DUE ON SALE INSURANCE

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DUE ON SALE INSURANCE

Jimmy AlexanderPro Member
Investor · Member since 2021 · 26 posts · 20 votes

So I was listening to BP podcast on my way to work yesterday and heard Pace Morby mention Due on Sale clause insurance. Ive searched the web over the last 2 days and cant find any companies that offer this. Has anyone heard of this before or heard of a company that offers it? Im assuming this would protect me from the DOS clause when I transfer an investment prop from my name over to my LLC...

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Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
4y
Originally posted by @David C.:

@Sylvia B. That's a good question. How common is it for this clause to be enforced?

It could be that the company offers this insurance because of the low likelihood that the DOS clause will be enforced. Just a thought.

Pace has been doing Subject To for almost two years now from what I can gather. He is in fact advocating a couple of things that are not prudent and I believe are reckless, but that comes from a lack of seasoning. 

I think most of his background is fix & flip for iBuyers and in which he seems to have done well in that arena.  

I've been doing Subject To for 25 years and in several states. I have never heard of Insurance for Due on Sale and I find it improbable that the insurance would actually be honored in the event it was needed. There are a dozen reasons insuring against Due on Sale is a non-winner for the insurance company. 

In 25 years I've had two loans called because of Due on Sale. 

One was in 2006 when someone I bought a house from in 2001 (5 years earlier) sued and claimed he never sold the house.  Later in court he was proven to be a liar, but the loan was called anyway. I had to pay it off. But, that's a long story for another time & Yes, of course I won the case. You learn all of the weaknesses of Subject To when you've been through a few lawsuits.

The second time was in March 2020 when I did a Subject To on a Reverse Mortgage. The house sat vacant because I was busy with a few other flips and just hadn't gotten to it. A homeless "crowd" broke in and started creating problems in the neighborhood. The bank was notified by the police & I received a letter giving me 30 days to pay off the loan or they would start a foreclosure. I simply paid off the loan and life went on.  

In case one, no one is going to have that happen to them. It is an entirely bizarre and psycho event.

In case two, if I had been working on the property or had someone living in it, the squatters would never have been a problem and the bank would never have been called.

 So, had I bought Due on Sale Insurance, (which is like unicorns farting rainbows) the clause that says you can't have done something stupid like let squatters overrun your vacant property or let psychos sue you, would negate the insurance company's need to pay the insurance and I'd have to sue the insurance company for specific performance. And 2 years later and lots of legal fees, the courts would decide who is right. And I'm guessing the "insurance" provider would have a pretty strong case that they don't have to pay out.

There is great reward in using Subject To, legally and ethically and correctly. There is great risk in not knowing what you don't know.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    4y
    Originally posted by @Peter Walther:

    From their web site:

    What is Equity Assurance?

    Equity Assurance is a Company to help us with almost any Subject 2 transaction which will give you and your seller peace of mind regarding the due on sale clause. This can help you close the sell to a skeptical seller.

    If the due on sale clause gets called Equity Assurance is a Company that will utilize its resources in one of three ways.

    1) Equity Assurance upon your request, can contact the lending institution and inquire about the desire of the lender to enforce the provision if the payments, insurance and taxes are current. Equity will work to resolve this issue so you can continue working with the Mortgage servicer.

    2) Equity Assurance can utilize its capital pool and investor pool to buy the mortgage and have it assigned to Equity Assurance whereas the terms will remain the same.

    3) Equity can offer the outstanding mortgage and note on the secondary market.

    "If it's "insurance" I suspect they should be regulated.

     Trying to buy an existing mortgage is pretty tough on a one off to virtually impossible.. now if the loan was with a local small portfolio lender I could see it.. but if its a slice and dice mortgage NO way NO how can they represent they can simply buy the mortgage themselves.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    4y
    Originally posted by @Bill B.:

    @Wayne Brooks

    Seems like a good way to make low risk money. 

    this kind of reminds me of the  attempts to sell RENTAL insurance.. was popular with D class turnkey.. just buy this insurance and if your tennat does not pay we step in.. it was real for about 10 months until they went broke  LOL..

    this is flip side this is a money grab as others stated no many mortgages get called.. I would provide this service all day long maybe 5k up front to me and just collect money and rarely if ever have to make a loan. 

