I have been carrying the liability insurance on terms deals (buyer can not use the property until paid off) but am wondering if I should change up the contract to have the buyer pay for insurance on more expensive lots. Do you have this convesation during the sales process, or simply have the contract specify buyer must have insurance on the property and how do you enforce? Does it impede your sales process?
@suitedconnector you could handle the insurance the same way you handle the property taxes. If you’re collecting an extra amount each month and managing a little escrow account so you can make sure the taxes are paid, you could do the same thing with the insurance and just bump up the payment a little higher to account for this annual expense.
If you’re dealing with a solid buyer (if you’ve done a credit/background check and you know they’re serious about making the payments), it wouldn’t be hard to write it into the contract and expect them to handle it… but that’s the problem, a lot of these buyers on smaller deals aren’t that reliable (better to just increase their payment and get the money from them each month so you can make sure the bills are being paid when they come due).
2 Likes
@retipsterseth What do you normally do? Add it to your note payments or require the buyer to provide proof of coverage?
1 Like
@suitedconnector I’ve always added these types of costs to the note payments, collected it, and managed the escrow myself. If you do this, be sure you’re keeping very good records about where the money is being held and what the balances are, so you can provide this information easily if the borrower ever asks for it (which they’re entitled to do, since you’re basically managing their money for them).
If you’ve got the right bank accounts set up and your loan servicing agent (or payment collection software) is breaking this out for you as it should, this isn’t hard to do IF you have the whole infrastructure set up right from the beginning.
Most borrowers will never ask for it, but if they do, this isn’t the kind of thing you want to just start figuring out a few years down the road after you haven’t been keeping track of things very well.
2 Likes
@retipsterseth and @SuitedConnector,
Are you two (and maybe others) buying liability insurance for each of your land parcels that you’re selling on time? Why? What are the risks that you’re insuring against? It’s vacant land, right?
Thank you!
Paul
@retipsterseth I’m just now starting my first terms deal. What kind of things should I be setting up now to save myself some trouble down the road? Sounds like the first step is a separate savings account to hold taxes in escrow? What else? I literally just have an ACH account and that is it at this point. Thanks
We are currently having the deed of trust and promissory note docs for seller financing drawn up by an attorney (Virginia) and we were surprised by the amount of insurance he is requiring. The documents state that the borrower “shall maintain” 1) property insurance in an amount equal to 100% of the “full replacement cost” 2) general liability insurance (umbrella coverage of not less than $250K and a general aggregate limit of not less than $500K) and 3) owner’s contingent or protective liability insurance for construction or alterations not covered under the other liability insurance.
This seems like a lot to us and we’re worried it’s going to discourage people from pursuing seller financing with us. Is this just over-kill attorney recommendations or do we really need to require more than the general liability insurance? And if we’re selling lots for about $20-40K, does there need to be such high coverage for the general liability insurance? Thanks!
@PrattFamily Yeah, I’d be scratching my head at those requirements too, especially for land in that price range.
The property insurance at replacement cost (your #1) is pretty standard stuff. Any lender is going to want that to protect their collateral, so I wouldn’t push back on that one.
But the general liability and umbrella coverage seems like overkill for vacant lots selling at $20-40K. Those kinds of requirements are way more common for commercial properties, places with buildings on them, or much higher-value deals. For raw land at those prices, requiring $250K/$500K in liability coverage is going to make a lot of potential buyers walk away. The insurance costs alone could eat up a chunk of what they’re trying to finance, and a lot of folks buying land in that range probably don’t even have umbrella policies (or any policies, for that matter).
And that third one about construction liability sounds like pretty specialized stuff. Unless you’re specifically worried about someone building something dangerous, it seems excessive.
My gut says your attorney is just being super cautious (which, fair enough, that’s their job), but they might not be thinking about how this affects your ability to actually sell these properties.
I’d go back to them and ask: What specific risks are we protecting against here with the liability insurance on vacant land? Can we scale these requirements based on the property value? Do we really need #2 and #3 at all?
At the end of the day, you need to balance protecting yourself with actually being able to close deals. I think it’s fair to push back and ask them to justify why you need all this for relatively modest land sales. Remember, you are their boss, not the other way around. Sometimes attorneys seem to forget this.
1 Like
Charlotte - Thank you so much for the detailed reply! Very helpful and confirmed what we were thinking. One other question - In that same insurance section, they state that we would need to approve of the insurance company and that we’d also need to be named as an “additional insured and loss payee on all policies.” Is that standard practice?
Thanks again, Charlotte, for all that info - we really appreciate it!
Great points, Charlotte I completely agree. Requiring property insurance at replacement cost makes sense for protecting the lender’s collateral, but asking for general liability or umbrella coverage especially in the $20‑40K land sale range does seem out of proportion.
As you suggest, let’s ask: What specific scenario are we protecting against with those additional policies? If a lot has no structures and poses no unusual risks, maybe we can scale back the requirements to something more appropriate (or even omit the extra coverage altogether).
At the end of the day, we want to cover real risks but we also don’t want to create barriers that make closing these modest land deals impossible. Thanks for the grounded advice.