Brush Fires In Austin Alarm RE Investors that own rental property, or really any property in which they have acquired it via a popular method called “taking a property SUB2” or “subject to the liens”. They are alarmed and wondering if their property burns down, will they get their insurance claim money.
Now a brush fire should not be alarming as it relates to getting an insurance claim paid or not. It should alarm RE Investors because people’s lives may be in danger!! But I guess RE Investors do have the right to be concerned about their assets too.
Anyway, I thought I would share a few tips on hazard insurance as it relates to property owned via SUB2. I should admit up front….I have never had any brush fires in Austin or brush fires in other central Texas
towns where I own rental properties or have done rehab projects burn down a property or get fire damaged. One time there were some brush fires in Austin within a few miles of one of our rental properties but our properties have not ever been touched with more than some brush fire smoke. So I also have never filed a claim in regards to the matter.
Having said that, I still believe this tip I’m about to share is valid and I have at least a 95% confidence that a claim would most likely be paid as expected. Heck 5% can go bad on any agreement of any kind, right? …and don’t you get tired of that big-headed guru type of person that speaks in absolutes–I do and I don’t want to be like them. I’m gonna be truthful and say this is a good tip, but nothing is guaranteed 100% certain.
OK so what is the tip?
First, we get a copy of declaration page from the previous homeowners before or during the closing to have on file for a reference as needed.
Second, we always change the insurance from homeowner’s policy to renter’s policy, fire policy or construction policy, etc. You need to explain your needs to your insurance agent to get he correct insurance policy for your situation, but the important thing is to NOT leave the previous homeowner’s policy in place. There were times early on when we afraid to make a change to the hazard insurance after we acquired a property SUB2 because we were worried about throwing up flags with lender that may trigger the Due On Sale clause. However, we learned from our insurance agent that an insurance claim for a house damaged or burned completely from brush fires in Austin would be less likely to be paid if the policy was an owner-occupied policy. That would be an easy out for the claim underwriter and lawyers to deny payment on the claim….and at best would cost you lots of money to fight it out in court and still likely lose the battle.
In other words, the risk of having the claim not paid far far far out weighed the risk of having the note called due in full. So we quickly stopped worrying about that and got a new insurance policy for the property at the time of purchase….and we got the correct insurance policy that matched the circumstances of the property so claim underwriters would have no valid position to deny a claim.
Third, when we made the arrangements to get the policy, whatever we had titled the ownership of the property, would become who the insurance policy was owned by. And the mortgagee clause would be added accordingly using the declaration page from the previous homeowners policy as a reference for the mortgagee clause details. Also we would add the previous homeowner’s name(s) as the name(s) are written on the 1st mortgage lien to be “additional insured” party. That way the insurance is agreed upon and claims are payable as agreed between us and insurance firm. But also, it allowed for the new insurance company to provide to the 1st lien mortgage firm a declaration page that indicated the previous homeowner’s names. So regardless if we titled ownership by using a land trust or went straight into an LLC or LP (done it all 3 ways), the mortgage firm still sees the previous homeowner’s name and no flags went off at the lender.
I think it is important to point out, that whenever you choose to buy a property using the SUB2 method, you should have a backup plan for what you will do if they mortgage lender was to call the note due. As long as you have a backup plan, it really should not matter if they do or don’t. It just saves you transaction cost if they don’t. But if you don’t have a backup plan, you should not buy the property. Some backup plans may be to fire sell it to another investor, get a mortgage, get a JV partner that can get a mortgage, refinance it with the same lender, etc. Just be prepared to act as needed and there is nothing really to worry about and there really is no risk at all there.
But the risk of standing in home where it was burned by brush fires in Austin, or where ever you may be, and not have your insurance claim paid…IS MASSIVE RISK. So if you just follow this simple tip technique, there is no reason that brush fires in Austin or elsewhere should alarm RE Investors.