Tax office

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However, you should never assume the tax office will contact you when a problem arises. Once a year you should call the tax office and determine whether taxes are current. Not making that one phone call a year could cost you your investment, not to mention the emotional expense of dealing with a messy situation. Some tax offices are now “on-line” and you can check tax payment status by dialing into the tax office via computer modem. The “Tax ID” of the property in question is used to access the tax payment records of that property. Since tax offices may or may not notify lenders of tax problems, traditional lenders combine tax and insurance costs into each monthly payment. Additionally, they hire a company to check that taxes are actually paid. As a private lienholder, you too should take extra precautions to ensure property taxes are paid. First American Tax Service is a firm that will do this for a onetime fee, good for the life of the lien or as long as you own the lien. In other words, if you subscribe to First American’s tax service and you later sell your lien to a third party, that third party would have to set up a new contract with First American. (This onetime fee is around $60.00.) You can contact First American Tax Service at the following number: 1-800-229-8291. You may also find it valuable to check out their web site since it contains a comprehensive underwriting library for all fifty states. You should verify that the property’s hazard policy in place is issued for an amount no less than the amount owed to you. The property owner should want the property insured for its full value, and you can require this within the security agreement. Confirm that you are listed as the “mortgagee/grantee,” “beneficiary” or “first contract holder” on the insurance policy. You are thus entitled to the proceeds from any insurance claim ahead of the property owner. If you are a junior lienholder, making sure that adequate insurance covers the entire debt owed is of great importance. The entire debt owed is the amount owed to you plus the principal owed on any other liens. Since you are not in senior position, insurance benefit monies will be paid first to the senior lienholders, then to junior lienholders. In other words, someone else will be paid off first, and you need to make sure there is adequate coverage to pay the amount owed to you.

You should also make sure you receive annual renewal notices from the insurance company and then file them for record keeping purposes. If you do not have a recent renewal notice, call the insurance company and obtain one. In addition, if your mailing address ever changes, call the insurance company and have them update their records, just as you would with the tax office. Be aware that most companies who service loans will not hold proof of insurance in their file. If one is sent to them instead of to you, they probably will send it back to the insurance policy provider. The insurance company should issue you a Notice of Cancellation if the owner fails to keep the policy current. Should you receive such a cancellation notice, immediately call the owner regarding this possible breach of contract. To be safe, add the property to your own insurance policy until you have confirmation that insurance has been reinstated at the correct amount and you are again listed as the beneficiary. Each municipality will handle tax foreclosures differently. Understand how your tax office operates, (i.e. the tax office which services the property used as collateral on your note). Once a year you should call the tax office and determine whether taxes are current. The following checklist will help you keep track of tax and insurance:

Annually check that property taxes are paid. Check that the municipal tax department has your correct mailing address, that they have you listed as a lienholder on the property, and that the property owners are who you think they should be. This is a way of double checking that the property has not been resold without your knowledge. Annually check that the hazard insurance policy on the subject property is in effect, and that the property owner is who you think they should be. Again, this is a way of double checking that the property has not been resold without your knowledge. Make sure you have a copy of the insurance binder (proof of insurance) showing that you are listed as beneficiary of the insurance policy. File this insurance binder for future reference. Check that the hazard insurance policy is written for an amount no less than the amount owed to you, or for the value of the property if you required this within your contract. If you are a junior lienholder, make sure adequate insurance covers the entire debt owed; not just what is owed to you. Have you moved? Call both the tax office and the insurance company and supply them with your new mailing address. Have you received a Notice of Cancellation? Insure the subject property yourself until you receive confirmation that insurance has been reinstated.

The value of your note also depends on the credit of the buyer. Selling to someone with poor credit will decrease the value of your note substantially. Try to avoid this situation up front by obtaining written authorization to pull credit on the prospective buyer and review two individual credit reports from different reporting agencies. The reason you may want to review two credit reports is that sometimes different agencies pull up different information on the same prospect. Consider that banks and conventional lenders utilize what is called a “tri-merge” credit report. Tri-merge reports contain credit information taken from three individual credit reporting agencies. This data is merged into one, often lengthy, master report which is then reviewed by the lender. Utilizing tri-merge reports is standard practice in the lending industry. Since you are also a lender, you should not hesitate to shadow the business practices of these firms. Also, check employment information, annual income, debts owing, and personal references. Should the buyer have damaged credit, you may want to insist on a larger down payment, additional collateral, and/or a cosigner. Like all of us, buyers tend to be creatures of habit. Even though they may have the best of intentions, they will most likely do to you what they have done to their previous lienholders. Note: Cosignatures are somewhat worthless unless the cosigner pledges specific assets to you. This can best be accomplished by using a separate deed of trust signed by the cosigner. When dealing with credit reports, look for patterns of nonpayment rather than a single report of nonpayment. The reason behind this suggestion is that people are generally creatures of habit. You should determine, therefore, if the blemishes on the credit report (if any) indicate a tendency to not pay financial obligations in general, or if they represent an isolated, specific instance with a feasible excuse behind it. You will also need to determine what type of blemishes you are willing to overlook, as well as how many. For example, some lenders will overlook all unpaid medical bills. However, some blemishes should never be overlooked. Some obligations can turn into liens and be placed against the payer as well as the property. If this occurs, the position of your lien may be compromised. Common examples of such blemishes would include child support obligations and IRS obligations. One significant blemish that may appear on a credit report is a past bankruptcy. Should this appear in a prospective purchaser’s credit history, you should ask yourself the following questions:

• Has the bankruptcy been discharged?

• Has credit been reestablished?

• Do new accounts show a positive payment history?

You are trying to determine if the prospect is currently paying his or her bills and if he or she will continue to do so in the future. The more questions answered negatively, the greater the risk that the prospect will fall back into a previous pattern of poor credit. Be aware that it is not uncommon for a person with a bankruptcy to reestablish credit for a number of years, then slowly slide back into a pattern of making late or no payments. If the prospect has been a homeowner in the past, look closely at the payment history on that lien. If the payment history is good on that lien but other obligations remained unpaid, you know that the prospect made the home mortgage a priority over other debts. Take this into consideration. If the prospect made late payments on a past mortgage, the chance is good that he or she will make late payments on your lien. Remember, the later the payment, the more difficult it may be for the payer to bring the account current. Ultimately, you are playing the role of a bank and the degree to which you investigate the prospect is a personal business decision. Should the prospect be motivated, he or she most likely will provide whatever documents you request. As a general rule of thumb, the poorer the credit and lower the income, the more down payment you should demand as compensation for your increased risk. Selling to someone with poor credit will decrease the value of your note substantially. When reviewing a credit report, determine if the blemishes (if any) indicate a tendency to not pay financial obligations in general, or if they represent an isolated, specific instance with a feasible excuse behind it. Some credit blemishes should not be overlooked since they could turn into liens against the payer and the property. It is not uncommon for a person with a bankruptcy to reestablish credit for a number of years, then slowly slide back into a pattern of making late or no payments. As a general rule of thumb, the poorer the credit and lower the income, the more down payment you should demand as compensation for your increased risk. A Preliminary Title Report, also called Commitment to Insure, is a document that identifies liens, liabilities, and conveyances that affect title to a specific piece of land. You should obtain a Preliminary Title Report or a Commitment to Insure on any property that will be used to secure your note. Use only a reputable title company. Should the Preliminary Title Report reveal no clouds or flaws to the title, you should then purchase a title insurance policy. Two types of policies are available: an owner’s and a lender’s policy. Owner’s policies are the most common policies requested, usually being issued to the purchaser of the property.