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When getting a long term option from a seller and securing it with a mortgage. Would you also what to be added as an additional insured under the sellers homeowner policy just in case it burns down? If so, wouldn’t that cost them extra money per month to have me added as an additional insured to secure my long term option?
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When you wrote “Would you also what to be added as an additional insured…”, I assume you intended to mean “want” for “what.” On that assumption I’m proceeding.There are two kinds of risks: insurable and uninsurable. The uninsurable (like acts of war or acts of God — as the insurance industry phrases it) are always excluded in insurance policies. The insurable risks are more complicated. An insurer can choose to take on a certain class of risk, or not.
Whether the target property is insured on a replacement cost basis, or a market value basis, or some other criteria, if the insurer allowed to you to be entered onto the existing policy as an “additional insured,” then the question would have to be answered as to how much of the post-fire event payoff you’d be entitled to, assuming the certainty that you would have exercised your option one day before the fire — an unknowable “certainty.”
If some fraction of the policy’s face value, then what logic could the insurer possibly use to justify diluting the longtime owner’s insurable payoff? None that I can think of. If you were entitled to 100%, then you are no longer an “additional insured” but the sole insured party, which would seem to me to obligate you to assuming the full burden of the ongoing cost of maintaining that house insurance — which I’m guessing you’d be reluctant to do, but I could be wrong.
Let’s go back to the uninsurable risk category. What kind of insurance could the homeowner possibly get to insure him against a catastrophic plunge in the market value of his house, from (for instance) a sudden jump in the going mortgage interest rate of, say, 3%? Without wading into the deep swampy discussion of Federal Reserve policy, international reserve currency issues, or another Fannie or Freddie financial bailout set of conditions, let’s just conclude that the homeowner has no way to insure against such arbitrary decisions made by a combination of marketplace and an army of bureaucratic choices. As an option holder, despite your cost(s) of initiating and possibly renewing your option, you’re not going to have greater rights than that homeowner against that combination of market and bureaucratic risks.
But back to the insurable risk category. I can think of no logic any insurer could make to justify to take you into the existing policy as an additional insured if the current policy holder’s 100% payoff interest were diluted. And unless you were willing to take on the total cost of maintaining that insurance policy (which I doubt), I think you’re over in the same uninsurable risk category as the homeowner has already assumed regarding that combination market and bureaucratic induced plunge in value.
If anyone knows of an exception to this analysis, please weigh in here.
–Dee
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B,
The premium for the option should not be considered insurable. You are reserving a right to purchase, but not an obligation.
Even if the place became uninhabitable you would still have that right. If the location is in a good area you could exercise the
option after re-negotiating the value of the property and maybe put something better on it, or flip the option to someone else.I was talking to an Attorney the other day about securing a long term option with a mortgage. He said that it wouldn’t work and to do a memorandum instead because he didn’t know about the foreclosure process and title company asking for a payoff amount in the future when they want to sell. If so, the Sellers have the right to remove the mortgage because the mortgage securing the option doesn’t meet the state definition of a mortgage. I’m going to continue to secure my options with a mortgage. Has anyone ever secured it with a mortgage and memorandum? I’m thinking that might be an over kill.
I’ve secured many options with a mortgage or deed of trust. The value of the mortgage is the equity you would lose if the home went to foreclosure.
You need to get a different attorney! You can absolutely secure an option with a mortgage.
The memorandum is worthless. Title companies don’t know what to do with them so they just overlook it.
One time, in the early days, I did record a memorandum of the option and even attached the option agreement. The seller sold the house out from under me. The title company said they only count mortgages, deeds of trust or liens as “on title” so the memorandum was completely disregarded and worthless.
I learned my lesson quick on that one. Now I always record a mortgage or deed of trust for a long term option.. Long term is more than 6 months to me.
I asked him all those questions. He said that you could just go back later and by it. Then i told him i’m getting into way too deep with attorney fees and time. I want the processed stopped before it even gets sold. I’m looking for a new one but he was recommended to me by a bunch of other investors (all fix and flip investors)
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