I know many real estate note investors wonder if using a servicer is worth the monthly fee. After all, if we could do it ourselves that would keep more money in our pockets and improve our ROI.
Let’s take a look at what loan servicers do and see how much you’d like to take on yourself.
First of all is the simple collection of the principal and interest payments. One advantage of having a servicer receive the payments is it forces the borrower to deal with the servicer instead of you. With a small number of notes you may be willing to contact the borrower who gets behind. If you’ve had rental properties you understand how much time that can take. As your portfolio grows this can turn into another part-time job for you.
Unlike talking with a renter, there is specific language you must use when talking with a borrower. Federal regulations are quite exact in the script that must let the borrower know that you are a debt collector and are trying to collect a debt. This also applies if you send a notice by mail or email.
Furthermore, since each state has its own regulations dealing with foreclosure timelines, you need to know how many days they have to be late before you can contact them. Is it three days? Ten? Don’t get it wrong or you may get a nasty call from an attorney.
Another federal regulation you need to follow is letting the borrower know that the servicing of their note has transferred to you. You need quite a bit of information about the loan and the borrower to fill out the letter correctly. The old servicer will also have to send a similar letter to the borrower stating that they will no longer be collecting payments. There is a specific timetable to adhere to when sending these hello and goodbye letters.
Besides principal and interest payments, many notes have a section that delineates escrow payments for taxes, and sometimes, insurance. If the borrower is sending these payments to you, you are responsible for putting these into a separate account and then paying the property taxes to the county and the policy payments to the insurer. You definitely don’t want those to go into arrears. And if the escrow accounts receive any interest, does the money go to the borrower, or can you keep it? Time for more due diligence.
Another service you must perform if you are the servicer is to send out tax forms at the end of the year. You will need to send each borrower a 1099-INT showing how much interest she paid and you’ll need to file a 1098 to show how much interest you received.
One last bit of oversight you might want to give up is making sure that the hazard insurance payments have been paid and that the taxes are up to date. A servicer can watch these for you and set you up with forced place insurance to cover you if your borrower has let their policy lapse. The servicer will add the price of your insurance to their bill, so eventually you should get that money back.
In conclusion, you can definitely take on all the tasks a servicer will cover for you if you’re willing to commit the time to it and learn all you need to do to stay compliant with all the regulations. Personally, I’ll gladly pay out a nominal fee to a servicer.