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Insurance and Your Real Estate Note

by Kevin Kaczmarek on July 7, 2011 · 9 comments

  
Post image for Insurance and Your Real Estate Note

It’s one of those intangibles that sometimes gets glossed over when it comes to seller financing, however it’s important to have a good understanding of the various aspects of insurance when it comes to seller financing.

Buying with seller financing: If you are a real estate investor buying property with seller financing, it’s your responsibility to get the property insured. You as the purchaser must make sure the seller is named as the additional insured. It is best to get the right amount of coverage, which is discretionary but I often tell investors to insure the property for current market value. Insuring for less than current market value, puts you on the short end of coverage and could led to a shortfall if there is a payout. Too much coverage and you could be paying a larger premium each month than what the insurance company would pay out in case of a claim.

Selling with seller financing:  If you’re selling your own property on seller financing you have a different responsibility with insurance.  Your responsibility as the seller is to make sure you are named on the insurance policy. Being named as the “mortgagee” or “additional insured” on the purchaser’s policy is your right and protection in case of a claim. Imagine a property you sell on land contract catches fire and is destroyed, the insurance company is going to pay a claim but to whom? As the mortgagee on the homeowner’s insurance, you as the note holder will be paid first on a claim to satisfy your interest in the terms of the contract. The remaining payout will go to the homeowner. Hence, it is very important to keep updated records of current insurance policies and be sure that you as the seller are on the policy in case of a claim.

Buying a seller financed note: As the purchaser of a seller financed note you essentially become the owner of the property and the contract. At this point, you become the additional insured and are entitled to the same right of claim as above. It is best to apply the changes to the insurance policy at the day of closing on the note so your coverage is seamless.

As you can see from the examples above there is quite a bit to consider from a basic claim aspect of seller financing. One of the best things you can do as a real estate investor is have a good understanding of what coverage you have with your insurance policies. Working with a real estate investor friendly insurance agent can help answer questions related to other aspects of insurance coverage such as liability and accident claims. I hope this primer to the basics of insurance will open a dialogue between you and your agent. Now, you and your real estate investing career are insured and protected!!

As always, I appreciate your feedback. Have you had an insurance related claim on a seller financed note? If so, please share your story below. Thanks for reading and happy investing!

Photo: Mark Bray

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{ 9 comments… read them below or add one }

John Evan Miller July 7, 2011 at 12:42 pm

I am glad you posted this article–it has great information on insurance/financing notes that most people do not take into consideration.

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Kevin Kaczmarek July 7, 2011 at 1:17 pm

Thanks John! I appreciate your feedback.

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Jon July 7, 2011 at 4:00 pm

Kevin, that is some great information. In the last couple of years I havent seen much seller financing but as lending changes and interest rates start rising I can see more being offered.

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Jeff Brown July 8, 2011 at 10:25 am

Hey Kevin — It’s been my experience, as it’s apparently yours too, that many investors simply take title insurance issues for granted, assuming far too many factors are ‘automatically’ being addressed. Great stuff.

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Kristie Jonca July 8, 2011 at 10:10 pm

Protecting your investments should be top priority! Very important article to all real estate investors-

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Steve July 9, 2011 at 4:24 am

Thanks for the article. I am currently negotiating a seller financied deal and will definitely include this information.
Steve

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Joel Owens July 10, 2011 at 6:46 pm

Hey Kevin,

There was a seller financed deal where the insurance could have been done a few different ways.

The note servicing company stated that the seller is still responsible for the mortgage company to carry insurance.If the buyer bought insurance and had the seller cancel and show the seller as a secondary insured it would have raised big red flags to the mortgage company.They never usually invoke the due on sale clause but didn’t want to take a chance.

So the buyer was added as a secondary insured on the sellers existing policy.This way the mortgage companies didn’t really see a change in coverage and business as usual.The insurance was escrowed into the mortgage payment of the sellers loan.

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Jeff Morris (Real Estate Agent) July 11, 2011 at 4:33 pm

If you are a real estate investor buying property with seller financing, it’s your responsibility to get the property insured.

Yup, that’s our point of discussion. We need to insure our property as we buy it.

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Jack Greenwood July 12, 2011 at 6:33 am

Insurance on the seller property is a good risk management system. Evading financial disasters is important when volatile market such as real estate is taken into account.

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