If you have sold a property with owner financing, then you now own a note. If you purchased a note, now what do you do with it? What do you do other than wait for the monthly payments to come in?  How should you care for your note? There are many steps you should take to keep you note safe.

Safeguard you note

Safeguarding of your note is just as important as other important documents you may have: pink slips, social security cards, birth and marriage certificates, or will and so on.   If an attorney assisted in the closing of the property, sometimes, the attorney will keep the original note document and give you a copy. You have the option of keeping the actual note yourself.  It is a good idea to keep the original note with the original mortgage of deed of trust which will be returned to you after it has been recorded at the county recorder’s office.

Keep a detailed payment history

Record keeping of the payments made on a note is necessary. This is help prevent any questions that may arise about payments made or not made.  Even if you have no plans to ever sell your note, it may help the borrower should he/she decide to refinance if you have a balloon payment. Or, if there comes a time when you decide to sell, the accurate payment history will help you get the highest possible price.

When the check arrives, make sure you deposit it into your own bank account. This is an added record that the payment was received. Copies of the check and/or deposit slip is also recommended.

Make sure taxes are paid

Property taxes and income tax need to be paid. If you are collecting escrow for taxes, it is easy to have property taxes paid. If not, make sure you verify that the property taxes have been paid by having the tax parcel number along with due date in order to be able to check  if they have been paid.

Another tax that needs to be paid is income tax.  If the property you sold is being used as the buyers’ primary residence, you must notify the borrower, the amount of mortgage interest paid during the year as required by the IRS. This must be reported by January 31 of the following year.

Don’t forget about Homeowner’s Insurance

Homeowner’s Insurance is vital to keeping your investment protected. Guaranteeing that a policy exists is not adequate. You must also make sure you are listed as the Mortgagee on the insurance policy and that the policy is covered for the balance of the mortgage note.  This ensures that you are covered should anything happen.  If there is a lapse in policy, you can purchase the policy yourself or prospect of adding the property to your own homeowner’s policy could be an option. The cost of this insurance would be charged to the buyer either up front or on the balance of the note.

Maintaining a property in good condition

The property is your investment and it is in your best interest that the purchaser continues to care for its upkeep both inside and out. If the borrower should ever default on the property, in order to get the best selling price is to make sure that the value of the property has not been reduced by poor care. Plus, a good property will help keep the borrower making payments on a regular basis. Check on your property yearly or have someone do so for you. By knowing the condition of the property, should the borrower default, or you want to sell the note, there will not be any surprises.

Late Payments and Default

If the check was mailed to you late, keep the envelope it arrived in to prove the date it was mailed/received late.  This is especially helpful if you are qualified for a payment penalty. Be sure that you are familiar with the notes’ grace period if it exists. Making detailed records of any attempt to collect on a late payment after the grace period should be noted.  This includes time and date of any phone calls, copies and proof of any correspondence through certified and return receipt mail.  If these steps do not produce any payments, the next step is to seek professional help from an attorney. Seek an attorney familiar with this type of law.  If you try to take matter into your own hands, you could find it difficult to enforce all areas of your contract. If you do nothing, this may be taken as acceptance. Be consistent in your actions. If you allow a late payment one month but send a notice another month, this does not present a clear message to the borrower. Do not delay the foreclosure process if the borrower is more than one month behind.

Good record keeping

It is essential to be organized about all paperwork and when payments are due. Besides the monthly payment, if you know when property taxes are due, insurance is due, and have the knowledge to look up if they have been paid, this will go a long way in keeping your note protected.

You only have so much ability to keep you investment protected. The other responsibility lies with the borrower. But by doing all in your power to keep your records straight, it will go a long way should a late payment occur, a default take place, or should you decide you want to sell the note.

Promissory notes are IOU’s, the physical evidence that a transaction took place a debt is owned.  In real estate, these notes state that a specific amount of money is owned to a specific person on a specific date. It also states interest, length of loan, the real estate used as the guarantee or the debt to be paid, the amount due after the interest has been met, and any default terms.

When there is owner financing and the lender is an individual, there may be a situations where the original note has been misplaced and lost. A replacement needs to be made with new documents to ensure that the debt remains in place or to enforce the debt should a foreclosure occur.   In some instances, the holder of the note might be the only one able to enforce it. The note is also needed should the note holder decide to sell to another lender/investor cashing out either all or part of the note.

Seek professional advice to help get a replacement note.  An Affidavit of Lost Promissory Note needs to be signed, notarized and recorded. This will include a statement that the original note has been lost, stolen, or damaged. The affidavit will also include the circumstances surrounding the loss using as much detail as possible. Details describing the lengths taken to look for the document as well as any other details about its’ disappearance should be included.

The Affidavit of Lost Promissory Note instructions are clear asking for information on the debt, what has been paid, what has not been paid, and that the note is not in default. The affidavit should state that the note has not been sold or transferred to another party. The purpose of the affidavit also is to get the borrower to sign the new note with the agreement that if the original note is found, the replacement note supersedes the original note and it will not be used as a separate debt.

If a copy exists, review it. In some notes, lost, stolen, or damaged notes may be addressed in the contract. This may include provisions that should such an instance occur, the borrower must sign the new promissory note. Include by attaching a copy of the note to the affidavit. This affidavit is to be notarized.

Once completed, it is ideal to place the note in a secure location such as a safe deposit box. A third party servicing company can also take care of safe keeping the note to ensure it does not get lost or damaged again.