When you sell real estate with owner financing, the most important ongoing task you need to oversee is getting paid.
Make no mistake, when you sell a property with seller financing, you are forming a long-term relationship with that borrower, and any good relationship takes effort to manage (some more than others).
If you want to avoid tension with your borrowers, you need to be clear with them about a few things,
In the banking world, this job is known as loan servicing. Its not the most glamorous task, but it is critical to keeping a lending operation running smoothly.
Owner financing can be a great way for investors to sell investment properties while collecting steady income over time. However, owner financing transactions require ongoing servicing of the loan payments and paperwork. Choosing the right loan servicing company is key to making your owner financing deals run smoothly.
In this comprehensive guide, we’ll cover
- What loan servicing entails with owner financing
- Key services a loan servicing company provides
- Questions to ask potential loan servicing companies
- Factors to consider when choosing a loan servicer
- Benefits of using a professional loan servicing company
- Drawbacks and risks of servicing loans in-house
- Tips for picking the best loan servicing provider for your needs
What Does Loan Servicing Involve With Owner Financing?
With an owner financing arrangement, the seller finances a portion or all of the purchase price when selling the property. This creates a seller-financed loan that the buyer repays directly to the seller.
A loan servicing company takes over managing the repayment and paperwork obligations including
- Collecting the buyer’s monthly payments
- Sending payment reminders and late notices
- Handling escrow for taxes and insurance (if applicable)
- Distributing funds to the seller after taking their fee
- Providing detailed accounting statements
- Overseeing proper insurance and title work
- Pursuing delinquent accounts
Professional servicing ensures payments are collected and distributed properly The seller then receives a steady income stream without headaches,
Key Services Loan Servicing Companies Provide
Reputable loan servicing companies are equipped to handle everything required with servicing seller-financed loans:
Payment Processing – Collects funds from the buyer and distributes them to the seller each month. Provides detailed accounting statements.
Payment Reminders – Sends notices when payments are coming due or late.
Escrow Management – Handles escrow for property taxes and insurance if required.
Delinquency Management – Pursues past due accounts with late fees, notices, and phone calls.
Debt Collection – Can take over demanding and collecting if buyer defaults completely.
Title and Insurance Tracking – Confirms policies stay current and title remains in seller’s name until paid off.
Document Preparation – Prepares amortization schedules, statements, and satisfies state filing requirements.
Customer Support – Available by phone and online if any issues arise for buyers or sellers.
Key Questions to Ask Prospective Loan Servicers
Vetting potential loan servicing companies thoroughly is a must. Important questions to ask include:
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How long have you been in business as a loan servicer? Look for 5+ years of experience.
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Are you licensed to service loans in my state? Mortgage servicing often requires state licenses.
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What loan servicing fees do you charge? Get fee details in writing.
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What is your process for collecting late payments? Make sure they pursue delinquent accounts appropriately.
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How often do you provide accounting statements? Look for at least monthly statements.
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How responsive is your customer support? Ask current clients about their experience contacting support.
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What happens if a buyer defaults? Understand their process for debt collection.
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How do you ensure policies and title stay current? Look for proactive tracking procedures.
Key Factors in Choosing a Loan Servicer
Consider these important factors when selecting a loan servicing company:
Fees – Compare monthly servicing fees across providers. Avoid companies with hidden or excessive fees.
Reputation – Check reviews and complaints with the BBB. Look for a long track record of satisfied clients.
Expertise – Experience with owner financing loans is a must. Ensure they understand the intricacies involved.
Technology – Look for online account access, automated payments and a modern platform. Avoid paper-only processes.
Security – Make sure they have strong data security and backup procedures. You’ll provide private buyer details.
Responsiveness – Ask current clients if they respond quickly when needed to avoid payment issues.
Loss Mitigation – Do they take steps to work with buyers behind on payments before moving to default?
Compliance – Are they up to date on state and federal laws for processing loan payments? This protects you from liability.
Benefits of Using a Professional Loan Servicer
Trying to service seller-financed loans yourself can quickly become a headache. Benefits of outsourcing to a professional include:
Convenience – They handle everything related to loan servicing start to finish. Much easier than doing it yourself.
Speed – No need to wait for checks and deposit them yourself. They collect payments seamlessly.
Security – Built-in fraud protection with no need to share your bank account details with the buyer.
Compliance – Professionals stay current on state and federal servicing regulations you may overlook.
Reliability – Rigorous payment collection procedures ensure you get paid each month.
Loss Mitigation – Experienced loan servicers have processes to handle late payments and prevent defaults.
Scalability – Easily add more loans to your portfolio without headaches managing everything yourself.
Risks and Drawbacks of Self-Servicing Loans
Attempting to handle loan servicing obligations in-house can backfire quickly. Downsides include:
Time Consuming – Collecting payments and paperwork is extremely time intensive each month.
Labor Intensive – No automation means depositing checks, creating statements, sending notices all manually.
Security Risks – Fraud is a real risk having untrained buyers send private account details.
Non-Compliance – Lack of expertise on complex servicing laws leaves you open to violations and penalties.
Payment Delays – No system to pursue late payments quickly means waiting longer for your money.
Lack of Scalability – Difficult to take on more seller-financed loans without help managing them.
No Loss Mitigation – No experience working with delinquent borrowers means more quick defaults.
No Fraud Protection – Scam buyers can take advantage of individuals vs professional services with fraud prevention experience.
Tips for Picking the Best Loan Servicer
Follow these tips when choosing a loan servicing company for your owner financing transactions:
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Ask local real estate investors which servicers they use and recommend.
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Make sure the company specializes specifically in servicing seller-financed loans.
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Look for servicers that allow you to submit loan enrollment forms online for convenience.
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Review sample accounting statements to ensure they provide detailed reporting.
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Ask how they handle escrow for taxes and insurance to ensure no gaps in coverage.
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Understand all servicing fees and costs—no hidden charges down the road.
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Check for flexible payment collection methods like online, phone, ACH, etc.
Find the Right Loan Servicer for Your Owner Financing Deals
Finding an experienced, reputable loan servicing company is one of the most important steps when offering owner financing on investment properties. Take the time to thoroughly vet servicers on their expertise, fees, technology, and customer service. This ensures your owner financing loans will be serviced smoothly so you receive your payments on time every month.
Option 1: In-House Loan Servicing
When I closed my first few seller-financed deals, I decided to service them myself.
I used some loan amortization software to figure out what each borrowers payment amount and schedule should look like, and they mailed checks to me each month.
I quickly realized this was a horrible way to collect payments on my owner-financed properties. It required way too much effort for both parties to send, receive, and deposit the money each month.
Even when everything is functioning properly, it was probably the highest-friction way to get the job done. When you multiply this friction by ten, twenty, or thirty borrowers, it turns into a living nightmare pretty quickly.
Different Ways to Handle Loan Servicing
There are a few ways you can handle the job of collecting payments from your borrowers. Some of them are efficient and easy, and some of them are inefficient and difficult.
Why you NEED to use a Servicing Company
FAQ
What is a fair interest rate for seller financing?
How does owner financing usually work?
Do loan servicers own loans?
What are the most common owner financing terms?