Note Insurance - Per UPB Or Per Purchase Price?

Question

This is a questions I often ask myself -

When you acquire a NPN note and you would like to insure  the property by yourself, do you insure it per the UPB value or per your purchase price?

For example - You acquire a NPN note in $60K while the UPB is $120K.

If you insure per UPB, does it matter if the house BPO is under or above water (meaning, per the example, if the BPO is $100K or $150K)?

In the NPN notes I acquired I used to insure per the purchase price to cover my investment, but would like to hear your thoughts.

Adam Adams · Answer

I insure it based off of what I invested. If I invested $60k, then I might insure it for $70k. Insurance is insurance and has a cost. It's not the lottery. I cover my investment. I don't waste my money on insurance hoping the sucker burns down and I make bank.

Jay Hinrichs · Answer

one thing to mention Bob is do you buy the vacant home rider.. ?  many insurance policies wont cover U for loss if the home is vacant more than 60 to 90 days.. I have seen that snag people.  however it is rare you get a fire after all the homes we have had I think we have had maybe 3.. when I had my big rental portfolio I was just about to go to self insurance.. at 200 to 300 homes in the low value asset areas self insurance for fire becomes very cost effective when its private equity and no bank.   But I have had more than one investor I know tell me they took a total loss because their home was vacant more than X days and fine print said insurance did not have to cover.. so there is a vacant home rider U can purchase and which I would think would be appropriate in the NPN business when you take back collateral and have some time to work on it and re purpose it..  Just pointing that out.

Chad U. · Answer

Most insurers will want you to pay insurance on a Adjusted Cost Basis (ACB) and many specify $50/sf, and if it's less than it is "Co-insurance" coverage meaning that they will only pay you out a fraction of what you insured it for.  For instance,  a 2000sf house you bought an NPN and only insure it for $50K, but their value is $100K.  If there is a claim of say $30K due to a fire, they will only pay you out $15K (50% of value you were insured for).

Bob Malecki · Answer

Yeah we insure for our cost basis + $5K or what ever the deductable is, so that we are made whole on the payout. Some insurers have a minimum per sq. ft. which may force a higher coverage amount but in general that is our formula. Other insurers like OSC do not allow for this, and REQUIRE that you buy the coverage which THEY determine is correct and its usually much higher than the BPO value of the home. Very unsavory IMHO

Chad U. · Answer

We get it too, but after 6 months vacant the deductible goes to $10K

Bob Malecki · Answer

Yes yes I specify that it's a vacant home when I take out the policy.

Eran Lifshitz · Answer

@Stanley Nguyen those are not dumb questions at all.

All of us were in certain point of time newbie investors asking same questions.

I am sure the forum members will be happy to assist you.

Please send me PM and I will be happy to assist as much as I can.

Stanley Nguyen · Answer

@Eran Lifshitz dumb questions from newbie:

1) do you only buy insurance for NPN or for all notes in general?

2) where can I buy insurance for note?  Is it from my note servicer?

Eran Lifshitz · Answer

Thank you @Tim Simmons & @Bob Malecki as well.

Seems we all are on the same page here - Covering our investment amount + $5-10K.

Eran Lifshitz · Answer

Thank you @Adam Adams for your response.

I liked your phrasing, and it totally make sense.

I do the same.

Note Insurance - Per UPB Or Per Purchase Price?

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