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Seller Financing Part 3

Seller Financing Part 3 of 3: Insurance and Your Real Estate Note

By Thomas J. Franklin

Click for Part 1 of 3, or Part 2 of 3

It’s one of those intangibles that sometimes is overlooked 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.

BUYING WITH SELLER FINANCING

If you are buying a property with seller financing, it’s your responsibility to get the property insured. You as the purchaser must make sure that 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 buyers 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.

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