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  • Daniel SmythPro Member
    Rental Property Investor · Rockford, IL · Member since 2019 · 471 posts · 342 votes
    4y

    @Jimmy Alexander

    Never heard of such a thing.

    Due on Sale insurance is having the ability to come up with funds at sale or transfer, or follow the contract.

    Got a rich uncle? He could be your insurance!

    [email protected]
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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    4y

    @Jimmy Alexander assuming you are getting conventional mortgages, for several years now, you have been able to transfer into an LLC. There are a couple caveats, the main one being that the majority LLC owner must be the same person who took out the mortgage. In other words, there is no need for insurance.

    Looking at equityassurance.us website, I would be very careful of this company. Most of the web pages say "under construction". Nowhere does it say that they are an insurance company and it doesn't say the offer insurance. Insurance companies are regulated. This seems to be a service provider or warranty, not insurance. 

    It seems best case that this is unnecessary and worst case it could be a scam. Nobody should be referring to this as insurance if it isn't. There are some red flags here. 

    Keep in mind that BP doesn't endorse guests or products mentioned by guests on the podcasts.

    3Reply
  • David C.
    Accountant · NC · Member since 2017 · 64 posts · 26 votes
    4y

    @Peter Walther I agree.

    0Reply
  • Jimmy AlexanderPro Member
    OP
    Investor · Member since 2021 · 26 posts · 20 votes
    4y

    I appreciate everyone’s input! Definitely not worth it and most likely a money grab 

    0Reply
  • Bill F.
    Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    4y

    This is the second thing I've heard about from that particular podcast and in both instances it was due to an overgeneralization or simplification of the process on the guest's part. 

    There is way more on this thread about it, but basically when Pace was talking about his 0% APR seller carry, he did everything but say out loud, "I'm trying to strip equity from the people I buy the homes from by using fancy finance langue."

    When he gives the example of offering $100k, when all the wholesalers offered $70k, that $100k is an illusion and the grand total she'll get over the life of that loan in today's dollars is between $45-55k. 

    3Reply
  • Mashika Johnson
    New to Real Estate · Columbia, SC · Member since 2020 · 97 posts · 65 votes
    4y

    @Jimmy Alexander they have a Facebook page Equity Assurance LLC

    0Reply
  • Luka Milicevic
    Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
    4y

    I haven't heard of it. 

    Due on sale really only happened during the savings and loan crisis and the 2008-2009 housing meltdown. 

    Banks want loans on their books, not real estate. 

    With that said....whatever allows you to sleep at night...

    0Reply
  • Sue Z.
    Rental Property Investor · Manasquan, NJ · Member since 2017 · 26 posts · 39 votes
    4y

    @Wayne Brooks I had read that Fannie Mae allows the transfer to LLC but not the part about it being a single member LLC? Do you know where to find that detail?

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    4y
    Originally posted by @Sue Z.:

    @Wayne Brooks I had read that Fannie Mae allows the transfer to LLC but not the part about it being a single member LLC? Do you know where to find that detail?

     Doesn’t have to be single member, that’s just the most common. I believe it is “a majority ownership”.  

    1Reply
  • Rico Victoriano
    Member since 2020 · 2 posts · 1 vote
    4y

    Guys,

    It’s called equity assurance not equity insurance!  

    1Reply
  • Peter Walther
    Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes
    4y
    Originally posted by @Jay Hinrichs:
    Originally posted by @Wayne Brooks:

    @Bill B.  @Ken Dunn @Jimmy Alexander

    I just looked at their site….it doesn’t cover the transfer to an llc. It only covers the Buyer in a wrap mortgage or sub2. The “insurance” is a refi, assuming the buyer is current on everything, you have to use their title company to close the loan, lender’s title insurance and other fees and likely caveats.

