The state of New Mexico is an escrow state which means that the majority of owner carried back notes are serviced by local escrow companies. Their services include holding original documents, collecting and disperses payments and providing year end tax information, all for a nominal monthly fee. It’s an important service because it brings order to the process and payment collection can become a very cumbersome burden especially if you have more than one note (especially at tax time). Interestingly, it’s not mandated by the state that you have to use an escrow company but it’s really the best option when you consider what can go wrong.
We’ve had several situations recently that have opened our eyes to the importance of escrowing. For example, in Texas, say you sold property on a note and you’re in first position at the origination date or the official closing. At some point in the future your payer gets in a bind and can’t pay the property taxes so they borrow the money to pay the taxes. A few years pass and you decide to sell your note, to your amazement you can’t because the title company just informed you that you’re in 3rd position behind two loan companies. There is a new statute in Texas that allows lenders to jump position on a secured real estate note because the money was appropriated for property taxes. In this example if you had escrowed the note you could have avoided this situation. By prorating the taxes and insurance and including them along with the principal and interest payment the buyers would have stayed current just by making the monthly payment.
Also, we’re getting a large number of note holders collecting the monthly payment in cash and thereby they’re unable to substantiate a legitimate pay history which makes the note suspect to investors and not marketable. An escrow company can provide an excellent pay history quickly and from a reputable third party.