Like any other business, as you scale in the note investing business, you will eventually reach a point where you can no longer manage all your notes on your own. Weather you hire in house or outsource with contractors, bringing more people onto your team is inevitable and sure to make your life easier as you run your business.
Here are the top 10 vendors you need on your team for note investing:
Before you do anything in the note investing space, you need to hire an attorney so they can help you through the process of establishing your business. It is critical you have an attorney on board when you start your business. This is so they can help you with legal documents and contracts you will need to go over when brining more vendors onto your team. They can also help you choose which business model works best for you and help you register your LLC.
When searching for an attorney, it is so important to hire somebody who specializes in real estate. If they have a background in foreclosure and debt collection that is even better. You also want to ask them what states they are licensed in as this determines where they can do business. Another important topic to touch on is if they follow the Fannie Mae Fee schedule versus charging by the hour. Overall, you want to get a good understanding of what the attorney can do for you and if this aligns with your business needs.
2. Loan Servicer
The loan servicer is the heart of your note business as everything flows through them. This vendor truly holds your business together and therefore it is essential that you hire the right company to service your loans. Your loan servicer is responsible for collecting payments from the borrower on your behalf and keeping you in compliance with state and federal regulations.
When looking for a servicer, you should have a list of criteria they must meet to be sure you bring on the right person. For starters, you need to make sure they are licensed in the states your notes are in. You also need to compare the servicing agreement with the fee schedule and really study this to ensure you understand it properly. The majority of complaints I have heard about loan servicers came from people who did not understand the terms of their agreements. Therefore, it is so important that you study this thoroughly.
3. Title Company
A Title company is required in the note investing space because when you purchase a note, you want to understand the note’s lien position and if there are other liens or issues on title. I highly recommend speaking with other note investors to get an idea of what reports to order, as there are single owner reports as well as full title searches. To ensure there are no surprises down the road, you must make sure your search goes back far enough. This is why I recommend ordering a full title search.
I have learned first-hand that not all title companies are the same. Because of this, it is important to understand if you are signing an agreement with them and what that agreement entails. I say this because what happens when you buy a note for $50,000 and have no agreement with a title company, then they make a mistake (which does happen) and the loan you just bought is no longer recoverable? What will happen is the title company will hand you back your $150 for the report, but typically that is the extent of the coverage they provide. This is why it is so crucial to ask a lot of questions and make sure you are working with a good title company. We searched long and hard to work with companies that ensure their work and product so if a mistake occurs, we are covered.
4. Realtors & BPO’s
A realtor or BPO company plays a huge role in your note investing business as this vendor has the most control over your profit. When you are doing due diligence on an asset, you will send a realtor out to the property to evaluate it and determine the estimated value. Unfortunately, not all these companies do a thorough job, which is why hiring the right company is so important. If the property is not correctly evaluated, it can cause significant harm to your profit.
When researching these companies be sure to ask questions and make sure you thoroughly understand their process. You want to find out who exactly is taking photos of the house and how they run their comps. Also ask about their verification process and quality control process. If you want to take it a step further, you can even ask for sample reports to get an idea for what they look like and what they will show. On higher priced assets, it is not uncommon to order two BPO reports for comparison purposes, which is part of our standard operating procedures. I had an experience where a second BPO featured photos of the side of a house caving in – this was not shown on the first BPO, so it essentially paid for itself.
5. Preservation Company
A preservation company is another important team member in the note investing business. This vendor is responsible for checking the status of the property to ensure it is safe and secure which alleviates potential fines from local jurisdictions. Some preservation companies are local while some are nationwide. When vetting a preservation company for your note business, you want to figure out what states they work in, what services they provide, as well as the fees associated with those services. Because all preservation companies are not the same, be sure to ask for pictures and copies of reports that they provide.
