Servicing a wrap yourself vs paying a licensed servicer, where's the actual line?

Question

I'm preparing rather than doing, and the piece I keep circling is who touches the money. In a wrap the buyer pays me, I pay the underlying lender, and I keep the difference. That's three transfers a month with my hand in the middle of all of them.

Case for a third-party servicer: they collect, they remit to the underlying lender directly, they keep the payment history, they generate the year-end interest statements, and if it ever ends up in front of a judge there's a neutral record of who paid what and when. It also gives the buyer proof that the underlying loan is being paid, which is the buyer's single biggest exposure in this structure. Cost I've been quoted in conversation runs somewhere in the 25 to 45 a month range plus setup, which on a 400 a month spread is real.

Case for self-servicing: it's cheaper, it's faster to set up, and on a single note with a buyer you know it's not complicated arithmetic. Plenty of people do it with a spreadsheet and an amortization schedule.

What I can't judge is whether the servicer is buying protection or buying tidiness. Licensing rules for who can collect on a residential note vary by state and I'd want that confirmed with a local attorney before assuming either way. Where do you put the line?

tylerbrooks9 · Answer

Servicer, every time, and I'd pay it out of the spread without arguing. The version of this that scares me is not fraud, it's me being on vacation the month the underlying payment is due and a wire being late. A servicer doesn't take vacations.

devon_pierce · Answer

35 a month against a 400 spread is under nine percent of the income. That's cheap for having someone else remit to the underlying lender on a fixed calendar. I'd want to know whether the servicer will actually pay the underlying loan directly or just hand the seller the collected funds, because those are very different products and the second one solves nothing.

raj_mehta14 · Answer

bramble's distinction is the one I didn't know existed until this thread. So some servicers just collect and forward to the seller, and the seller still has to make the underlying payment themselves? Then the buyer has no more assurance than before, they've just added a middleman to the first leg. I'm going to ask about that specifically.

nicole_adeyemi · Answer

Self-serviced two land contracts for six years with nothing worse than a spreadsheet and a receipt book, so I'm not going to say a servicer is mandatory. But land contracts on small balances with a buyer twenty minutes away is a different animal from a wrap sitting on top of a bank's mortgage. The bank is the party you cannot afford to be late with, and that argues for the automated version.

paulgrant17 · Answer

anchor, one more thing the servicer gives you is the payment history in a form a buyer's future refinance lender will actually accept. If the buyer wants out of the wrap in three years and into a conventional loan, twelve months of documented on-time payments from a servicer is the record that gets it done. A spreadsheet from the seller is worth much less to an underwriter.

Servicing a wrap yourself vs paying a licensed servicer, where's the actual line?

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