When most people hear about real estate investing, they think about short-term or long-term rentals, even renovation and flipping. But there are many real estate investment strategies and insuring them isn’t always that straightforward or easy.
That’s why we have Jackie Price here today. Jackie is EVP of Compliance at National Real Estate Insurance Group. She started her insurance career in 2012 when she worked for a local State Farm agent. After four years, Jackie decided to join the NREIG team. And during her time, her vast insurance knowledge has contributed to her success here at the company. She was once a landlord for three years and based on that tenant experience, she has decided to stick to insurance.
Creative insurance strategies, we know, is a very large topic and we have many clients who have a lot of different portfolios and ways to insure their locations. So, lots of things to talk about today. Let’s get started.
Subject To
What is a Subject To deal?
Subject To is essentially when an investor purchases a property, subject to the existing mortgage. So that’s how it gets its name. Let’s say that you own a property and you’re looking to sell it and I am an investor who’s looking to purchase that property from you. But for one reason or another, I (the investor) do not want to get a loan on my own. So, I buy the property subject to your existing mortgage. And that means I start making the mortgage payments directly to your lender on your behalf. But within that transaction, the deed gets transferred over to my name and I become the owner of the property.
How do you insure a Subject To Property?
How to insure these properties is something that I don’t think a lot of investors may think about. The most important rule that I would give to an investor who is investing in Subject To properties is do not assume that the seller’s homeowners insurance is going to cover you if there is a loss to the house. The seller’s homeowners insurance is for an owner-occupied property. Even if the seller is still going to be residing in the house, they no longer own the property. So, they should not keep a homeowners policy in place. It would not protect either party properly. Instead, investors should purchase an investment property policy, like we sell at NREIG. You would want to make sure that you are the named insured. That protects you at claim time because you would be named on the claim check and the seller wouldn’t be. That’s important because when the loss happens, you don’t want the seller to sign off on the check that is rightfully yours.
Another thing that I think that you should consider is keeping the seller as an Additional Interest on the liability coverage. Because while they no longer need to be on the property insurance, they still have a liability risk on the property because they’re still named on the loan.
The last piece of information that I will give you about how to properly insure a subject to property is to make sure that the lender is named on the documents. It sounds silly. It sounds like something that everyone knows how to do, but that’s very important to make sure that the loan doesn’t get called due.
Those are three things. (1) You want to make sure there’s an investment property policy in your name. (2) You want to make sure that the seller is not named on the property coverage and (3) that the lender is properly named so that they are satisfied with your coverage documents.
Non-Performing Notes
What is a Non-Performing Note?
I’m not going to lie, it’s something that took a long time for me to wrap my head around. I want to go through a real-life example with you. Say you own a property and for whatever reason, you’re no longer able to make the mortgage payments. Let’s say after three months of you not being able to make the loan payments your lender has decided that they don’t want to go through the foreclosure process. Instead, they sell the note, most likely to an investor. I (the investor) can go to that lender and purchase the note from them, and I essentially would become your lender. Something that I, as an investor, could do after I take over the note is come to you, and try to rework your payments. Maybe I know that you’re in hard times right now so we are working on a payment plan so that you can pay off your loan over time. Or I could extend the period of the loan so that you could make smaller payments and still pay it off.
In my example, let’s say that your outstanding loan was for $100,000. When I purchased the note, I purchased it from your lender for $50,000. I essentially purchased it at 50% of what the loan value was. If I can rework the terms of the loan with you and get you to pay me back in full (or plus some), I’ve essentially made $50,000 plus the interest that is part of our agreement. Then, I transfer the deed back to you once the loan is paid in full.
The other option would be if you are unable to make the payments or we’re unable to come to terms on a new payment strategy, I could foreclose on the house. That puts a lot more risk on me as the investor. But once I’m through the foreclosure process, I now have an investment property that I can sell, renovate, or rent out to another tenant. Basically, for $50,000 I have now acquired an investment property.
How do you insure a Non-Performing Note?
You want to ensure you have insurance as soon as you purchase the note and that it covers at least the note’s amount. So, even though I bought it for $50,000, the full note is worth $100,000. I want to insure that property for at least $100,000. In case something happens, I could potentially insure it for the replacement cost. But I at least want to insure it for the value of the note.
Now, if I’m able to come to terms with you, as the homeowner, and you’re able to start making payments to me and you can show me that you have valid homeowner’s coverage, I could potentially drop my investor coverage because we now have an agreement. We now have a loan agreement that you’re paying, and you have an active certificate of insurance that you can show me. And so, like that, I’m a lender, I’m just named on your policy. (That’s very important.) But until you have shown me that you have current insurance in place, I need to make sure I have insurance purchased myself.
Tax Sales
What is a Tax Sale?