    EXCATLY Wayne:

    Coverage Criteria

    In order to obtain coverage protecting the Buyer from exercising of the Mortgage's "Due On Sale" Clause through Equity Assurance, LLC for the existing unsatisfied mortgage in the transaction the following must be met:

    1. Mortgage must be current or brought current at the time of closing.
    2. All property tax (county, city, state, school, MUD, etc.) must be current or brought current at the time of closing.
    3. Property insurance must be current or brought current at the time of closing.
    4. Home Owners Associate (HOA) dues must be current or brought current at the time of closing.
    5. Closing must take place at Paradise Settlement Services, LLC d/b/a PSS Title.
    6. Title Insurance must be purchased from Paradise Settlement Services, LLC d/b/a PSS Title.

    From there website.. this is simply a refi and I suspect your paying up front for a refi that may never happen.

    nice money making gig..  I would do this for anyone also under  those terms and conditions EASY MONEY. 

    Similar to my thoughts to title lock guarantees.

    1Reply
  • Casey Caton
    Investor · Member since 2017 · 69 posts · 65 votes
    4y

    @Jimmy Alexander sounds like a lot of folks can't locate anyone except for Pace that offers such a product - might be a good business to start a niche insurance company that provides such a service. Thanks for bringing this question up - it caught my attention on the podcast as subject to seems to be a pretty good opportunity if you can learn how to do it right.

    0Reply
  • Omid Aghazadeh
    Member since 2021 · 4 posts · 2 votes
    4y

    If I use a service company for the mortgage payments and provide proof to the lender about the new responsible person who pays for the loan and ask for the 75% reduction of the DTI in the first year,....doesn't that ring the bell for the lender or mortgage company to start the Due-on-Sale clause?
    This subject is discussed around 32 minutes of the podcast.

    1Reply
  • Troy DeLong
    Real Estate Agent · Lansing, MI · Member since 2020 · 170 posts · 91 votes
    4y

    Was VERY intrigued after listening to the BP Podcast episode with Pace Morby discussing Due-On-Sale insurance. But that Equity Assurance website does absolutely nothing for me... Most of their site is "under construction". No contact information. No pricing. Seems like a dead end. Very disappointed.

    That being said, are there private money lenders out there that will be your DOS insurance? EX: I get under contract on a sub-to with a Seller for a $150,000 remaining balance and want insurance for that potential $150k due-on-sale. Could a contract be made up where private insurer agrees to cover the potential DOS amount for a monthly premium from buyer of, say, $50/month? Or whatever terms the parties come up with.

    1Reply
  • Kyle ConikerBusiness Member
    Lender · Pittsburgh, PA · Member since 2020 · 13 posts · 15 votes
    4y
    Quote from @Tyler Hodgson:

    @Jimmy Alexander - skip the insurance and just get a Fannie Mae conventional loan. See below snip and link to Fannie guidelines regarding Due on Sale exceptions. Just make sure if you get a conventional loan that it's a Fannie Mae loan and not a Freddie Mac loan

    Fannie allows a transfer of the property to: a limited liability company (LLC), provided that

    - the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and 

    - the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).

    Source: https://servicing-guide.fannie...

      @Tyler Hodgson good point with Fannie Mae guidelines. Freddie Mae recently in October 2021 updated their guidelines to reflect something similar. However, Freddie Mac wants there to be a waiting period of 12 months. If you have a conventional loan, I would always check with your lender/servicer to make sure your situation meets all the criteria.

      Permitted Transfers of Ownership subject to conditions

      In situations where all of the following conditions are met, Freddie Mac will permit a Transfer of Ownership of the Mortgaged Premises:

      • - At least 12 months have passed since the Origination Date
      • - Either
        • + The transfer is to a transferee who occupies or will occupy the Mortgaged Premises as a Primary Residence and is:
          • - A parent or child of the transferor, or
          • - A grandparent or grandchild of the transferor, or
          • - A brother or sister of the transferor, or
          • - An original co-Borrower of the transferor under the Note, whether or not related to the transferor
        • + The transfer is to a limited liability company (LLC) or limited partnership (LP), provided that:
          • - The managing member/general partner of the LLC/LP is the original Borrower. If there are multiple Borrowers, all of them must be members/partners of the LLC/LP, and at least one of them must be a managing member/general partner. If the transfer results in a permitted change of occupancy type to an investment property, such change must not violate the Security Instrument (e.g., the 12-month occupancy requirement for a Primary Residence), and
          • - The Servicer notifies the original owner or natural person that the Mortgaged Premises transferred to an LLC/LP must be transferred back to the original owner or natural person prior to any subsequent refinance or modification application to meet Freddie Mac's underwriting requirements
      • - The Servicer has complied with all mortgage insurance requirements applicable to the transfer
      Source: https://guide.freddiemac.com/app/guide/section/8406.4
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    • Nathan GesnerBusiness Member
      Moderator
      Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
      4y

      Even if it does exist, you would be a fool to purchase it.

