Managing the hazard insurance is an important aspect of protecting your seller finance note.
So you’ve sold a property with seller finance terms and are now the owner of a different kind of asset called a promissory note (a promise to pay). Now what? The property securing your seller financed note through a mortgage or deed of trust is more than real estate—it’s your collateral. With natural disasters increasing in frequency and severity, making sure adequate hazard insurance is in place has never been more important. Here’s what you need to know about hazard insurance, how to manage it as a seller finance note holder, and what steps to take if coverage lapses.
The Importance of Hazard Insurance
Hazard insurance protects against damages caused by events like hurricanes, wildfires, floods, and other natural disasters. If the property is damaged or destroyed, a valid policy makes it possible for repairs or rebuilding to happen, and preserve the value of your collateral.
Without hazard insurance, a disaster could cause the property to become unlivable and significantly devalue it. As you can imagine, this could jeopardize your borrower’s ability to make payments and put the value of your seller finance mortgage note at risk.
Be Named as an Additional Insured
Being listed as an additional insured or loss payee on the borrower’s hazard insurance policy is important for protecting your financial interest in the property. This provides the owner finance note holder key safeguards, including:
- Notification of Policy Changes: You’ll be alerted if the policy lapses, is canceled, or modified.
- Access to Payouts: In the event of a claim, you’ll be included as a beneficiary, ensuring that funds are used to make repairs.
This step isn’t just about financial security—it also ensures you stay informed and in control should anything happen to the property.
Respond to Lapsed Insurance Quickly
Even responsible borrowers can occasionally let hazard insurance lapse. When this happens, force-placed insurance can a useful tool to use as a backup plan.
Forced-placed insurance is more expensive and typically only covers the property’s structure. However, it protects the collateral for your seller finance note during gaps in coverage.
You can usually charge the cost back to the borrower if your promissory note or deed of trust includes this clause. Be sure to review your terms in advance and promptly notify the borrower if you add force-placed insurance. This not only covers your risk but also encourages the borrower to reinstate their own policy.
While not ideal, using force-placed insurance can be a temporary workaround to protect you if unexpected issues come up.
The Bigger Picture: Natural Disasters and Preparedness
From wildfires in California to hurricanes in the Southeast, natural disasters are a growing risk for property owners and note holders across the country. A single uninsured loss could lead to substantial property damage, making your mortgage note unsecured and creating financial problems for both you and the borrower. Being proactive and following a few steps will ensure that your seller finance mortgage note remains protected.
Key Tips for Seller Finance Note Holders
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Seller Finance Note Setup: Require insurance and add a force-placed insurance clause to recover costs if needed.
- Require Insurance: Confirm borrowers maintain active hazard insurance and verify it regularly.
- Get Listed as an Insured Party: Being an additional insured ensures you get updates and access to payouts.
- Monitor Compliance: Set up reminders to check that policies stay active and adequate.
- Communicate Clearly: If force-placed insurance is required, notify the borrower immediately and explain the added cost.
These practical steps will help you actively manage your seller finance note, protect your investment, and give you peace of mind in the face of potential challenges. As a seller finance note holder, prioritizing hazard insurance isn’t just smart—it’s essential.