Changing policies on a new property that you buy subject to (which we’ll call “sub to” henceforth) existing financing will likely save you some money, but you’ll need to stay on the bank to make sure it gets done in a timely manner.
When I say it’s likely to save you money, it’s because you can use the same insurer we do; they are the largest non-owner-occupied insurer in the country.
When you buy a home sub to, it has a loan in place of course, as well as an existing insurance policy. However, once your name is tied to the property, you’ll want to change that.
Changing up the insurance on this type of purchase can create a lot of anxiety and fear about whether it will trigger the bank’s due-on-sale clause. But it’s been done thousands of times. There are a few ways to do it, but we use (and recommend to our associates) a rather simple process.
Please understand, though, that we are not attorneys, and this is simply our opinion and how we operate.
How to Change Insurance Policies on a Property
To begin the process, our general manager (my daughter) gets a new policy quoted by one of our investor resources. With a quote and binder, we then have the seller authorize a release form that allows us to release information and call the bank. At this point, it’s a standard form in our sub to purchasing package.
1. Call the Bank
The conversation with the bank goes something like this:
“My name is Taylor with XYZ Property, and we manage the home located on 742 Evergreen Terrace. We’re going to send you a new policy because we just replaced the policy on the property you’re escrowing for. The insurance company is called REI Guard, and they are going to bill you directly. I will send this policy over now, please replace it…”
If the bank follows through, you should just have this new real estate insurance policy, which should cut down your costs. Your total PITI then should come down, as well.
2. Call the Bank Again
Here’s the thing. Banks are notoriously inefficient, so include a tickler reminder to call the bank back three days later to make sure they actually followed through with swapping out the old policy.
Did the new company bill you? Did the old policy get canceled?
It’s helpful if you also have the past seller call the day after your call (or even the same day) to make sure it got done, as well. Getting the seller involved to help you swap policies can cut costs, too.
Just because you or REI Guard faxes or scans them the new policy doesn’t mean they processed it. If you don’t follow up and make sure they transferred it, you could end up paying on the new and old policies. Paying on two policies is throwing away money, as you’re not likely to be able to collect on both should something happen.
3. Cancel the Old Policy
While I’m on this point, let me mention that I know some investors who just keep both in place so as not to trigger any red flag with the bank and change of ownership. It’s been our experience that when we call, email, or mail a letter as the “management company,” it doesn’t cause any problems or throw up any red flags.
4. Contact REI Guard
That’s the bank side. On the insurance side, you contact REI Guard and show them the new house and policy, and fill out their form.
You still list the bank as the first lien holder (it has to be), the seller’s name second as an additional insurer (that didn’t change), and then you list your XYZ Property Company. They will recognize you as the management company.
And that’s it! That’s both ends of covering and insuring a sub to property.
Do you have any additional questions for me about this process?
If so, ask me in the comment section below!