6. Collateral Storage Firm
Collateral storage refers to taking the physical hard collateral you receive from the seller and making sure it is kept in a safe and secure spot. When it comes to collateral storage, you typically have three options. You can store it in house which would be wherever you have your office or live. If you choose this option, it is vital that you keep it in a fireproof cabinet or other safe and secure area. Your second option would be to have your servicer store the collateral for you. Your third option would be to hire a custodian to house the collateral for you.
7. Document Recording Firm
If you ask anyone in this business what the most painful part of note investing is, they will most likely tell you document recording. Document recording occurs when you buy a loan and get the allonge and assignment from the seller. The assignment needs to be physically recorded in the county so that if there was ever an issue on title, tax sale, or liens, your firm’s name will be in public record, and they can notify you. This is important because if you name is not on the list, they will have no way to contact you and you will not be notified if the property were going to tax sale or foreclosure from another lien.
Hiring a document recording company to handle tasks like these for you can save you a lot of time and effort. If you as the seller take it upon yourself, you run a great risk of filling out a document incorrectly. If you fill something out correctly it will get sent back to you, wasting more of your time and running the risk of missing deadlines. These companies do this for a living so they know what they are doing and will get it done right the first time. Hiring a professional to take care of these documents for you can save you a lot of stress.
8. Tax Service Company
The three biggest risks in note investing are taxes, title and property value. We checked off two of these earlier (title and property value), but many note investors struggle with taxes. This is because so many people have never heard of a tax service company. Tax service companies are able to pull the tax bills for your notes and monitor the taxes on an annual basis, ultimately making your life easier. If taxes are delinquent, your tax service company can make you aware of this.
A tax service company is also able to monitor your servicer. As a note investor, you will own many loans which have escrow. Escrow is when the borrower provides funds within their payment to pay for taxes and insurance. When the tax bill comes out, the servicer will pay the taxes with these escrow funds. However, there are instances where checks get lost in the mail or the taxing authority simply does not cash it. Should this happen, your tax service company would advise you that taxes were not paid so you can communicate with your service on these issues and get them resolved.
Although most people in the note business try to avoid spending money on this vendor, a bookkeeper will save you the most money in the long run. Having a bookkeeper on your team is so important, especially once you start to scale as it gets very challenging to manage your notes on your own. A bookkeeper can help you with what goes on the balance sheet versus what can be written off as profit and loss, as well as where it goes on your asset sheet (asset column versus liability column). If you are not an expert in this field, all the different rules and ways of doing things can get confusing and be very time consuming. Therefore, I think it is best to hire a professional to handle this for you and make sure it is done correctly.
When looking for a qualified bookkeeper, be sure to choose somebody with a background in notes. Not just real estate, but specifically notes as this is a very niche industry and a whole different animal. You also want to make sure that you have the same software that your bookkeeper uses (most people use QuickBooks).
While many note investors choose not to bring a Certified Public Accountant (CPA) onto their team, I believe you do need a CPA no matter how many or few notes you have. When you start running your note investing business, it should be treated like any other business. Every successful business I know of has a CPA on their team. One of the main reasons you should hire a CPA is because of all gray areas so many of us struggle to interpret. If you were ever audited, a CPA could explain these to you as they are the expert when it comes to the tax code.
When selecting a CPA to join your team, you want to choose somebody who has a background in real estate and more specifically mortgage notes. Even if you bring a CPA on just to do your taxes, this is a small expense (probably around $1000) that will likely be worth it by saving you a lot of time and effort.
We hope you find this article useful, and if there are other vendors you recommend for a note investor, feel free to add to the comments below and share with us your thoughts. We are also willing to provide recommendations for vendors who we use, but remember, just because we use them does not mean they may be the right fit for you so we always recommend you thoroughly vet any vendor.
Lastly if you do get a recommendation from someone, ask that person if they used them? I mention this as there are a lot of instances where people will recommend a company that they have never used but saw another investor mention the name. I have seen many people get burnt by this (including myself), therefore when receiving recommendations, make sure they have first-hand knowledge and experience.