Subject to: title company won't issue title insurance

Engineering Consultant, Investor · Seattle, WA · Member since 2013 · 213 posts · 61 votes

I got a potential subject to deal but when I talk to title companies, most of them won't do it because of the "due on sale" clause on the exiting loan.

Only one title company I talked with said they can do it but won't be able to issue title insurance. They will need the lender's agreement to do be able to insure the title. I guess my luck of getting the lender to officially say yes it close to none.

I am wondering which title companies / real estate attorneys that investors in the Washington State, especially in the Seattle area, have used for subject to transactions? I've call all the big ones (Chicago, First American, Fidelity, Old Republic, Ticor).

What's your thoughts on proceed without title insurance? Many title companies I talked with can do a informational title report looking for liens and judgments for a small fee. Is that report sufficient to guarantee a clean title?

Any suggestions will be appreciated!

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

@Chris Mason your on fire dude !! @Jessica Zolotorofe

no need for title insurance .. No need for escrow.. you simply have title company pull the last recorded deed and draft the deed yourself.. ( which is what I do) get it notarized and then go record it. Wa La your now the owner.. subject to the existing debt and any other encumbrances.

Now In WA you do need to pay the tax's current to convey title they won't record with you taking title sub too back tax's.

And if its lot and block no need for surveys etc we simply do not survey properties on the west coast like its customary to do in older parts of the US>. were like when I buy in Charleston SC we survey everything.. even in Texas in lot and block. but our plats are bullet proof and physical inspection will determine an encroachment and even if you have one who cares.. not a big issue.

Now once you alienate the title the lender ( pretty much boiler plate in all debt instruments used on Trust Deeds ( which is what we use in Wa. not mortgages) the alienation clause will be violated and that is an event of default at the discretion of who ever is the current beneficiary of that instrument.

In other words the loan could get called and accelerated.. it happens but not often..

The bigger risk is to the seller .. now WA is a purchase money owner occ state.. that means a loan used as purchase money to buy a owner occ home . there can BE NO deficiency judgement by statue.. CA same OR same AZ same and NV same. they can do judicial foreclosures but the property is the only security for the loan they cant come after you personally like they do in Texas and other states owner occ or not. and this is why sub too is SO very risky to sellers..

Not to mention if the buyer defaults it totally wipes out their credit rating..

