Safeguarding Your Mortgage Note Investment: Tips for Protecting Against Property Damage
Calvin Ewing
Helping People Obtain Above Average Returns Backed By Real Estate - Note Buyer | Real Estate Investor |
Hey there, fellow investors!
Today, I want to dive into a crucial topic within the realm of note investing, sparked by a great question from one of my YouTube viewers. They asked, "If you buy a note and the house gets destroyed, is your investment protected by insurance, or how would you protect yourself?"
This question highlights the importance of understanding how to safeguard your investment in real estate notes, especially when dealing with potential risks. So, let’s break down the key strategies to protect your investment effectively.
1. Ensure You're Listed on the Homeowner's Insurance Policy
When you purchase a performing note, it’s essential to be listed as a primary loss payee or lender on the homeowner's insurance policy. This means that in the event of a disaster—like a fire or flood—you would be the first to receive the insurance payout, rather than the homeowner. This is a critical step in protecting your financial interest in the property.
Why This Matters
If the house suffers damage, being listed on the policy ensures that you, as the lender, are compensated for your investment. This is particularly important because, without this designation, you might find yourself with a damaged asset and no financial recourse.
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2. Consider "Force-Placed Insurance" for Non-Performing Notes
If you’re buying non-performing notes, there’s a chance that the borrower has stopped making not only mortgage payments but also insurance payments. In such cases, the homeowner's insurance policy may have lapsed, leaving you vulnerable as the owner of the note that is secured to the property.
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What is Force-Placed Insurance?
Force-placed insurance is a policy that lenders can obtain to protect their interests in a property when the borrower’s insurance is insufficient or nonexistent. This type of insurance covers risks such as fire damage and vandalism, which is especially crucial if the property is vacant or undergoing foreclosure.
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Things to Keep in Mind
While force-placed insurance provides necessary coverage, it tends to be more expensive than standard homeowners' insurance. Therefore, it’s important to factor these costs into your investment calculations to ensure that your overall financial picture remains healthy.
3. Protect Against Vandalism and Internal Damage
When dealing with non-performing notes, especially those involving foreclosure, you may encounter disgruntled borrowers who might vandalize the property before vacating. Ensure that your insurance policy covers internal damages as well.
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Understanding Policy Coverage
Before purchasing force-placed insurance, review the details to confirm that it includes coverage for internal vandalism. This will help you avoid unexpected expenses that could arise from property damage caused by the previous occupants.
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4. Conduct Thorough Due Diligence
One of the best ways to protect your investment is to have a clear understanding of the property's condition before you buy the note. If you can't inspect the property yourself, hire someone you trust—a real estate agent or a property inspector—to evaluate the property. Keep in mind though that you typically cannot inspect the inside of the property if you are buying the note and therefore you will likely need to use the external condition of the property as a proxy for the internal condition. If the property is vacant, you may be able to get a glimpse inside through the windows.?
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Why Getting Eyes on the Property is Crucial
Properties can have hidden damage that isn’t visible through Google street view. For example, I have seen properties that had fire damage in the back that wasn't visible from the street. Having a knowledgeable and trustworthy person assess the property can save you from making a costly mistake.
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5. Buy at a Discount
When investing in notes, aim to purchase them at a discount relative to the property's value. This strategy provides a buffer against potential damages and ensures that you have equity to cover your investment should you need to sell the property later after taking ownership of it via foreclosure (as an REO) or deed-in-lieu of foreclosure (cash for keys).?
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The Benefit of Equity
By buying at a discount, you create a safety net. Even if the property suffers damage, the equity you’ve built in the investment will help you recover your costs when it’s time to sell.
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Conclusion
In summary, protecting your investment in note investing requires proactive measures. Ensure you’re listed on the homeowner's insurance policy, consider force-placed insurance for non-performing notes, and always conduct thorough due diligence on the property.
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By implementing these strategies, you can minimize risks and safeguard your financial interests in the notes you invest in.
Want to get Involved in US Mortgage Note Deals?
I can't buy every note deal by myself and so I often work with folks who are seeking to earn consistent and above average returns while having their funds secured to real estate. I bring the note deal, experience and management team, they bring the funds to purchase the note and we buy it together.
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If you have funds sitting on the sidelines or a self-directed IRA sitting idle, or if you are watching your savings evaporate due to inflation, let's get your money working for you.
If you'd like to learn more, let's schedule a phone or Zoom call to discuss the details and answer any questions you may have.
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Best regards,
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Cal Ewing
49th Parallel Properties, Ltd.
Calvin Ewing Real Estate & Mortgage Note Investor 49th Parallel Properties, Ltd. [email protected]
(403) 608-7481 - MOBILE
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Principal of Axiom Capital Resource - Real Estate Investor, Note Investor
3 个月Great tip. This is definitely a topic that can be overlooked.
Professional Mortgage Note Investor
3 个月Cal, I like your style. You are putting some great content out there and I'm eating it up..keep at it. ??