Dear Angie:
I read your article last month on Seller Financing. I am very interested in selling a rental house I have this way. One of the items you mentioned was “long term escrow collections”. Can you tell me about this service. —Mary in Spokane

Dear Mary:

Yes, I would love to share this information. Seller financing is my passion. I owned and operated Spokane Closing and Escrow Company from 1978 to 2003 and had over 3,500 escrow collections.

These are accounts established once a closing transaction is completed and the parties needed an independent third-party to hold the fulfillment documents and service the terms of the escrow. It is a two-part service.

Part One: The parties have the escrow agent or attorney prepare the documents to be serviced. The two preferred methods are note and deed of trust, or real estate contract. They will have the terms of the agreement, the unpaid balance, interest rate, due date, and many other items. The long-term escrow collection company, called the holder, will send a bill to the purchaser. The purchaser pays either with a check or sets up an ACH (or sometimes goes to the holder’s office and pays directly there). The holder processes the payment applying it according to the note terms and then sends the money to the seller. Seller sets up ahead of time how they want to receive their money, either by check or a ACH to their bank. Seller receives an accounting each month of principal balance, how the money was applied and if the purchaser paid into reserves for taxes and insurance.

Part Two: This makes it a “true” escrow collection. The original “fulfillment” documents are also placed in escrow collection. If it is a note and deed of trust, then the request for full reconveyance is the fulfillment document. If it is a real estate contract, then it is a “fulfillment deed” (The next article will detail the differences!). By the holder having these documents in their fire-proof filing cabinets (required by DFI) then the purchaser can pay off their loan at anytime without contacting the seller. The holder handles it all.

The holder charges a yearly fee for this service, but it is minimal considering the service that is provided.

Here is an outline of some of the services provided by a long-term escrow collection:

• Handling the payment process – receiving the payment from purchaser, computing the payment, remitting the payment to the seller and documentation monthly to each party.
• Holding the original documents
• Handling the reporting to the IRS at year end of the 1099 or 1098 interest reporting.
• Monitoring late payments or forfeitures
• Handling the reserve deposits purchaser may have included in his/her payment for taxes and insurance, paying when due and remitting proof to seller they are current.
• Maintaining the reserve account to keep it updated based on increases in taxes and insurance.

Many other services of the long-term escrow collection are available. It is not just for purchasers and sellers but can also be for:

• Construction loans between private parties
• Lease options
• Holdbacks for work to be done AFTER closing between the parties.
• HOA’s

Long-term escrow collection companies are bonded, licensed and insured. They meet all the requirements of Department of Financial Institutions. And are subject to a quarterly audit of their bank statements.