If you plan to sell a mortgage note be ready to show the buyer is keeping real estate taxes and property insurance current. Follow two easy steps to protect the promissory note and demand top dollar from investors.
Checking Real Estate Taxes
Real estate taxes become a lien against the property that can take priority over mortgage notes. That means the county gets paid first and can eventually take the property back for nonpayment.
It’s easy to find out if real estate taxes are current or delinquent. Just contact the county tax assessor and provide the property address, owner’s name, or tax parcel number.
Most counties make tax roll information available online. Pull up a search engine and type in the county name and state followed by the words “tax assessor.” (For example: Orange County FL Tax Assessor). If records can’t be found online then a phone call or visit to the county office will be the next step.
Obtain a printout of the tax status and provide to note buyers when asking for a purchase commitment. Even if sellers don’t plan to sell a mortgage note it still makes sense to verify taxes at least twice a year, or whenever they become due.
Verifying Property Insurance
Investors will want a copy of the insurance declaration page showing any buildings of value are protected against fire and other hazards. This “dec page” should show the buyer or payer as the insured owner and the seller as the insured mortgagee.
If it’s not already on file the seller will need to contact the property buyer and ask for a copy. Next call the insurance company to verify the policy is current and the annual premium has been paid. The mortgagee listed on the policy should receive any notice of cancellation, but it is safer to verify on or before the premium due date.
Next to delinquent payments, the most common default by buyers is failure to keep the property insured and the real estate taxes current. In fact about a quarter of the notes we see have some sort of tax or insurance issue that needs solved.
Most seller-financed note documents require the buyer to keep taxes and insurance current. That means a failure to fix or cure the default can result in foreclosure. Sellers as lien holders may also elect to pay the delinquent amount to protect their interest and add back to the balance due, depending on the terms of the actual note, mortgage, trust deed, or contract.
Some sellers prefer to avoid headaches by having the buyer set up escrow reserves through a servicing agent. This way the buyer pays an amount equal to 1/12th the annual amount for taxes and insurance into an account used to pay these bills.
We once owned a cash flow note with lapsed insurance where the house burned down shortly after buying the mortgage note! That’s a school of hard knocks lesson that doesn’t need relived (for all the details read Note Buyer Burns to Learn – Real Deals #160).
Savvy sellers and note buyers know to protect their valuable asset by verifying the real estate taxes and hazard insurance are being kept current!