Help me understand how insurance works in a subject-to deal

[Eric Black]

We have been exploring purchasing a contract for a subject-to deal but haven't been able to understand one issue.

A few of the properties we have looked at the mortgage payment was PITI, which we understand.

Our question is, if the insurance policy is in the name of the original owner, how does that work when we purchase the property subject-to? We obviously need to have insurance on the property for liability. Once the bank finds out that the new insurance policy is not in the mortgage holders name, won't they call the loan due?

Anyone who can help me understand how this piece works I would be very grateful.

Thanks all.

Eric

[Brian Burke]

Yes, they might call the loan with a new policy, and they might not. If this is a flip, consider leaving the former owner's insurance in place and also get your own policy without the lender being on it. The former owner's policy protects the lender and your policy protects you. I've also heard of people having the former owner add them as an additional insured on the former owner's policy, but I haven't done that myself.

If this is a buy/hold, having two policies is problematic because of the cost. In that case, I have no advice for you, there is probably someone else that can comment on that with a brilliant idea.

[Eric Black]

Thanks @Brian Burke This would be a buy and hold however your information is good if we find one that would be a flip. Thanks again. Eric

[Account Closed]

Originally posted by @Brian Burke:
Yes, they might call the loan with a new policy, and they might not. If this is a flip, consider leaving the former owner's insurance in place and also get your own policy without the lender being on it. The former owner's policy protects the lender and your policy protects you. I've also heard of people having the former owner add them as an additional insured on the former owner's policy, but I haven't done that myself.
If this is a buy/hold, having two policies is problematic because of the cost. In that case, I have no advice for you, there is probably someone else that can comment on that with a brilliant idea.

How sure are you that the former owner's policy protects the lender? I always thought that because the former owner no longer has an insurable interest in the property that no claim would be covered. I just went through this as a lender, I made the new owner get a policy in his name with me as mortgagee.

I can see where the lender would not be alerted as to the change in ownership if the former owners policy remained current, but for the lender to actually be protected, I think that's another story.

@Tim Norris , do you know?

[Tim Norris]

Sure...this is a re-post, but I wrote a piece a few years ago here:

http://www.nreinsurance.com/docs/Insurance-Issues-for-the-Sub2-Deal.pdf

My opinion only, but has been successful for us for years. I think it's saved on BP as an article, too...

[Account Closed]

Originally posted by @Tim Norris:
Sure...this is a re-post, but I wrote a piece a few years ago here:

http://www.nreinsurance.com/docs/Insurance-Issues-for-the-Sub2-Deal.pdf

My opinion only, but has been successful for us for years. I think it's saved on BP as an article, too...

Thanks Tim. The last sentence says you name new owner, mortgagee and former owner on the policy. If a claim is paid out wouldn't all three be named on the payout check, including the former owner?

[Tim Norris]

Nope...former owner is named as an additional insured, relative to only the protection afforded by the liability coverage. They are not named as a "loss payee" (which would allow them benefit under the property coverage)...

[Account Closed]

Originally posted by @Tim Norris:
Nope...former owner is named as an additional insured, relative to only the protection afforded by the liability coverage. They are not named as a "loss payee" (which would allow them benefit under the property coverage)...

Again looking at the last sentence, you say "landlord" policy, I guess the same logic would apply if it was a "vacant (builders risk)" policy for a rehabber?

[Tim Norris]

Correct, at least in my opinion! : )

[Eric Black]

Thanks @Tim Norris for the input and the report. This definitely makes more sense!

[Steve Babiak]

@Tim Norris has these other relevant posts:

http://www.biggerpockets.com/blogs/197/blog_posts/457-insurance-issues-for-the-sub2-deal-

http://www.biggerpockets.com/articles/607-insurance-for-the-subject-to-deal

http://www.biggerpockets.com/articles/25727/user

[Whit B.]

Quote from @Brian Burke:

Yes, they might call the loan with a new policy, and they might not. If this is a flip, consider leaving the former owner's insurance in place and also get your own policy without the lender being on it. The former owner's policy protects the lender and your policy protects you. I've also heard of people having the former owner add them as an additional insured on the former owner's policy, but I haven't done that myself.

If this is a buy/hold, having two policies is problematic because of the cost. In that case, I have no advice for you, there is probably someone else that can comment on that with a brilliant idea.

For anyone reading this today…this is terrible advice. The seller has no equitable interest in the property once the deed is transferred. Naming you as an additional insured on their policy does NOTHING to protect you! ABSOLUTELY NOTHING!!