Would you rather purchase a used car from a seller who kept meticulous service records? Or a seller who didn’t want to tell you very much about the car and didn’t have any records? Two completely different experiences and more often than not, you probably would feel more comfortable buying from the seller who kept detailed records. The seller with detailed records will most likely sell their vehicle at a premium compared to the unorganized seller.
Selling a land contract note can be very similar. As the owner of a land contract note, you want to keep detailed records for potential note buyers down the road. The better records you keep; the more valuable your note becomes. Let’s take a look at some of the important record keeping items you’ll want to keep track of as the owner of a seller-financed note.
Payment History: Establish a policy at closing that monthly payments are to be made by check or automatic monthly withdrawal from their bank account. Money orders and cash are not ideal payment methods because there is ambiguity as to whether the purchaser paid the monthly payment or money just got deposited to show a payment was made. Each month when you receive that payment by check, make a copy of the check and keep it in your file. Good payment history is just as important as Loan to Value and down payment as far as criteria for selling a note.
Appraisal: At the time of sale, an appraisal should be done to show your sales price and the appraised value are in line with each other. As mentioned, Loan to Value is a big factor in your note’s market value. The appraisal will be the document to back that up.
Insurance Records: Always require your purchaser to obtain a 1 year insurance policy with you named as an additional insured party. One pitfall to avoid is allowing your purchaser to pay monthly on their insurance. That increases the likelihood of the policy getting canceled because they forgot to pay the bill. Remember, managing monthly insurance records can turn into a nightmare very quickly!
Application Data: Employment verification, credit reports, references, tax returns, pay stubs and other documents you gather at the time of approval should be kept in your files. These records are vital to substantiating why you approved the buyer in the first place.
If you can maintain this list of records, your note will be in better standing than 90% of the notes that are originated. ‘Good Housekeeping’ on your part will establish your note as something worth considering for an investor’s portfolio.