Worried the buyer won’t make payments?
Understandably, this is a common concern by sellers using owner financing. After all, an owner-financed note is one of the seller’s most valuable assets. Unfortunately so many sellers fail to protect their asset when it comes to verifying current property insurance and taxes.
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 many buyers will make their monthly note payments but fail to pay the insurance premium or real estate tax installment.
Sadly, a lapse in insurance can be devastating to both the buyer and the seller. If the property burns down and is not insured, the seller will probably never see another payment from the buyer.
If a buyer fails to pay the real estate taxes for long enough the county can actually foreclose on the property. In most states, the lien for county taxes even takes priority over mortgage note holders, leaving an unsuspecting seller high and dry.
The solution is for sellers to diligently verify the insurance and taxes are current by requiring the buyer to submit proof. For insurance, require a copy of the declaration page showing the buyer as the insured owner and the seller as the insured mortgagee. Next call the insurance company to verify the policy is current and the annual premium has been paid. As the mortgagee listed on the policy you should receive notice of cancellation but it is safer to verify on or before the date premiums are due from the buyer.
To verify taxes are current simply check the county records using the property address or tax parcel identification number. This can be done with a phone call, a visit to the county tax assessor, or online.
Most documents require the buyer to keep taxes and insurance current and failure to do so qualifies as default under the note. Sellers can demand the default is immediately cured or start foreclosure. Sellers as lien holders may also elect to pay the delinquent amount to protect their interest and add back to the amount due, depending on the terms of the actual note, mortgage, deed of trust, or contract.
Some sellers prefer to avoid the headache by setting up reserves through a third party servicing agent. This way the buyer pays an amount equal to 1/12th the annual amount for taxes and insurance establishing an escrow reserve account from which the bills can be paid.
A note investor will also verify the taxes and insurance are current should the note holder ever decide to sell the note, mortgage, trust deed, or contract.