Sandwich lease : How to handle insurance? - Posted by Bill K. - FL

import · February 17, 2000, 9:44am

Posted by JPiper on February 18, 2000 at 01:43:34:

Gene:

I’m on my way to bed as I read your post…too tired for a question of this type. But first I would say that I don’t have a “spiel”…no magic words. My style is more one of questioning…with the questions leading the seller to a predetermined conclusion.

But as fate would have it, I happen to have answered this question in November of 1998…and I happen to have that post. So I’m going to repost it below. I think the possible objections fall into one of the two categories I mention below:

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

import · February 17, 2000, 9:44am

Sandwich lease : How to handle insurance? - Posted by Bill K. - FL

Posted by Bill K. - FL on February 17, 2000 at 10:44:32:

Still waiting for input from L/O people on how they handle insurance on their sandwich leases.

import · February 17, 2000, 11:21am

Re: Sandwich lease : How to handle insurance? - Posted by JPiper

Posted by JPiper on February 17, 2000 at 12:21:25:

Bill:

Bud gave an answer below: Record a performance mortgage, this gives you an insurable interest, then add yourself to the insurance policy as an additional insured.

JPiper

import · February 17, 2000, 3:04pm

Re: Sandwich lease : How to handle insurance? - Posted by Bassman

Posted by Bassman on February 17, 2000 at 16:04:32:

Why not record an affidavit concerning real estate ?
Would this not essentially do the same thing, and no numbers would be exposed to public viewing. Then send a letter to the insurance company, signed by the seller , stating that you will need the policy changed to a landlord policy, with your company handling all matters concerning this property and to have your company added as additional insured?
Just my thoughts.
Scott Cooper

import · February 17, 2000, 2:51pm

Re: Sandwich lease : How to handle insurance? - Posted by Bill K. - FL

Posted by Bill K. - FL on February 17, 2000 at 15:51:01:

J.,
I must plead ignorance concerning a “performance mortgage”. Is this part of someones L/O course? Or would you care to share the info with the rest of us?
Thanks.
Bill K.

import · February 17, 2000, 1:04pm

The “Cut & Dried Option Agreement” - Posted by H.G.Cho

Posted by H.G.Cho on February 17, 2000 at 14:04:04:

To answer Mr Bills’ question concerning insuring the sandwich option, first and foremost, you must have the option recorded! (This is a must) You will have in your lease agreement that the owner will continue paying the insurance (They would want to anyway, afterall it’s their house until you exercise your option) You will have a clause in it stating you are additionally insured. Your clause to sub-lease is also included, therefore you are covered on all angles.
Pretty much “CUT & DRIED”

I have some material on this that I have being processed as we speak. It will be available on June 1, 2000. More on this and other material later.

H.G Cho

import · February 17, 2000, 7:01pm

See Explanation Below (nt) - Posted by JPiper

Posted by JPiper on February 17, 2000 at 20:01:55:

.

import · February 17, 2000, 3:21pm

Re: Sandwich lease : How to handle insurance? - Posted by Bill K. - FL

Posted by Bill K. - FL on February 17, 2000 at 16:21:36:

Scott,
I believe it was Robt. Bruss who first suggested recording an affidavit concerning RE to cloud title while not revealing any details. And like you said, the owner should change the policy to a rental dwelling policy since he will not be occupying the property. This should also reduce the premium considerably. So your suggestion makes sense in as far as the insurance co. cooperates. I just would like to hear from someone who has tried to collect after being named addtnl insured. Anyone out there?

import · February 17, 2000, 3:49pm

Re: Sandwich lease : How to handle insurance? - Posted by TRandle

Posted by TRandle on February 17, 2000 at 16:49:07:

Bill,
Performance mortgages are discussed in Bronchick’s L/O course. I haven’t done one yet, but based on what I’ve learned, it does give you a much stronger position than just recording a memorandum of agreement. Since Piper uses them, I’ll wait for a more detailed explanation along with you…

import · February 17, 2000, 3:12pm

Follow up JPiper or Bud?? - Posted by Terry (Dallas)

Posted by Terry (Dallas) on February 17, 2000 at 16:12:34:

…You will have in your lease agreement that the owner will continue paying the insurance (They would want to anyway, afterall it’s their house until you exercise your option) You will have a clause in it stating you are additionally insured…

Having a clause in the lease does not mean that you are additionaly insured does it. I mean the owner still has to add you on. Either as Bud states or in the form of a trust. A question to JPiper. wich would you choose:
The performance mortgage or the trust?
Thanks in advance
Terry

import · February 17, 2000, 2:20pm

Re: The “Cut & Dried Option Agreement” - Posted by JPiper

Posted by JPiper on February 17, 2000 at 15:20:40:

When you get this material ready, you might try contacting JP Vaughan, the owner of this site, about advertising the material here…posting ads is not within the policy guidelines of the newsgroup.

