment for you.
Also make sure the borrower has insurance on the property as well.
Paperstac is great as they map out the process for you and make it very easy
@Account Closed I know you're new to notes but you've got to start the shift in mindset from real estate. You incorrectly used "tenant" in your original post instead of "borrower." You'll be the "lender" and not the "landlord." Each party, no matter what label, is entitled to certain things by law and contract and it's important to know the differences.
Yes, the borrower makes the payment to the servicer. Then, the servicer forwards the payment to you. The servicer collects a fee separately from you or from the remittance for their services.
Fees for non performing notes are much higher. $75-$100 per month.
I recommend FCI.
Thanks, everyone, @Andy Mirza you're 100% correct with your response. I typed my question a little too fast, but yes, I understand the difference.
@Brian Good I'm not sure if there's a point at which it's too late. Are you talking a few months or a few years?
If you self service and maintain common practices with regards to keeping servicing notes and pay histories and sending out standard compliance letters and disclosures required by RESPA and the CFPB, I don't think it would be a problem.
If you haven't kept records like most servicers do, I'm not sure if a servicer would take your loan and under what circumstance. I'd like to know the answer to this one, too.
I do not know anyone who can service loans and do it cheaper than a servicer. Your time is far better spent elsewhere.
Once you get to 200, I thought of hiring someone to do it but still not worth risk to me
@Chris Seveney I look at servicing as just another part of the business that can be replaced when the numbers make sense. Maybe 200 doesn't make sense for you. Will it make sense at 1000?
For us, I don't know where that point will be either. When we get to 200 NPNs, at $95 per month, that would be $19,000 going out the door, every single month. Seems like that would be enough to hire a few people, at least one of whom would be an expert in loan servicing and know the business enough to avoid trouble.
Your typical loss mit employee at a servicer handles about 200 loans. It would be nice to have one dedicated person to handle the whole portfolio. Add the right financial incentives in the form of bonuses for successful outcomes and you could have a situation that's far better than any servicer out there.
Here are scenarios where I see others self service:
1. One of our main sellers has a loan portfolio in the billions. They have their own separate company that services their loans (but nobody elses). They also have other verticals for real estate brokerages, asset management, foreclosure services, loan originations, you name it. They've got all aspects of the business covered.
2. Our other main seller is at about $250 M and they service in house. Not sure how many employees they have dedicated to that and when they transitioned but that will be an interesting future conversation.
3. Before my current funds, I JV'd with an investor who bought a ton of cheap seconds back in 2011-2013. His strategy was to do the bare minimum for collections and just wait until eventually people refinanced or sold homes. Then, he negotiates payoffs that were always huge compared to what he bought the notes for. Because of the amount of loans he bought and the length of time he held them, servicing costs would bite too much into his profits for this strategy to make sense. Not sure what his risks were for self servicing but he seems to be just fine since he's still making money in the business.
You are 100% correct. I agree as well as its another part of the business. I have shifted and sent most of my loans to allied for $18.50/month and it has saved me thousands per month. The biggest hurdle I have with the servicing is the risk/liability. One being licensing, as when you run funds if you have an employee they need to be employed by every entity to stay within "self servicing". Some states still require licensing from self servicing if I recall. Then when I looked at training someone and managing them, I am at around $4k per month in fees which is $48k per year. Yes I could probably get someone for around $35k-$40k per year but then when you think about mailing monthly statements, tax forms etc. to me it was not worth it.
If I were to add the servicing side my thought would be to acquire an existing company and move my loans to them, that way they have the licensing in place, as well as other forms of revenue. Yes it would cost significantly more but if it makes money then you are earning a return on it.
THere is no magic number on when to move to self servicing, its strictly a business decision, and since I am a one man show adding that to my arsenal at this time is not something I even want to consider.