The Ins and Outs of Servicing Your Note

The ultimate point to the Filthy Riches approach is to sell your property and hold tight to the note. What do I mean by this?

Let’s backtrack a bit. In the Filthy Riches approach, a $30,000 property is bought for $5,000 and then resold for a $1,000 and the seller (you) holds the remainder of the note through the duration of the loan. This means you make the initial investment of $5,000 cash but immediately recover $1,000 of that in the down payment. You then offer to finance the remainder – $29,000 to be exact – at a 11% interest rate. This equates to just under a $400 monthly mortgage payment for the buyer. In a year, you recover the $4,000 left from your initial investment in the property.

So, what exactly does this mean for you?

For nine years, you make money on a note that you hold free and clear! Who wouldn’t like that sort of math?

So, fast forward to after the sale. You may choose to sell your note immediately, but the ultimate goal is to hold onto this note. How do you go about servicing your note? There are a couple different ways you can approach this. You can do it on a ledger sheet, on a spreadsheet, use servicing software or you can solicit the help of a servicing company.

A ledger sheet or Excel spreadsheet is a simple document that lists the contact information of the buyer, how many payments they owe over the course of ten years, and the monthly amount due. A digital copy of this is available in the full Filthy Riches guide. This might be a good way to help you get started but when your business really starts picking up momentum, it may be hard for you to keep track of each transaction. The last thing you want is for a borrower to skip a payment, and not catch it because you’re weighted down in spreadsheets! Of course, if you have a financial background, this might be one of the areas you want to hold tight to and find help for some of the other nuances of your busy business.

If you want to go the route of servicing software, there are plenty of options available. You can set up payments through QuickBooks or another type of accounting software. My company uses Loan Ledger, which is pricy, but it also suits our needs to service hard money loans as well. My guide includes a digital Million Dollar Rolodex of other companies that offer servicing software. Look at the advantages of each one to choose what is most suitable for your personal needs. Some companies even offer free trial periods. This is a great way to “test drive” some new loan software. I would suggest using a phantom borrower though. It would be counterproductive to enter all your information for a buyer into the program only to decide not to use that software, after all.

If you don’t want to handle servicing your own notes, an outside company might be your best option. Servicing companies are great for handling all aspects of the note. Many will service the note and collect the payments each month for you. Additionally, they can handle escrows and the 1099s at the end of the year, which essentially lists out how much interest the buyer has paid out on the loan in that calendar year. They can also handle all the small details that eat up your time, including sending out late notices and even making phone calls on a late payment. Many of these companies also have an online option so you can log on at any time and see the status of each note they service for you.

Again, my Million Dollar Rolodex outlines many of these servicing companies for you. They may charge a setup fee and a small monthly fee as well, but for sellers who don’t have the financial fortitude – or simply the time – to service your own loans, this is a great option. Many of the companies in my Million Dollar Rolodex specialize in servicing loans specifically for small businesses.

If you decide to hire a servicing company for your note, you’ll need to send a letter to your borrower advising them where they need to send their payments. The letter doesn’t need to be long; it simply needs to state the servicing company’s contact information, advising your borrower where to send their payments. A full sample letter is available in my complete guide.

The objective with finding your ideal avenue for getting your notes serviced is to ensure that nothing falls through the cracks. If you do go with a servicing company, absolutely make sure the above mentioned letter is sent. The earlier in your history with this borrower, the better. There might be some confusion if you service the loan and then decide later to hire a servicing company. Obviously a letter is pretty self-explanatory, but you don’t want to give your borrower any reason to be late on a payment.

As with many aspects of my Filthy Riches program, there are number of different ways to approach the same tasks. This is true in nearly all of the steps from locating your first properties to servicing your final note.

There is no one perfect approach for anybody. You need to step back, determine what your needs are, what your abilities are and go from there. Don’t be afraid to adjust your techniques either. For example, for the purpose of servicing notes, you may approach the idea knowing that you were a straight A math student. You may assume you can handle your own bookkeeping only to become bogged down or so distracted with other aspects of the business that you’re making mistakes.

There isn’t anything wrong with altering the way you address the steps of buying and selling real estate. This is an ever-changing enterprise. You may be doing yourself a disservice if you don’t change certain aspects as you become more proficient at the real estate business. After all, Filthy Riches was designed to give you the steps toward financial freedom. Make sure you have your business set up so you can enjoy all these benefits!