Servicing my own note versus paying someone $30 a month to do it

The discount you're describing isn't a penalty for being disorganized. When I underwrite a note the pay history is the only evidence that this specific borrower pays this specific payment on time, and a spreadsheet the seller maintains is the seller's assertion. Bank statements help, and they still take work to reconcile because transfers don't tell me what got applied to interest versus principal versus a late fee.

Twelve months of clean servicer statements moves a note from a story into a documented cash flow. That's worth more than the fees you'd have paid over that year on a $148,000 balance, in my experience of what I'm willing to bid.

Run the arithmetic before the argument. Thirty dollars a month is $360 a year. If the servicer record moves a bid by even two points on a $148,000 balance that's about $2,900. You'd have to service for eight years to spend that.

The part I'd check in writing is what the servicer actually does when a payment is late, because some shops just log it and some send the notices, and the fee schedules I've seen differ a lot on default servicing.

I'm still working out what a servicer does beyond collecting money. Does it include the escrow for taxes and insurance, or is that a separate thing you set up?

@meridian I want the same answer, plus the one I'm embarrassed to ask. If the borrower pays late in month nine, who is the person who actually writes to them, and does @girder ever find out before it's 30 days gone?

The escrow piece is where I got lost reading about this. If nobody is collecting for the tax bill then the borrower has to save for it themselves, and if they don't, the county has a claim that sits ahead of the note, which means my collateral position isn't what I thought it was...

On raw land notes the economics look different to me. I've got payments of $310 a month on a parcel and a servicer minimum eats a real percentage of that.

Half this thread is describing a service business, which is what caught my eye. Somebody has to keep those ledgers, chase the late payer and produce the statement the note buyer wants, and it's a fee for work rather than capital at risk. @girder is basically deciding whether to hire himself at thirty dollars a month.

Check the note and the deed of trust for a servicing provision before you switch anything. Good paper says the holder may designate a servicer and that the borrower's obligation is to pay whoever is designated on written notice, and without that language you're relying on the borrower cooperating with a change of payment instructions.

Also worth reading is whether your documents require escrow or leave taxes and insurance as the borrower's covenant with a right for the holder to advance and add the advance to the balance. @vellum that provision is the answer to your worry, and whether a property tax lien primes a recorded mortgage is set by state law, so confirm it for your state with a lawyer there.

I bought a note two years ago from a seller who serviced it himself and it took me most of three weeks to rebuild the history from deposits. Payments came in odd amounts, some months twice, and the seller had been applying overages to principal in his head without documenting it. The balance he told me and the balance the schedule produced were $2,100 apart.

I still bought it. I bid it lower than I would have, and I said why. @girder that's the entire mechanism behind the answer you got.

So the fee is trivial and the reconstruction cost lands on whoever buys it. That's an easy trade from where I'm sitting.

I'll be the dissent. Two notes carried on land, both self-serviced, and I have no intention of selling either one, ever. The payments arrive, I record them, the borrowers know my phone number, and I've had one late payment in six years that got fixed with a conversation.

If saleability is worth nothing to you because you're never selling, you're paying a fee for an option you'll never exercise. @girder the honest question for you is whether you know which of us you are.

The thing I'd want a servicer for isn't the payment at all, it's insurance. Policies lapse for nonpayment and nobody tells the lienholder unless the lienholder is named and monitored. I've watched an owner discover a lapse after a kitchen fire, and the note holder in that situation is holding paper secured by a burned house.

Most servicers will track the policy and flag a lapse. Ask specifically whether they do, because it's not universal.

@trellis is right and it cost me to learn it. Different situation, my own insurance on a fourplex, but the lesson transfers. Every unit teaches something and that one taught me to set a calendar reminder for renewal dates on anything I have money in.

@girder if you stay self-serviced, at least get named as mortgagee on the policy and call the carrier yourself in month eleven each year.

I've read this thread three times and the split is clean. Sell someday, pay the servicer. Hold forever, don't. @orchard made the useful point that everyone else skipped past, which is that the whole cost of self-servicing shows up only at exit, so if there's no exit the cost is zero. I'd still hire one, because I don't trust my own forecast of what I'll want in five years.