How to handle Insurance in "subject to"

Question

I will be purchasing a house subject to the existing mortgage. How should I best handle the insurance? The options I see are

1. Contact their insurance and make me the "name insured", then have them as "additional insured"

2. Cancel their policy and get a new one all together.

How do you handle this situation to best avoid any DOS issues?

Steve Babiak · Answer

BP already has lots of threads that touch on this (and with differing opinions on what to do); here are a few:

http://www.biggerpockets.com/forums/83/topics/34344-i-bought-a-house-subject-to-but-i-m-unclear-about-the-insurance

http://www.biggerpockets.com/forums/50/topics/71852-subject-to-insurance-question

http://www.biggerpockets.com/forums/95/topics/15949-insurance-for-subject-to-property

http://www.biggerpockets.com/forums/12/topics/73293-subject-to-purchase-how-to-guide

http://www.biggerpockets.com/forums/61/topics/12973-subject-to-question-regarding-changin-insurer

http://www.biggerpockets.com/forums/83/topics/57404-what-s-docs-needed-to-close-a-subject-to

http://www.biggerpockets.com/forums/432/topics/69301-owner-finance-with-property-insurance-problem

http://www.biggerpockets.com/forums/41/topics/14609-insurance-question

http://www.biggerpockets.com/forums/311/topics/35498-buying-sub2-what-about-homeowner-s-insurance-

http://www.biggerpockets.com/forums/50/topics/22474-subject-to-underlying-mortgage

http://www.biggerpockets.com/forums/50/topics/12495--quot-subject-to-quot-question-informing-the-lender

Grant Kemp · Answer

Agreed. And I'm not scared to death of it, but this will be my first transaction, so I need to do my due dilligence and do everything in my power to keep it from being called.

You guys are great, thanks for the help.

Bill Gulley · Answer

Oh what a tangled web we weave when first we practice to decieve.

Give notice of the sub-2 and have the buyer obtain a new policy, before any lender goes the due on sale route they will give a notice to cure, if you can't do it then fix it then.

If you are scared to death of the due on sale, don't do a sub-2, use a contract for deed if that is allowed in your state. Before a CFD, I have used a lease and obtained a LL ins. policy. After awhile of payment being received I provided a CFD and simply had the buyer pay the premiums and made an assignment of insurance proceeds to the buyer. An owner providing an assignment of loss proceeds to the agent as such is customary for a second mortgage or other lien situations. I suggest you ask your agent to provide you with an assignment.

The mortgagee clause allows a lender to accept loss proceeds and apply it to the loan, this is not customary unless there is a total loss. If it is a significant loss, the lender will allow the property to be repaired and disburse funds required as work is completed, for small losses, the lender usually doesn't even get involved, but they can.

If you have two policies on the same property IMO, now, thanks to everything being tied to the big computer in the sky, the ins. company will find that coverage exists and neither company is likely to pay as much if they had been the only insured. They certainly will not pay the full loss from both companies and making a claim to each would land you in hot water as insurance is to indemnify you for a loss not be a way to make money. So why try to pay for two policies if you can't benefit or mess things up? And, the lender would likely want to know why the A ins. co. is not paying the full loss leading to your deal.

We recently had a comment about the DOS clause not being at all common in Texas, where you can't do a CFD, consult with an attorney and see how insurance is addressed locally in an installment transaction.

Use the Sub-2 when it is appopriate, it's not always the best way to skin the cat.

Michael Quarles · Answer

I think Bill was referring to a form simular to this one...

http://michaelquarles.homestead.com/Assignment_of_Beneficial_Interest_of_Insurance_Proceeds.doc

I think Bill's statement "If you are scared to death of the due on sale, don't do a sub-2" should be a subto montra....

Great job Bill.

Jon Holdman · Answer

K. Marie Poe, I think there is minimal risk right now that these loans will be called.  Not zero, but pretty close.  However, when I first moved to Houston in 1982 OO rates were 15% or higher.  Negative ARM was standard. By 1987 "jingle mail" was very popular.  I bought my first house about that time, owner carried at 9%.  I just don't see rates staying where they are now for the long term.  Eventually the banks will work through this foreclosure mess.  Rates will, I believe rise.  Then there will be a massive wave of  calls on these loans.  If you have a portfolio of a dozen rental, or even three or four, that are subject to's, its going to be difficult to have a massive refi all at once.

If you do have a subject to deal called and you can't pay it off or refi, I think sellers, who may have forgotten all about the deal, will start suing.

Short term, like for a fix and flip, I think this is an acceptable strategy.  Maybe not in Texas where a foreclosure can happen in a month.   But most areas that takes many months.  So,  you finish the fix and get it flipped and pay off the troublesome lender.  But long term for rentals?  Too risky for my blood.  I will fully admit I'm quite averse to this sort of risk.

There's also the issue of just finding these deals.  Its hard to find a good deal period.  Finding a good deal, that has some equity and a decent loan and a seller desperate enough to let you buy it subject to is a TON of work.

Nick J. · Answer

No need for apologies! Steve Babiak is our resident search expert. At times, if I can't find something, I'll just send him a message. He didn't post all those links in an effort to scold you, just make you aware so you can read through some of those.

Don't worry, you're not the only one that sucks at searching for stuff, I'm also a member of the sucky search skills club. Thankfully we have him though.

Account Closed · Answer

@Jon Holdman  Why would you let a loan being called due prevent you from taking a deed sub2?  Lenders can call a loan due, but there there is no "risk" if you can pay it off. If you have the money or credit to pay off the loan in full should it be called due, sub2 is just another form of leverage.  Taking over loans with no equity or bad terms and where there is a slim chance of paying off in full if DOS comes up puts the seller at risk, IMO, and shouldn't be done (again, just my opinion).  But controlling a property with equity and a decent loan in place?  What's the risk?

Steve Babiak · Answer

BTW - the very last thread that I posted earlier has some tips in it on how I do some of the searching; it is an old thread though and BP has made some changes that "break" some of the items I posted.  But that post I made was so good that some blogger copied it verbatim with no credits / attribution whatsoever.

Grant Kemp · Answer

geez, I'm sorry. I try to search for stuff before posting, but just realized that I had wires cross in my brain.

I had searched and found nothing for "Investor friendly Dallas insurance"...then I posted this question with the "well nothing came up" in my mind.

Sorry about that...

Grant Kemp · Answer

My understanding is that if you're the "also insured" you are second in line for any claim checks. If you make a claim, then mortgage owner would be the one who got the check.

This may be good if the mortgage owner would play ball and provide the money to me, the homeowner, but you can never be sure.

How to handle Insurance in "subject to"

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