Insurance clause in note?

Question

Good morning real estate gurus. I have a question about a house we are selling. We own it free and clear, and have accepted an offer for about 34% down with the rest seller financing. My question is, should there be a clause in the note that the borrower will have insurance on the property, and keep the property taxes paid? I know that all of the bank loans that I have had, had this clause. Another question, the note he had drawn up has an acceleration clause, but there is no mention of how default is triggered.

I apologize if I left out any important information, I read here quite a bit, but post little.

Thanks in advance, Eric

I apologize if I left out any important information, I read here quite a bit, but post little.

Thanks in advance, Eric

Jeff S. · Answer

If anyone is to draw up a note Eric Miller it should be you, not your borrower.  Realistically though, it sounds like you’re not doing anything unusual or creative here; just standard owner financing probably done hundreds or thousands or times each day using boilerplate forms easily provided by a title company.  I wouldn’t pay a lawyer to reinvent this wheel but I also wouldn't use anything provided by my borrower.

Our note doesn’t require fire or liability insurance, a requirement to pay taxes, escrow, an acceleration clause, or even an obligation to preserve and maintain the property – our Deed of Trust does.

I assume your property is in California.  Not legal advice but you might at least read:  CALIFORNIA- -Single Family- -FannieMae/FreddieMac UNIFORM INSTRUMENT Form 3005 to see what it contains and to educate yourself.  Google it or go to the Fannie Mae site for a copy.  A good title company will provide a similar trust deed as well as a fully vetted up-to-date note, valid in California.  I’m not trying to discourage you from seeking legal advice, but I’m not sure you need it here.

Jeff

Loc R. · Answer

Eric,

As everyone else has mentioned - yes, have taxes and insurance impounded.

And most certainly YES, be sure that you have someone on your side review/draw up the documents.

Finally, please consider using a 3rd party servicing company to collect on the note - should you decide to liquidate (sell) the note having an independent 3rd party record of collections will help speed along the underwriting process.

Dion DePaoli · Answer

Yea, this sounds like somebody is DIY.  Bad idea.  Due on Sale should also be in the security instrument.  Also you want to have a requirement for insurance to be carried sufficient to replace the home and you also want the capacity to obtain insurance in the event the borrower does not and have him have to pay you back.

There are too many things to list that need to be in the paperwork to protect your collateral.  Go see a lawyer and have them draw the papers up for you so it is done correctly.

Ann Bellamy · Answer

Eric Miller, almost everyone is giving you essentially the same advice:  get an attorney or at least a title company.  I totally concur.    I never lend money without having an attorney draft the documents.  My attorney, not the borrower's.

If the guy pays every month and there is never a tax or insurance issue, and everything is hunky dory, then you'll probably never know if your note and Deed of Trust were sufficient.  But the minute there is a problem, you will find out who has the better attorney:  the borrower, who will either hire one or use legal assistance, or you, who hired yourself to edit the borrower's documents.

In addition, if the documents don't comply with state law, your foreclosure can get thrown out in court, or overturned, or whatever.  At that point, the $300 you saved hiring an attorney will be the most expensive money you ever saved.

Bill Gulley · Answer

Jeff S. hit it on the head;

The insurance and taxes are issues of the deed of trust not the note. The note should not address these issues as it would likely duplicate the issues and if not identically addressed, could cause confusion as to any right to cure.

If the deed of trust provides advances for the payment of back taxes and forced placed insurance, these are not default issues under the note for foreclosure by themselves, the process is for the lender to advance funds and add the amounts to principal and bear interest in a standard DOT.

The due on sale is under the note, but sence you have no interest rate risk as a lender, I suggest you add that you have a due on sale without written consent and modification of the note and deed of trust and that consent may be denied at the sole option of the holder.
This stems from the fact that a seller financed note is not the same as a cash advanced note, it is an extension of the sale transaction for the payment of equity based on an agreed sale price.

Note serving as Loc suggested is strongly advised, as you can put yourself at risk in failing to provide proper filings, notices and adminstration of your note. It will also provide a much better credit history for the borrower to meet any future obligations to refinance as well as other benifits. While either party may pay for servicing, the borrower has paid the costs, when the benefits are properly explained, in all of my dealings with seller financed transactions.

All title plants, closing offices have either a title attorney in them or affiliated with them and should be capable of providing standard documents for a transaction. An RE Attornet may cost you more and end up with the same product, could also be worse as many RE types are not financing attroneys. About 25 to 30% of my business involved fixing seller financed transactions that title companies or RE attorney threw together.

Gotta run, I'll add more later, unless others cover the issues.....

Don Konipol · Answer

As a lender I always provide the note. as prepared by an attorney representing me.  Having the borrower prepare the note will almost  always have some defect that will render the note unsaleable on the secondary market.

Steve Babiak · Answer

FYI - not too many of those "gurus" hanging out here, just the down-to-earth folks who actually invest money in real estate and notes ...  those "gurus" are too busy peddling some crappy info course / training materials ...

Dion DePaoli · Answer

Eric, just a restatement of what has been said more than once.  If you are doing this yourself you are doing your self a massive injustice.  As a mortgagee you have things that you need the mortgagor (borrower) to do such as pay and maintain taxes and insurance.  Mortgagee's also need the right to enter the property to preserve the collateral in the event of abandonment.  Additionally, you need the right to cure any lien which might take a superior portion to your security instrument and you need the right to demand re-payment for any such advance.

The thread asked for advice and that advice was get an attorney to help draft this.  Certainly it is your choice to listen or not.  An improperly prepared note and security instrument can be deemed unenforceable in whole or in part.  Obviously that can be very costly.  Additionally, use an attorney not just a title company, they are not the same and you want an attorney.

Eric Miller · Answer

Thank you all for your quick answers.  The acceleration clause is worded to be a due on clause.  There is no mention of the requirement of insurance or that prop. taxes are kept current.  There is mention of balance being due immediately upon default, but it doesn't specify how late payment will be to be in default.

I will request that insurance and taxes be current, and put in a time period that a late payment will make note default.

Thanks again, Eric

Kevin Kaczmarek · Answer

Eric,

I would suggest you work on your own contract for him to sign. As the owner of the property I would work with a title company, or an attorney to draw it up and make sure all the little nuances are in there like taxes and insurance. I would suggest escrowing for both and you paying those so you know they are paid.

Remember, he who drafts the contract, drafts it in his favor.

Insurance clause in note?

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