Common Owner Financing Mistakes
Over the years that I’ve been involved in buying Real Estate Contracts, I’ve seen some common problems that can hinder the sale of a contract. The most common of these problems are summarized below. Please email or call if you need more information.
Mobile Home Titles
There are several mistakes involving mobile home titles that sellers and buyers make. One of the most common is assuming that because a mobile home is affixed permanently to the ground and taxed as real property that the mobile home title can be thrown away. The mobile home title should be rendered “inactive”, a procedure that is covered in the Newsletter “Deactivating A Mobile Home Title In New Mexico”. Another common error is assuming that the closing agent, usually a title company, properly transferred the title at closing. Title companies usually deal only in real property, and mobile homes are personal property. They often, as a courtesy, provide Motor Vehicle Department documents at closing for signatures, but usually the title is not actually transferred. There are several other errors made when a mobile home is part of the sale. All of these problems, and their solutions, are covered in other Newsletters.
Deferred Down Payments
It is common to see Real Estate Contract in which the “Down Payment” is partly cash and partly payments on a “side note”. For example, a guy in Otero County called me and said he had a contract that he’d like to sell. He said the property sold for $85,000 with $15,000 down payment. I told him what I could pay for the contract and he accepted. When I saw the contract, the down payment read “$1500.00 cash and $13,500 payable in monthly installments …”. There is a huge difference between $15,000 cash in hand at closing and $1500. The value of the contract is directly related to the CASH down payment. The series of articles entitled “How To Set Up Your Real Estate Contract For Maximum Safety and Value” will give you an idea of how to handle deferred down payments.
Title Searches
A common and very serious mistake seller’s make is not getting a proper title search done prior to selling a piece of property. I recommend providing an Owner’s Policy of Title Insurance for the purchaser, in spite of the expense. If you don’t provide the policy, at least ask for a title company to provide you with a title search on the property and a name search of the buyer. The search usually costs only about $100, and it will tell you if something appears against the property or the buyer (like an IRS lien). Often, if a buyer has a judgment or lien against them before you sell the property, that judgment will attach to the property you sold even though you had nothing to do with it. That may render the contract un-sellable, and if you had to repossess the property, the judgment or lien may become your problem!
Not Using An Escrow Company
Escrow companies provide a valuable service to buyers, sellers, and investors. They keep independent records of the payment history. In many cases, escrow companies provide IRS information to all parties. New Mexico has two different kinds of “amortization” schedules, and most escrow companies know how to handle both, whereas most “seller held” contracts only know how to amortize using one of those methods. Most importantly, escrow companies hold documents that clear title on payoff and/or default. That means that even if the seller or the buyer can’t be found (for example, if either moves away or is deceased), title can be cleared when there is a payoff (or default) anyway. If the seller holds the original documents, the buyer has to hope that the seller is available to release the proper documents at payoff.
Setting The Interest Rate Too Low
Many people decide on the interest rate of their contract without regard to the consequences of that decision. Before you decide on the interest rate you should charge, you should understand how risky the transaction is, and set the rate according to the risk. If you ever decide to sell your contract, interest rate is the main factor in determining what your contract will sell for. Please see the series of articles “How To Set Up Your Real Estate Contract For Maximum Safety and Value” for details. Also, see “Harnessing The Financial Power of Your New Mexico Real Estate Contract” in the Newsletter section.
Failure to Check Buyer’s Credentials
When you owner finance the sale of your property, you are extending a loan to another person, most often to someone you don’t even know. Most seller’s don’t investigate their buyers credentials at all, which is a big mistake. At a minimum, you should have your buyer provide you with a credit report. Credit reports are available over the internet for less than $10, and often are free. It’s even better to get have your buyer fill in a short application AND get a credit report (see the articles How To Set Up Your Real Estate Contract For Maximum Safety and Value” for more information and to get a copy of an application). It only takes a half hour to analyze your buyer’s credentials, it costs nothing, and it can reveal a host of problems (or good news!) that you would never know otherwise.
Failure to Monitor Property Taxes
All standard New Mexico Real Estate Contracts require the buyer to pay property taxes as they become due. However, most sellers assume that the taxes have been paid every year but don’t ask for proof of payment. Don’t make that mistake. You should either check with the county assessor to see if taxes have been paid, or write to the buyer and request that they send proof of paid taxes. Usually, taxes are due semi-annually in November and May. It’s good policy to write a letter to your buyer in October and April asking that they send you proof of payment when taxes are paid. If taxes go unpaid for three years, the State of New Mexico can sell the property for the taxes due, which will eliminate your contract!
Failure to Monitor Insurance
If there is a home or building on the property you sold, the contract should require the buyer to maintain fire insurance on the property. Just because the contract requires insurance doesn’t mean the buyer actually pays it! You should be listed as a Mortgagee on the insurance policy. Doing so will ensure that you receive notices from the Insurance company every time the buyer renews or fails to renew the policy.