Don’t Get Burned by Insurance ... or Taxes

If there is a house, mobile home, or other building on the property, the purchaser is usually required to buy a fire insurance policy to protect you from the possibility of fire. Many (if not most!) people who receive payments on a contract assume that since the contract requires the buyer to pay taxes and insurance, the buyer will do so. It turns out that in many cases the buyer “forgets” to do so. That puts you, as the contract owner, in danger. If you have not done so, read the Newsletter “Taxes and Insurance 1 of 3” (in the newsletter section of www.cashnewmexico.com). Capital Creations LLC lost $25,000 as a result of such an assumption.

Although less catastrophic in terms of destruction, unpaid property taxes can cause you big problems … you can lose the property to a tax sale by the State of New Mexico. Almost all New Mexico Real Estate Contracts require the purchaser to pay property taxes.

Property taxes and hazard insurance are similar in a couple of ways. Most New Mexico Real Estate Contracts:

1) Require the purchaser to pay the cost of these items

2) Do not require the purchaser to notify you when they are paid. You must monitor whether or not these are paid

3) Do not allow you to force the purchaser to pay these items by “foreclosure”. You must first pay the cost, and then follow the terms of the contract to “foreclose”

As mentioned above, it is very common for people who receive payments on a real estate contract to assume these items are being paid. It is also very common that this assumption is incorrect. It is your responsibility to make sure they are paid, and if not, to follow the terms of the contract to enforce payment.

Monitoring Insurance

If there is a building or structure on the property you sold, your contract usually requires the purchaser to buy a Homeowner’s Insurance Policy. (NOTE: If the contract does not require the purchaser to buy a policy, you’d be well advised to do so for your own protection). The main purpose of the policy is to make sure that the property is replaced or repaired if it is damaged by fire. The person who bought the property from you is the “Insured Party”, and you are the “Mortgagee” or “Loss Payee”. You must have yourself listed as a Mortgagee on the insurance policy. Doing so will ensure that you get notification of renewals and cancellations. It also ensures that if there is a fire, the building will be replaced or you will be paid the balance due on the contract. Monitor the due date of the policy premium, so that if you do not get a notice of renewal or cancellation, you can call the insurance company a week or so prior to the policy expiration. Most policies are paid a year in advance, but others are paid quarterly. Quarterly policies are a pain to monitor because you’ve got to watch them more often. If you don’t get renewal/cancellation notices, you should call the insurance company to find out if the buyer paid the premium.

Monitoring Property Taxes

NOTE: The dates below are the usual practice of the State of New Mexico, but are sometimes changed in certain Counties. You should call the County assessor to ascertain whether or not the dates have been altered.

Property Taxes (Ad Valorem Taxes) are due once a year. The State of New Mexico allows the property taxes to be paid in two installments, one installment due in December and the other in May. Statements and tax bills are usually sent out in November. The bills should be sent to the purchaser, who is then responsible for paying. The problem with paid taxes is that you, the seller of the property and the recipient of payments, do not automatically receive a receipt. Capital Creations LLC owns several hundred contracts, and we have never received a receipt for paid property taxes unless we asked for it. You must request that the purchaser send you a receipt. Alternatively, you can call the County Assessor where the property is located and ask if taxes have been paid. In New Mexico, Ad Valorem taxes that remain unpaid for three years or more are subject to foreclosure by the State, who can then sell the property for unpaid taxes. If sold at a tax sale, your Real Estate Contract will be wiped out, and you’ll lose the contract and the property!

What do you do if either item is not paid as required? The next Newsletter (part 3 of 3) discusses enforcing payment of Taxes and Insurance.