Need Insurance Advice! Closing with non-paying tenant in place...

13 Replies

Hi fellow investors,

I'm in a unique situation I have not had to deal with before and would like to get some opinions on the best way forward. 

Here's the deal:

I have a single family home under contract for $25K, with an estimated ARV of $120-130K. Estimated $35-40K in rehab required. I plan on closing on the property to rehab and resell.

Here's the issue: 

The owner lives out of state and her son lives in the subject property. He is not paying rent, and has fallen out with the family. They are not speaking to each other and there is a lot of animosity. He has threatened to burn the house down if she sells it. This is why we got it for a good price - the owner just wants to be done with the situation. There is no lease, and we cannot gain access to the property.

I am fine purchasing the house as-is without seeing the interior as we are planning full rehab anyway. My concern is that the tenant follows through on his threats of burning down the house and then I have lost $25K overnight. I have contacted numerous insurance agents and nobody can give me a policy to cover this. I cannot get a traditional homeowners policy without a 4 point, and I cannot get access to the house to get the 4 point inspection done. The GL policies I have been quoted for only cover the house if it's vacant at time of closing.

The current owner is selling it to me because she does not want to handle evicting her son, which I understand, so giving me the house vacant is not an option. 

Does anybody know what sort of insurance policy I can get, if any? Or do I have to take the risk of closing without insurance? I know we could ask seller to leave some funds in escrow until the son vacates, but I don't know if she'll go for it. 

Thoughts? Advice? Thanks in advance! 

Unless they own the house free and clear, insurance is a requirement.  If you're that worried about it, you could go over there with the seller and try and get the son to leave and possibly offer cash.  Otherwise you can evict the son before you process the transaction by either hiring an attorney or acting as her PM or agent.

@Jassem A.  Thanks for your reply. House is free and clear. Trying to avoid bringing the owner into the eviction process at all since she is already tired of this and is giving me a good price in exchange for not dealing with eviction.

Landlord Insurance, until you get the kid evicted, and then switch over to your builders insurance.  But this sounds like a Problem waiting to happen.  Why would you buy yourself a headache?  I can just imagine the eviction process becoming overly complicated.  

Well if he has threatened to burn the house down and there is a witness to that then maybe all you need to do is place an anonymous call to the police department and tell them the address and the owners name and number.  Also if he leaves for about a week then usually that is considered abandonment.  You could also try and get the house condemned and then he would have to leave.

@Chris Kennedy I agree with Jassem on this deal you would have act like the seller PM to get the son out of the property.  Make sure your insurance company will put the policy in effect ASAP

Do you have any other background on the son? Do as much of a background check on him as you can before you go any further. A lot of information can be obtained from public resources and social media. Get the insurance lined up (fire policy) and then make the son an offer he can't refuse. Everything is negotiable.

Thanks everyone for the responses. Some good ideas here.

@Troy Fisher  I'm going ahead with it because there's an excellent profit potential - or I will hold it as a rental in a worst case. I have an excellent evictions attorney that I can work with if needed. Yes, it could be a headache, but it's a risk I'm willing to take. It's in a solid neighborhood. Haven't been able to get a landlord policy for it yet, all the agents have told me they can't provide it, I guess I need to make more calls. 

@Marcia Maynard  I am working on getting background on the son (who is a fully grown adult by the way - I believe he is in his forties). And yes, my goal is to do this the easy way and offer him some cash to move out. This would be preferable, but I like to be prepared for worst case also! I am inquiring about a standard fire policy, thanks for the suggestion.

Tell the seller you will only do the deal if all funds stay in escrow. If son carries out the threat, you get back the money in escrow, former owner can have the land and the shell. You will need an attorney to set that up of course. 

@Steve Babiak  Thanks. That's along the lines of what I was thinking for plan B if I can't find an insurance company that will work with me. I was considering leaving half the funds in escrow to be given to me in event tenant burns the place down, then I still have a lot in a nice neighborhood...

@Chris Kennedy  Do You have a type of policy called a "Builders Risk" policy?  It would be reasonable since the home needs repair and most insurance companies won't insure properties under construction. No need to combine the squatter and insurance together.  They are separate issues. Recommend General liability on property address as well. Once you close he is truly a squatter and do what ever it takes to remove him. Money or force.   

@Tom Keith Thanks. Yes, I have quotes for a typical builders risk policy, and GL, but neither of those will cover me in event of tenant burning down the house. The issue is that I can't get a landlord policy without a 4 point inspection, which I cannot get due to no access to the house. So, I figured there might be some alternative - but all my research thus far suggests not. 

I appreciate everybody's input nonetheless, and will keep you all posted as this unfolds.

You are over thinking things.....Go talk to the tenant.   I'd do it before i gave my cash over.

I'd also tell him you are willing to help him move into another place (have a listing with you) or pay him to leave.    You don't want to pick up the drama that his family and him are in, and you simply aren't part of it.      You are an investor and have other plans for that asset.   He doesn't have a lease, and he is going to move....would he like a stick or a carrot.    His choice.     As for the threat of arson, call the police and put it on record, odds are a worthless call but if the worst should happen it may help you down the road.   

I'd take that deal, and anyone who deals with the courthouse steps property would too i'd wager.

@Leigh C  thanks for the input. I'm thinking going to speak with him before closing might be a good idea at this point. At least it will give me a better idea what I'm getting into - perhaps I'll be pleasantly surprised and he'll be easier to work with than I'm being told by sellers. Perhaps he'll even let us get a 4 point inspection done and the insurance won't be an issue anymore. The power of positive thinking! 

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