How do taxes and insurance work in a seller finance deal?

Question

I have a motivated seller for a great multifamily property, I could use some advice from someone experienced on how to set up payment for the taxes and insurance! Thanks!

Andy Prince · Answer

@Bob Norton Got it! Thanks so much! -Andy

Bob Norton · Answer

@Andy Prince I purchase a new policy when I buy subject-to and name the seller and the mortgage company as additional insureds, so that I'm protected and their names are on the policy. If you refinance the mortgage later on, then you can remove the others as additional insureds.

Jeremy Goodrich · Answer

Without seeing the agreement your entering into, its very hard to say what the right path is.  Question #1 is: who’s name will be on the deed?  Whatever entity this is should be the named insured on the policy. period.  From there, if there’s a contract connecting someone else (person, LLC, management co, etc), that can be navigated based on the language in the contract.  Terms like Additional Insured, Additional Interest, Loss Payee, etc could apply depending on the scenario.

But you don’t need to become an insurance nerd overnight.  Reach out to an independent insurance agent.  Share your scenario.  Have this convo.  I’m a distant person in a forum giving advice based on limited information. I’d have to see the contracts and the plan to be concrete in my answer.  Find an insurance advisor, establish a relationship, build trust and then thoughtfully follow their lead.  That’s the best advice I can give. It will be big when you pick up a few 100 unit apt complexes with multi million dollar price tags.

Andy Prince · Answer

@Jeremy Goodrich

Thank you!

The second paragraph makes sense to me for this situation. If he adds me as "additional named insured" on his policy, It sounds like we will both be covered in the event of a claim. I have also read that I should get an RCV policy (opposed to ACV) and it should cover the amount that I am purchasing the property for. I am hoping when he adds me to the policy, we can upgrade to that type of coverage so I will be safe. Let me know if that sounds correct. Also, will I be able to make direct payments to the insurance company, or should I just pay him? Thanks again for sharing the knowledge. I am extremely grateful! -Andy

Jeremy Goodrich · Answer

Insurance coverage is all about “ownership interest”.  If a sale is happening and you will become the deeded owner, the policy needs to be in your name.  The sellers mortgage is not your problem nor should there be any lingering connection with it.

If you’re “buying on contract” in a scenario where the property won’t be deeded to you yet but you have some ownership via a contract, you should require being added as an “additional named insured” on the owners policy.  This gives you protection if you wind up in a lawsuit because of your connection to the property.

I think this advice is inline with your question but LMK if I’m missing the point.

Andy Prince · Answer

@Bob Norton @Jeremy Goodrich Thank you both so much! In this case, The owner has an existing mortgage, So my attorney will be structuring a "subject to" type of finance deal. If the seller ends his insurance policy, it will possibly notify the first position lender, and could lead to a "due on sale". I am trying to find a way to solve this. Is it possible to be added to the sellers policy and keep his name on it? I would then pay the monthly insurance payment along with the note I owe him. If that is not an option, I am happy to get my own policy, but possibly would need to list the seller on it? It is a great deal potentially, and this is the only major hang up. Any help is appreciated! Thanks! -Andy

Jeremy Goodrich · Answer

Generally, on the personal homeowners side of things this is automatically included as an escrow account connected with your mortgage.  That may be want your used to.  A commercial loan isn't going to set it up that way.  So, as Bob said, you can either set up an escrow account or simply manage them on your own. Most of our investment property clients set up automatic monthly payments for the insurance piece.  Keeps the cash flow stable.  Property tax likely won't be that simple.

Bob Norton · Answer

@Andy Prince If you just want someone to handle the insurance and tax payments for your, you can work with a local escrow company to handle that.