Owner Financing: Seven Reasons to Use a Servicing Company for Your Contracts
Many investors who carry their own paper on real estate contracts like to receive the payments themselves. It’s OK to do this if you know all the rules and laws about servicing contracts. But, there are things to watch out for, and it may be better to have a professional servicing company handle the payments.
In some states, receiving payments from the buyers, calculating principal and interest, and then sending the money on to the seller is called “account servicing.” In others it’s called “escrow” or even “contract collections.” Whatever the name here are seven important reasons why you should use a servicing company to handle your notes.
1. No Balance Disputes
With a disinterested third party figuring principal and interest, buyer and seller can’t dispute the current balance.
2. Hold On To Deeds
If the contract is a Real Estate Contract, Land Contract, or similar instrument in which title is not conferred to the buyer on sale, the servicing agent will escrow the deed. At closing, the seller executes a deed handing over title to the buyer, but this deed is not released until the contract is paid. The escrow agent is responsible for releasing the deed.
3. Escrow Taxes and Insurance Impounds
The servicing agent can collect taxes and insurance from the buyer can make sure they are paid on time. The best part is that they can make sure you are collecting the correct amount for T&I each month. For example, if the taxes are $600 per year, they will collect $50/month. If the taxes go up to $660, you can increase the payment amount by $5 per month. The servicing company knows all of the rules for how much you can keep in the impound account.
4. IRS Reporting
A servicing company will properly report to the IRS. The borrower needs a Form 1098 for interest paid. The seller may get a Form 1099 for interest paid. For some contracts, if the buyer makes extra payments at the end of a calendar year and is paid ahead, it’s possible that not all of the interest can be deducted in that year. A servicing company knows all of these rules, and will properly report the interest amount to the IRS.
5. Daily vs. Periodic Interest
Most people who service their own loans just use an amortization schedule to calculate principal and interest. An amortization schedule assumes that the payment is made on the same day of the month. This is called periodic interest.
A servicing company has the ability to calculate daily interest. With daily interest, the borrower pays less interest and the seller gets more principal reduction if he pays early. Conversely, if the payment is late, more interest is paid. Daily interest is fairer for both parties.
6. Reports for More Than One Account
If you have more than one account, the servicer can give you reports on your portfolio. If you have lots of accounts, like 50, it may be easier for the servicer to collect all of the payments for the month, then send you one check every month, or two weeks, or whenever. The reports can be downloaded to Excel.
7. Late Notices and Collections
The servicing company can automatically send late notices, and even do some collection work for you.
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The biggest advantage of using a servicing company is not only will it take care of all of the above items, but it frees up your time so that you are out making deals instead of doing bookkeeping.