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Jessica Zolotorofe
Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
9y
If there is a due on sale, you CAN'T do a subject to... you'll end up with a defaulted mortgage the day you record your deed. And no way would I ever suggest closing without title insurance, especially if it was a distressed property. You could have boundary issues, survey issues, easements, on and on...
Even if anyone was able to give you a suggestion for a title "company", it would likely just be an agent that underwrites through one of the big ones, so if none of those companies will do it, I would be shocked if you can find anyone who will. You may want to take their reluctance to insure as a pretty significant red flag and a big indication that this may not be a good business decision.
If you have the capital, why do you need to take subject to? Why can't you just pay off their mortgage or refinance it with your own mortgage loan? Or if the mortgage exceeds the value of the property, then try a short sale. You can't hide a change in title from a lender. It just doesn't work. I wish I had better news, I'm sorry!
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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
9y
Title insurance is for properties that the title company is reasonably certain has clear title.
If you call up and basically say "hey I have a property here that I 100% know for a fact does NOT have clear title because I'm in the process of clouding title, will you issue title insurance?" -- From an insurance provider's perspective, it would be like calling drunk from the scene of an auto wreck you caused, and asking someone for auto insurance that will cover the accident you just created.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Chris Mason your on fire dude !! @Jessica Zolotorofe
no need for title insurance .. No need for escrow.. you simply have title company pull the last recorded deed and draft the deed yourself.. ( which is what I do) get it notarized and then go record it. Wa La your now the owner.. subject to the existing debt and any other encumbrances.
Now In WA you do need to pay the tax's current to convey title they won't record with you taking title sub too back tax's.
And if its lot and block no need for surveys etc we simply do not survey properties on the west coast like its customary to do in older parts of the US>. were like when I buy in Charleston SC we survey everything.. even in Texas in lot and block. but our plats are bullet proof and physical inspection will determine an encroachment and even if you have one who cares.. not a big issue.
Now once you alienate the title the lender ( pretty much boiler plate in all debt instruments used on Trust Deeds ( which is what we use in Wa. not mortgages) the alienation clause will be violated and that is an event of default at the discretion of who ever is the current beneficiary of that instrument.
In other words the loan could get called and accelerated.. it happens but not often..
The bigger risk is to the seller .. now WA is a purchase money owner occ state.. that means a loan used as purchase money to buy a owner occ home . there can BE NO deficiency judgement by statue.. CA same OR same AZ same and NV same. they can do judicial foreclosures but the property is the only security for the loan they cant come after you personally like they do in Texas and other states owner occ or not. and this is why sub too is SO very risky to sellers..
Not to mention if the buyer defaults it totally wipes out their credit rating..
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Yinan Q.
OP
Engineering Consultant, Investor · Seattle, WA · Member since 2013 · 213 posts · 61 votes
9y
@Jessica Zolotorofe, thank you for your reply. It's good hear from the attorney's perspective. I get your point, subject to without getting approval from the lender is a gray area. To answer your question, I could pay off the mortgage. The reason I am looking into subject to is to save on capitals. If subject to works, my out of pocket will be significantly lower than paying off the mortgage, thus my ROI will be much higher.
Of course, I will only do a subject to if it can be done legally.
@Chris Mason, I love your analogy. Does it mean nobody would insure title for a subject to deal?
1 Reply
Jessica Zolotorofe
Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
9y
Goood lord that post was exceptionally poor advice, I couldn't even figure out where to start, so instead, I am just going to very strongly suggest you take none of that advice and talk to a local lawyer asap. WA has a 1.5% mortgage tax, right? Is that what you were trying to avoid?
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Yinan Q.
OP
Engineering Consultant, Investor · Seattle, WA · Member since 2013 · 213 posts · 61 votes
9y
@Jay Hinrichs, thanks for your inputs. I was hoping you could chime in and here you are. Since I am new to subject to, I will have to read your post a few times to digest.
1 Reply
Rocky V.
Rental Property Investor · Arlington, TX · Member since 2012 · 788 posts · 640 votes
9y
@Yinan Q.
I've personally purchased many homes via sub2 and never received title ins. You must know how to research title issues and liens against property or know someone that can help with this. I've never had a lender call note due but have only dealt with large banks. I would advise having an exit strategy in place of either selling outright to another buyer or refinancing within a couple years.
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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
9y
Originally posted by @Yinan Q.:

