L/O gurus: insurance on lease options? - Posted by Tom


#1

Posted by JPiper on November 30, 1998 at 15:15:04:

Just a few thoughts on selling the idea of the performance mortgage.

Most of the ?performance mortgages? I have written in the past have primarily had to do with unrecorded AITD?s, not lease/options. I have had no difficulty at all with the concept here. It was presented as one more item in the paperwork that needed to be signed, along with deeds which were to be held by an independent party, and the deed of trust. The ?performance mortgage? was presented assumptively?.in other words, this is the way it?s always done.

I haven?t done as many lease/options as a buyer, and the problems presented with this type of transaction are somewhat different. Again, however, the tact I have taken is assumptive. It?s just the way things are done. I don?t answer objections unless the objections come up. But what I have found is that the objections I have received are objections that can be handled.

Here?s one objection. ?If you don?t exercise your option, or otherwise perform your agreement, this performance mortgage is a problem.? Solution: As the optionee you execute a release to this performance mortgage which is held by the independent escrow agent along with instructions as to when this release should be recorded.

Another objection. ?I might want to refinance my property, but this performance mortgage will inhibit that process?. Solution: Insert a subordination clause in the performance mortgage in which you agree to subordinate to a new first up to a presestablished limit which does not affect your interest.

I know these are not all of the possible objections. But what I have found is that a careful questioning of the optionor?s objection reveals a problem with one of the above. Again, I don?t bring these solutions up unless the optionor brings them up first. The assumptive technique has worked well for me.

JPiper


#2

L/O gurus: insurance on lease options? - Posted by Tom

Posted by Tom on November 29, 1998 at 22:47:26:

Tomorrow I am about to complete my first true lease option. I am going to lease option two 3-unit buildings from a tired landlord, but I am confused as to how to the insurance on the property works. According to Bronchick and Kaiser(I have their courses), the homeowner maintains their policy and would list me as “additional insured.” 1)Is this adequate, or is there anything else I should be concerned about? Also, the payments I am making to the landlord just cover his mortgage on the properties. 2) Does anyone pay the insurance for the lessor/optionor (albeit under that person’s name). 3) Is it correct thatI wouldn’t be able to get insurance until the option is exercised? (I am going to keep these, and not assign them.)Thanks for all the help in advance.

Tom


#3

Re: L/O gurus: insurance on lease options? - Posted by Bronchick

Posted by Bronchick on November 30, 1998 at 09:39:26:

Some insurance companies make a stink about insuring you as an optionee, so you should ask the lessor to sign a mortgage to secure performance of your option (as outlined in my course). This makes you a lienholder and creates an insurable interest.


#4

Re: performance mortgage forms? - Posted by gwTx

Posted by gwTx on November 30, 1998 at 18:22:23:

Wow! Thanks bunches for putting together one of those last missing pieces to the L/O puzzle.

Just one more piece if I could be so bold as to ask. Bill, do you have a performance mortgage form that we could use for L/O?

I also have both courses and both of the authors have just outdone themselves (along with Bud & Jim). Thanks again.

Gary


#5

Other reasons for performance mortgage - Posted by Bud Branstetter

Posted by Bud Branstetter on November 30, 1998 at 10:35:35:

Advantages of a performance Mortgage
Facilitate that insurance is payable as mortgagee versus Optionor
Elimination of subsequent owner incurred judgements or liens.
Back up to gain title if seller not available or escrowed closing documents missing.
Public recognition of interest in property.

Any others?


#6

Thanks Bill! - Posted by Joe Kaiser

Posted by Joe Kaiser on November 30, 1998 at 10:11:50:

Wish I’d thought of that.

I’ve tried incorporating the “performance mortgage” into my lease option routine . . . but the results were less than spectacular since I could never really get a handle on explaining it to the seller.

If you’ve been in the same boat as me, Bill just threw us a live preserver.

The next time around I’m going to let the sellers know that we need the performance mortgage to, among other things, guarantee insurance won’t be a sticking point. I’ve gotta feeling that will fly.

Joe


#7

Re: Other reasons for performance mortgage - Posted by Joe Kaiser

Posted by Joe Kaiser on November 30, 1998 at 14:27:56:

All true, but how do you tell the seller that you need to get items 2-4 covered and without raising lots of questions or having him think you’re questioning his ability to later perform? My experience is this is a path I don’t want to walk down.

I think Bill’s insurance angle is all you’d need to be able to elegantly get the thing signed off.

Joe Kaiser


#8

Re: Other reasons for performance mortgage - Posted by Bronchick

Posted by Bronchick on November 30, 1998 at 22:29:51:

Yes, Joe, that is usually the way I explain it. The other reasons are valid, but I think that the insurance issue is the best to explain it without coming off as being “slick.”