      Find me one investor on BiggerPockets that has lost an investment because of a "due on sale" clause. I'll wait.

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    • Dolly Caswell
      Investor · Eagle River, AK · Member since 2015 · 121 posts · 45 votes
      4y

      Mark Hern  would you share your knowledge about the “great reward in using subject to legally, ethically and correctly. You state there is great risk in not knowing what you don’t know, and I would agree with that. I sure would like to know how to do this legally ethically and correctly. Thanks Dolly Caswell, Alaska 

      0Reply
    • Catherine Cleveland
      Investor · Rock Island, IL · Member since 2018 · 24 posts · 7 votes
      4y
      Quote from @Ken Dunn:

      @Jimmy Alexander - I was surprised when I heard Pace say that on the podcast. I’ve never heard of “Due on Sale” insurance either. Please post back once you learn more details. I’m curious to know if it actually exists or not. 

      Also, I have some properties that I have purchased and/or refinanced under my LLC. Since the lender is a portfolio lender (using their own money) they can be more flexible. They do not care that the loans are in my LLC. Another big benefit is the loans do not reflect on my credit report and, therefore, have no impact on my DTI.

      They do charge a slightly higher interest rate (maybe .25 to .50) but I’ve been able to move my Debt Service Coverage Ratio for my portfolio above 1.5 and soon to be above 1.6…so a little more interest is OK by me.

      You may want to consider using a portfolio lender.

      Cheers,

      Ken


      Ken be careful assuming that. While not on your credit report, if you use depreciation on your taxes, the bank does use them for DTI; just happened to me. Bank pulls credit AND last 2 years taxes. If those loans are on your taxes, then they will want them for your file.

      0Reply
    • Jeremy Marquez
      Investor · Sacramento, CA · Member since 2021 · 44 posts · 15 votes
      4y
      Quote from @Jimmy Alexander:

      So I was listening to BP podcast on my way to work yesterday and heard Pace Morby mention Due on Sale clause insurance. Ive searched the web over the last 2 days and cant find any companies that offer this. Has anyone heard of this before or heard of a company that offers it? Im assuming this would protect me from the DOS clause when I transfer an investment prop from my name over to my LLC...


       listening to it now ...interesting 

      0Reply
    • Tamara Fontanot
      Member since 2022 · 1 post · 0 votes
      4y

      I’m going thru the same I heard pace Norbi saying that called couple lawyers and no one said it’s. Areal thing. I’m very confused  

      0Reply
    • Manuel Angeles
      Lender · Los Angeles, CA · Member since 2015 · 278 posts · 78 votes
      4y

      @PaceMorby

      0Reply
    • Jim Viens
      Rental Property Investor · Kansas City, KS · Member since 2014 · 604 posts · 222 votes
      4y

      It sounds like it's a product directed specifically to investors getting into Subject-To deals that have a high level of concern about the DOS clause. If I remember the podcast episode correctly they offer a refi into a new mortgage in your name with the same terms as the one being called. If you're experienced and have several deals under your belt with no DOS issues then pass it up. But for someone reluctant to get into Sub-To deals because of a fear of the DOS clause it may be something they could get to ease their concerns. If the numbers still work even with the added cost of this "insurance" then good on them. Go forth and crush the Sub-To market in their area!

      0Reply
    • Moira BaggettPro Member
      Member since 2020 · 21 posts · 15 votes
      4y
      Well ....very interesting that Pace Morby has 300 doors all gotten through seller financing or with "subject to" creative financing...Bigger Pockets podcast published on Nov. 4, 2021.   Sounds like a creative genius to me....and using "subject to insurance" just in case.   If the dude says he does it, I believe him!!
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