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.
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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