@Jessica Zolotorofe,
@Chris Mason, I love your analogy. Does it mean nobody would insure title for a subject to deal?
I'd be shocked if anyone did. But I could be wrong.
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Yinan Q.
OP
Engineering Consultant, Investor · Seattle, WA · Member since 2013 · 213 posts · 61 votes
9y
@Jessica Zolotorofe, I am not trying to avoid the excise tax. That will be paid with transfer of title.
What I am trying to do with subject to is to use less capital. Let's say the mortgage is 250k and I buy the house at 300k, fix it up, sell, and make a profit of 45k. Let's say fix-up and holding cost totals 70k.
Scenario 1: I pay off the mortgage upfront. My total investment is 370k (300+70). My ROI is 12.2% (45/370).
Scenario 2: Subject to. My total investment is 120k (300-250+70). My ROI is 37.5% (45/120).
Although the numbers are simplified, I think this makes my point. The difference is how much I have to pay out of pocket. With 370k, I can only do 1 deal a time for Scenario 1. Or I can do 3 deals at the same time for Scenario 2.
1 Reply
Jessica Zolotorofe
Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
9y
Subject to is only typically a title concern if the mortgage has a due on sale and the lender can foreclose your interest or charge you a default rate the rest of the term, which does happen, to deter exactly this scenario. If there is no reason you can't take subject to under the law or in the loan docs, then the title company will often just write the mortgage in as an exception to your policy but still insure otherwise. Some state courts have even considered the intentional failure to disclose transfer of title to be fraud. Most residential mortgages have a tax service that monitors your taxes and/or pays them, and as soon as that bill is in a new owner's name, you are putting your investment in jeopardy.
And all of the plats are iron clad? Really? Call a tax assessor and ask them to confirm that. Not a shot in hell they would take on that liability because it is just so so not even close to true. And you can see encroachments and easements..... Also absolutely not true. Amd they're not a big deal... uh, when you're paying to repave your neighbor's driveway every 2 years, or you find out you aren't allowed to park cars within 30 feet of the lot next door, but that's where the driveway is and now you can't offer parking to your tenants, or maybe you lose 10 feet of your setback because you can't see all encroachments with your naked eye and now you can't develop the lot in the future without an expensive variance pricess. It's just so ridiculous. Every surveyor would be out of business if that was even sort of how any of this worked. I'm hoping another real eatate professional chimes in soon! Please do check in with a local attorney.
2 Reply
Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
9y
Yes, sub2 is done every day, and the mtg.s always have a due on sale clause. As long as you understand the risks of the note being called due. As for getting title insurance, of course Not, there's an existing mtg on the property! Perhaps, just perhaps, you could get title insurance with the existing mtg as an exception? Any way, for a short term, as long as you got a title search/committment showing only the mtg, not a lot to worry about, unless of course some past heir/title holder pops out of the wood work with the "my name was forged, yada, yada" and you'll be out in a few months. And as @Jay Hinrichs states, the biggest risk in a sub2 is for the seller, when a buyer is holding long term, can't pay off the not if it is called, the debt stays as the seller's obligation, etc.
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
9y
Yep, excise tax (1.7% ish) will be paid at transfer before the county will record your deed. See the treasurer first to get stamped.
Bring 4 copies of the excise tax affidavit all completed to the treas. They will tell you with no remorse or empathy to come back with the correct stuff if you don't. No biggie for me, but I ain't in the city:)
I don't bother with surveys here either with lot and block. I do order an O&E/L&E from the title co for about $80 to check title, plats, encroachments, encumbrances, etc.
If there hasn't been a death or divorce since the sellers bought it, I don't require more than an O&E. Check it closely. Stay creative @Yinan Q.!
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Jessica Zolotorofe its an excise tax on the transfer of real estate.. this what makes wholesaling and double closing in WA tough.
If you were refer to my terrible advice.. that your perspective from the east coast... we do things WAY different than you do out there in the closing realm.. I have personally bought well over 200 homes sub too and not a one with title insurance all done myself.
we simply don't use lawyers the way you do in your state.. I use them were they are required like when I do deals in PA IL SC etc.. but out here NOPE no reason title companies have their own escrow department..
Sub too I do not like form a sellers perspective unless the buyer is VERY strong.. we could cut a check if our loan got called and I did have two called we paid them off.
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Jessica Zolotorofe
Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
9y
To piggyback on @Chris Mason's brilliant analogy, it wouldn't make me want to drive my car wasted just because someone else did it 10 times and never got caught...Or, there are millions of people who don't wear seatbelts when they drive, and are most of them fine? Sure, probably, but god forbid your car is the one that gets into a wreck, you're not any better off because none of your friends wear them and they all had no consequences. That's exactly what you would be doing, knowingly doing something wrong by clearly breaching the terms of the loan that will be a lien on the property that you now own, and hoping you just aren't one of the ones that suffers the consequences.
And also, the bank has the right to accelerate, but they ALSO usually have the right not to accelerate and to just raise your interest rate significantly for the rest of the term while tacking on all kinds of fun fees.
It all comes down to what the loan documents say, and how big of a risk you're willing to take. Again, good reason NONE of the big title companies will touch this..., but up to you! Wish you the best of luck whatever you decide.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Jessica Zolotorofe I fully understand what yo mean about enchroachments and that is common in your area .. I have experienced it many time.s
but we have the different ways of surveying on the west coast. it starts with the BAse and Meridians and then falls down to the township and range , then section quarter section etc etc.. There are NO meets and bounds in most instances were most of these folks will be buying existing homes.
and yes you can have small little spats but that's all they are.. it simply is not done here . NO one orders a full blown survey on the sale of a standard SFR.. there are simply not enough survey companies to do this work if everyone who transferred properties ordered a survey.. would clog the wholes system.. and of course there are boo boos but its rare.
its what I love about this game what you do we don't what we do you would never do.. its all regionalized and having been a real estate developer in WA ( not sure how many plats you have developed in WA) and in Oregon and CA.. I do understand whats needed and whats over kill...
Where we do survey always is when I was in the Timber business.. we always ran cut lines.. the old method was to use BLAZE's .. but you cut a tree that's not yours and its triple stumpage and if its federal timber its a federal bust... many a logger have seen jail time for stealing FED timber.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Jessica Zolotorofe Default interest rates are not done on owner occ in our area... it would be very rare.. now late payments and other fees of course.
and on private mortgages for sure.. when I had my HML company I had default written into all my loans.. not that it did me any good once you are in default the deals equities usually go by by.
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Jessica Zolotorofe
Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
9y
@Jay Hinrichs, I do transactions all over the country, but I wasn't suggesting that he needed a lawyer to close the deal, just for some advice on his risks from a legal perspective. @Yinan Q., in your 2 scenarios above, isn't there the third option of getting your own financing? It'll cost you only a few hundred in closing costs, especially with no attorneys fees, and you can get a title policy no problem. Why does that option not work for you? I totally understand wanting liquidity, but if there is no mortgage tax (and excise tax you have to pay anyway), then what is the deterrent to getting conventional financing?
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Jessica Zolotorofe
Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
9y
@Yinan Q., is this intended to be an investment or for you to live in? I think I might have missed if you mentioned.
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Yinan Q.
OP
Engineering Consultant, Investor · Seattle, WA · Member since 2013 · 213 posts · 61 votes
9y
Jessica, it's going to be a fix and flip. It will done through my llc so getting conventional loan is almost impossible.
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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
THINK. What about the end-game on a property bought Subject To and now being sold to someone else. They don't give squat how or why you bought it, they just want a clean title - - oops, What do you mean the title is clouded? Bye bye offer to purchase. Frequently we can horse shoe an action we desire but later run into a consequence for which there is no escape.
@Yinan Q.
@Jessica Zolotorofe
@Jay Hinrichs
2 Reply
Jessica Zolotorofe
Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
9y
Even worse idea for a fix and flip, and then the owner occupancy protections don't apply even...
0 Reply
Rocky V.
Rental Property Investor · Arlington, TX · Member since 2012 · 788 posts · 640 votes
9y
@Jeff B. Made a good valid point. It took me nearly 7 months to refinance a group of sub2 properties. Title company had to track down original owners in order for them to sign a document before they would issue title insurance. I would definitely consider an Option to Purchase on this property if your intending to fix and sell right away.
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Yinan Q.
OP
Engineering Consultant, Investor · Seattle, WA · Member since 2013 · 213 posts · 61 votes
9y
Originally posted by @Rocky V.:

