When you sell property with owner financing, closing the sale is only the beginning. What happens next is ongoing loan management, known as servicing. Whether you take on this responsibility yourself or hire a professional servicing company, the choice will impact your time, peace of mind, and ultimately the value of your note.
What Is Note Servicing?
Servicing is the day to day management of the loan. It includes:
- Collecting monthly payments
- Tracking principal and interest balances
- Managing escrow for taxes and insurance
- Sending year-end tax forms
- Recording payoffs and lien releases
- Handling late payments or defaults
This behind-the-scenes work keeps everything compliant, organized, and running smoothly.
The Self-Servicing Route
Many note holders choose to manage their own accounts. This approach offers:
Advantages
- No monthly servicing fee
- Direct control over all communication and decisions
- Flexibility to make quick changes if both parties agree
Drawbacks
- Time-consuming and requires detailed record keeping
- Higher risk of errors in payment histories, escrow, or legal filings
- Added stress if the borrower falls behind or disputes arise
- Payments made ahead of schedule can disrupt the amortization, making it confusing to track principal and interest
Self-servicing can work if you are comfortable tracking balances and handling paperwork. It does take consistent effort and close attention, and even small errors can create bigger issues down the road.
Professional Servicing
Hiring a professional servicing company is another option. A servicer will handle the loan for you and provide detailed monthly reporting. This approach offers:
Advantages
- Accurate and standardized records
- Neutral third-party communication with borrowers
- Monitoring status of taxes and insurance
- Established systems to manage late payments or defaults
Drawbacks
- Monthly servicing fees
- Less direct control, since requests are routed through the servicer
Servicer Facts
- Licensing: Servicers must be licensed, with requirements varying by state.
- Specialization: Not all servicers handle seller-financed notes. Choosing one that specializes in owner-financed notes ensures they understand the unique challenges, legal requirements, and best practices for your type of note.
- Security: Servicers may offer to store original notes and related documents securely, reducing the risk of lost or damaged paperwork.
For many note holders, outsourcing is worth the cost because it reduces stress and ensures consistency. In some cases, the cost of professional servicing can be built into the terms of a new note, but it is rarely acceptable to pass that cost onto a borrower for a note that has already been created.
Protecting the Value of the Note
Professional servicing does more than simplify your life. It also protects the long-term value of your note. Accurate documentation shows when payments were received and how they were applied. Escrow for taxes and insurance is tracked, and year-end tax statements are handled properly. At payoff, professional servicers issue official statements and ensure lien releases are recorded correctly. This clear documentation validates the account and reduces the risk of disputes, errors, or lost records.
Your Role as the Note Holder
Even if you hire a professional servicer, it is still your responsibility as the note holder to review the account periodically. Mistakes can happen from time to time, which is why reviewing your account regularly is so important. Catching errors early helps keep your records accurate and gives you peace of mind that value of your asset remains protected.
Key Takeaways
- Self-servicing saves money but requires strict attention to detail and comes with added risk.
- Professional servicing costs more but provides accurate records, smoother management, and protection of the note’s long-term value.
- The cost of professional servicing can sometimes be built into a new note but is rarely passed onto a borrower for an existing note.
- Regardless of the method you choose, reviewing your account periodically is essential to confirm accuracy and safeguard your investment.