In the world of distressed second mortgages, we use servicing companies for two main reasons. The first is for “insurance reasons” (I’ll explain later) and the second is for “convenient reasons”.
The convenient reasons we use a servicing company is an obvious one. We are either too busy or have no desire to perform the functions of the servicer.
A servicer offering their full services usually charges from $75 - $150 per loan per month (pricing is usually different for non-performing and performing loans) and performs the following tasks:
Boarding of your loans – The servicer will enter all the necessary information about your loan into their loan management software. There’s usually a one-time per loan fee for boarding (approximately $50) and if you decide to leave the servicer or take back a particular loan, there’s usually a $50 (approximately) one-time fee for “de-boarding” the loan.
Skip Tracing – Servicer will research many different avenues to try to find your borrower. This can be an extremely time-consuming and frustrating process but needs to get done.
Borrower Calls – Once the servicer finds your borrower, they’ll make scheduled collection calls notating what transpired and what actions need to be taken.
Collection Letters – A variety of collection letters are mailed out based on the delinquency of the borrower.
Borrower Statements – Print and mail out monthly borrower statements.
Incoming Funds from Borrowers – Any incoming funds from the borrowers will be received, recorded, and distributed to the investor, less the servicer’s fees.
Year-End Tax Information – At the end of the year, the servicing company will print out all eligible borrowers who have made interest payments greater than $600. This form is sent to the borrower, investor, and the summary form is sent to the IRS.
Other fee for services may include door knocking, bankruptcy research and filing of proofs of claim, providing credit reports, workouts with borrowers, loan modifications, short sales, REO (Real Estate Owned) management, inspection services, foreclosure management, etc.
SERVICER OF RECORD OPTION
A servicing company may also offer you the opportunity to do your own workouts with the borrower while using their license as “insurance” (this is what we meant by “insurance reasons”). The servicer would need to be licensed in the state where the property address of your loan is located.
The servicer will perform all the same tasks as the Full-Service option except for the skip tracing and borrower calls. You can expect to pay between $25 to $50 per loan per month.
Remember, no one will work harder on your loan and has more at stake than you!
You may decide that it’s not worth using a servicing company and may opt to do all the services yourself.
TO SERVICE OR NOT TO SERVICE
Whether to use a servicing company or not comes down to you and it’s good to ask yourself these questions:
1. Do I want to be the person managing my loan-handling the workouts which can include making calls, monthly statements, collection letters, etc.?
2. If the servicer is charging me $100 per month to fully service one of my loans and the borrower can only make payments of $150, is it worth only making $50?
3. If after a number of months of reaching out to my borrower with no success, I can then decide to go the LEGAL route. (At that point, you would review the loan with an attorney who would advise you if it is necessary to board the loan with a servicer licensed in that state.)
No matter which scenario you choose, it’s helpful to use a high-quality loan management software program to keep track of your loans.
Additionally, even if you are using a servicing company, you owe it to yourself to know what they’re doing and how the income is being applied. You don’t want to be taken advantage of and you want them to know that you’re an experienced investor.
FYI - A handful of sellers require buyers to board their new note with a servicing company.
LIST OF SERVICERS
The following is a list of servicing companies. We have worked with a few of them and have had good experiences. If you are thinking of going the servicer route, the best thing for you to do is contact them and have a set of questions lined up so you can compare services and costs.