@Jeff B. Made a good valid point. It took me nearly 7 months to refinance a group of sub2 properties. Title company had to track down original owners in order for them to sign a document before they would issue title insurance. I would definitely consider an Option to Purchase on this property if your intending to fix and sell right away.
Rocky, can you please elaborate what you have in mind on an Option to Purchase deal? When will I get the title? What would be the risks?
1 Reply
Yinan Q.
OP
Engineering Consultant, Investor · Seattle, WA · Member since 2013 · 213 posts · 61 votes
9y
Originally posted by @Jeff B.:

THINK. What about the end-game on a property bought Subject To and now being sold to someone else. They don't give squat how or why you bought it, they just want a clean title - - oops, What do you mean the title is clouded? Bye bye offer to purchase. Frequently we can horse shoe an action we desire but later run into a consequence for which there is no escape.
Jeff, that's a very good point. I understand a clouded title would deter some buyers. So it's important to clearly document the "clouds". My plan is to find the good title company to work with to make sure everything is done right. When sell, I will use the same company, hopefully they would be able to help explain the situation to buyers.
All these are my hypotheses, I'd appreciate any comments / critiques.
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Jessica Zolotorofe
Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
9y
There's really no "explaining" to a buyer... there will be a gap in title insurance coverage. That's all there is to it. It won't just deter some buyers, no one will be able to get any kind of financing without quite a major headache. If no title company will insure now, and for good reason, how could they help explain anything other than they wouldn't insure title because you were violating your loan docs? Not sure how the title company could help. All of this trouble and risk are necessary just to avoid short term commercial financing??
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