By the way, given a choice I would rather not record the option itself. Personally I think that’s a poor choice. I’d rather record the performance mortgage. Something to think about.

JPiper

import · February 17, 2000, 7:01pm

Performance Mortgage - Posted by JPiper

Posted by JPiper on February 17, 2000 at 20:01:07:

A performance mortgage/deed of trust is similar to a mortgage?.except that in this particular case it secures an option rather than a note.

The value of a performance mortgage is that it gives you a recorded interest in the property. Any subsequent voluntary or involuntary lien against the optionor will be recorded AFTER this mortgage (with the exception of course of certain liens like property taxes). Therefore if the optionor is unable to deliver clear title later when the option is exercised, you would foreclose on the performance mortgage. Liens recorded subseqent to the performance mortgage would be cleared from title in this foreclosure action.

The distinction between this and recording your option or a memorandum thereof is significant. A question that arises, as an example, is what happens if the seller has a judgment against him recorded subsequent to the lease/option of the property. Attempting to transfer title to you upon your exercise is going to bring that judgment into play. What happens if the judgment is of a size that the proceeds from the sale are not adequate to pay off the judgment? Now you?re embroiled in a lawsuit hoping that you?ll prevail, and paying attorney?s fees to boot. With a performance mortgage you foreclose. A performance deed of trust gives you a non-judicial way of obtaining title should the seller default.

Recording an option triggers the due on sale clause. Whether it would be noticed is another question?.but this issue recedes considerably with the recording of a performance mortgage.

I understand that Bronchick covers this topic in his lease/option course.

JPiper

import · February 18, 2000, 7:33am

Re: Follow up JPiper or Bud?? - Posted by Bill K. - FL

Posted by Bill K. - FL on February 18, 2000 at 08:33:44:

Terry,
Prudence dictates you be added to the policy instead of just relying on your lease agreement. You are in a stronger position to collect or be involved with repairs etc.as TRandle pointed out.
Your question of whether to use a perf. mtg or deed of trust would depend on whether the property is in a mtg state or deed of trust state. It has nothing to do with holding title in a trust. That’s another topic. We are talking about recorded instruments against the property title. Some states use DOT and others use MTG. You need to find out what is used in your state.

import · February 17, 2000, 9:58pm

Random Thoughts on Thread - Posted by Gene S Hou Tex

Posted by Gene S Hou Tex on February 17, 2000 at 22:58:24:

As a middleman on a s/w lease optin you are going to be aware of any ins loss & can be present when the adjuster investigates. Simply say, “I’ve made you a copy of where the insured has authorized me to be named as an additional payee. Here it is. Will there be any problem putting my name on the draft?” Treat him decent & my experience is no problem. Here is another strategy that has worked for me. If the owner gets the draft & he is the single payee & won’t cooperate enlist the VP in charge of the “Loss Draft” dept. of the mortgagee. His interests are compatable with yours. He wants the asset repaired properly because it’s his collatral. He can help by calling the breaching owner & putting the heat on him because he is in default of his loan by sitting on the draft.

Jim, Bronchick gives 4 reasons for doing the perf DOT thing. 3 are told to L/s in the name of logic.

as lender I now have insurable interest
right to redeem if L/S defaults
IRS & others 3rd in line behind me

The 4th reason is silent. It’s foreclose on L/S if he breaches!

Your above response on perf DOT as always is excellent!

However, I have never seen an article, post or course material that shows how to present perf DOT in a positve, benefit laden L/S light. Remember, not all L/S are desparate. Now if anyone knows how to pitch this issue at 7:30 pm at the kitchen table of the L/S in an ethical manner it’s gonna be YOU…JPIPER!

Let’s say L/S is educated, 40ish, can wait for $, house is $40k above median price near your house , 4 yrs old, good upside,etc. It’s PERFECT & JPiper you WANT this deal!!

What do you say in “sales speak” when you get to the perf DOT??? Mr.L/S , please don’t take this personally but it’s just prudent that I have this assurance of the perf DOT blah, blah?!

C’mon Jim! Please give me some pearls of wisdom here so I don’t have to wing it on my 1st deal.

Just kidding! But if you have time I’d love to see you response. This was tough! I type w/ 1 finger!