We recently had Mel Babtkis from Ross Diversified Insurance Services (RDIS) as a guest speaker at one of our note training events to discuss types of Insurance and why it is important even as a note investor.
The intent of insurance is to protect you and your investment. As a note investor, there are two types that you should be aware of: Force Placed and REO insurance.
So you mean to tell me even though I have a performing note I still need to get insurance? That depends on whether or not the borrower has homeowners insurance. But before we get into that, let’s go over the types of insurance.
Force Placed and REO
- Force Placed: When a borrower lets their insurance lapse or expire without renewing (or sometimes they never get around to getting insurance), the investment in that note is at risk. The note could be performing or non-performing. As the lender, you have to protect your investment in case it burns to the ground. So you put force placed insurance on the property.
- REO: You had to foreclose on the property and take it back. You are now the owner of the property and it becomes REO (Real Estate Owned or bank owned). Because you are now the owner of the property you want to make sure the property is protected until you can get a new borrower in the property or sell it. Another situation is if you have a contract for deed, also known as a land contract. You would get REO insurance because you are still the owner of the property until the contract has been satisfied.
According to Babtkis, you need both hazard and liability REO if the note is non-performing. For a performing contract for a deed where the borrower has homeowners insurance, you simply need the liability portion. The justification is that you are still the owner of the property until the contract is satisfied, therefore, should there be a liability claim – someone slips and falls on the front steps – you may be the one who is sued.
Performing Mortgage
Okay, so back to the question above…If you have a performing mortgage where the borrower has homeowners insurance and is fully covered, do you need to get insurance as the lender? The answer is no, but you need to be on the borrower’s policy as the lender loss payee and not as the additional insured.
Conclusion
The conclusion of the matter is, when it comes to insurance, be sure to consult a professional who can direct you toward the best way to insure your investment.