There are two different kinds of tax sales. There’s a Tax Lien and a Tax Deed sale. Essentially a Tax Deed is when a homeowner has not paid their taxes to their county and the county auctions their deed. With a Tax Lien, they will only auction off the taxes that are due.
So, let’s say again, you’re going to be the homeowner who no longer has enough money to pay for their taxes. Say you owe $12,000 to the county. I, as the investor, will go to the courthouse on auction day and purchase your Tax Lien for $12,000. I can now work with you to pay back your Tax Lien to me with interest over time – let’s say 60 days. You and I work together. You pay off your $12,000 plus interest to me and at day 60, as long as it’s paid off, you now own your deed in full and I no longer have an interest in your property.
How do you insure Tax Sales?
It’s a common misconception with Tax Liens that they don’t have to be insured. This is because, as the investor purchasing it, I know that on day 60 or any time that you pay off your Tax Lien to me, the deed could go back to you. So, I’m thinking I’m not going to get insurance until I know that it’s my property. What could happen is on day 60 it becomes my property. But on day 59, the house burned down. Now I’ve been given a deed for a house that needs to be demolished. That’s not what I want. So, it’s recommended that as soon as an investor has an interest in the property from a Tax Lien they insure it.
On the other side is a Tax Deed. That is where the county sells the entire deed on the courthouse steps and it’s a one-and-done transaction. There’s no period of time where you, the original homeowner, could pay me back and keep your property. The deed becomes mine immediately. Therefore, I own the property outright from there. That is where, at NREIG, we’ve had clients call us from the courthouse steps and tell us they just bought a property, and they need to insure it. Now, sometimes they don’t know much about the property. They’ve likely never seen it and they don’t know the condition. So, their coverage may be more limited for the time being than a property where you can fully answer all our underwriting questions. But at least getting liability coverage and limited property coverage is vital to make sure that if something happens to the property, the investor has some coverage.
Any time you’re taking over a property, no matter the situation or strategy, get insurance right away. It’s not like when you purchase a car that you have 14 or 30 days with your insurance company to add your new car on. Property insurance doesn’t work like that. If you purchased the home at one o’clock in the afternoon and there’s a loss at three o’clock and you didn’t call your insurance agent before then, you likely don’t have coverage.
Land Contract and Contract for Deed
What are Land Contracts and Contracts for Deed? How common are they?
We do have clients that invest in Land Contracts or Contracts for Deed. I don’t think they’re super popular, but we do have clients that do this regularly.
We call them two different things: Land Contract or Contract for Deed because they are two different types of transactions, but from an insurance perspective, they’re similar. I like to think of it as a rent-to-own type of situation. So, the seller finances the purchase, and the buyer pays for it in installments. The title remains in the seller’s hands until the loan is paid in full. The seller is acting like a lender. After the buyer has paid off the full debt, the deed is transferred to them.
How do you insure Land Contracts and Contracts for Deed?
In this case, I always recommend that the insurance follows whoever holds the deed. So, the seller is the insured party until the buyer fulfills the contract.
Sandwich Lease
What is a Sandwich Lease?
This is a term that I love because it’s a funny vision in my head. A sandwich lease can also be called a triple-net lease. It means there are three parties and essentially there’s two pieces of bread and then there’s the meat in the middle and that makes up the three people, or the three parties, that are part of this lease agreement.
In a Sandwich Lease, the property owner will lease the property to a middleman (aka the sandwich’s meat) for an extended time. So, let’s say you’re going to lease the property to me for three years. You own the property therefore you want to make sure that you insure the property for property and liability coverage (same thing you would have as a normal investor). But you and I have agreed that I am going to then essentially sublease the property. So, you own the property and I’m subleasing the property for three years. During those three years, I’m going to lease it out every week for a vacation rental. It doesn’t necessarily have to be a vacation rental. I could rent it out as a long-term rental on an annual basis. I could also do a corporate rental. Sometimes, it could even be a commercial space where I’m renting it out to a business. But you (the property owner) only want to lease it to me and then I lease it to another party/person.
How do you insure a Sandwich Lease?
As the property owner, you want to make sure you continue to have your own coverage for the location. But you also need to make sure that the middleman has coverage too. Because as the person who is now going to be subleasing the property, I have my business activities and my liability exposure. So, you (the property owner) want to make sure that I (the middleman) have business liability coverage to protect both of us. Should there be a slip and fall or should someone get hurt on the property from a faulty stair, you want to make sure that I have insurance. It’s most important that I name you as the Additional Insured on my policy because you could also be called into the lawsuit since you own the property.
Remember, I (middleman) cannot get property coverage because I don’t own it. And that is something that I have found has been confusing to some investors at times. Now, I may have contents in the property, like furniture, that I want to insure. So, I can get a policy to cover those contents, but I can’t cover the structure because I don’t own it.
Watch or listen to the full interview here!
