Homeowners Insurance on a Real Estate Investment Property from a Lender’s Perspective

[John Jacobs]

Re: Homeowners Insurance on a Real Estate Investment Property from a Lender’s Perspective

I am a private money lender.  Amongst other things I always instruct the insurance agent that the property will be vacant. I always request a Builder’s Risk Policy.

My question has to do with what I need to tell the Insurance Agent in terms of how much property insurance I want.

Here is an actual deal that I lent on. I lent $225,000 of which $185,000 was for the purchase of the property and $40,000 is going toward renovations.

As a lender I just want to get back my loan amount back (in this instance $225,000) if there is a total loss with the property.

I have seen where a lender tells the insurance agent how much property insurance he/she wants based on a price per square foot calculation.

On the other hand I have also seen where a lender tells the insurance agent that the amount of property insurance should be the loan amount in this instance $225,000. I myself have done this and when I have the insurance agent comes back to me to ask me how much the purchase price is and how much in renovations are.  I provide to the insurance agent the breakdown in this instance $185,000 (purchase) and $40,000 (renovations).

How should I best communicate to the insurance agent how much property insurance that I want (and communicate it in such a way that they he/she clearly understands)?

Thank You

John