Subject-To Insurance . . . Shhhh!
A Subject-To investor suggested that he buys subject-to, he simply gets a new insurance policy, and doesn't tell the insurance co about the mortgages on the property. Therefor, they banks are never notified of the new policy.
Does anyone see any problems with this, or is this a good alternative to use?
$CASH$ . . . any thoughts?
BAMZ
[ Edited by BAMZ on Date 11/06/2003 ]
I believe that the problem comes in where the current insurance policy names a new insured. The bank requires the insurance so if the old policy is not paid on then they could have a problem. Am I right John??
Thanks for your thoughts.
I guess if the loan already has taxes, insurance in escrow, and you continued to pay them, there wouldn't be a problem, especially if you had a new 2nd policy in your name only.
But yes, it would be a problem if it wasnt in escrow and the previous owner of course stop paying onthe insurance, the bank would certainly be notified. What would you do at this point?
BAMZ
Let me get my question in on this one too. What about the lovely Trust. If, indeed, you try to get your name on someone's insurance policy and the property is in a Trust (don't you just love those things) do you put the trust's name on the policy or the beneficial interests' name on the policy.....that's if you even decided to go this route.
I admit I've never done a Subject-to, but here's my take on insurance policies.
Say you keep the insurance policy in the previous owners name, and you kept paying the policy along w/ the mortgage, either through the escrow, or separately. This will be a problem if you ever have a claim. Insurance policies can not be transferred from owner to owner.
If you get your own policy, and don't list any mortgages, and the old owner cancels his policy, the bank will not be notified of coverage, and they won't be happy about that. They will either force coverage on you (which is unbelievably expensive), or you will have to furnish them w/ proof of insurance. This will surely cause the mortgage company to look twice at this account, which I've heard y'all say you don't want w/ Sub-to's.
My advice is this. When you buy a property subject to the existing mortgage, have the previous owner cancel their policy, and you start your own policy same as always. List the same mortgagee clause, same as the previous owner. The mortgage company will be notified in the change in insurance companies, and they probably won't notice a change in the named insured, same as they probably don't notice your name on the check sent each month. Y'all have always said on posts regarding Sub-to's, "The best strategy is to not make any waves". Since property owners change insurance carriers all the time, I doubt that the mortgage company will even blink an eye.
BAMZ,
I agree with rentalman, the mortgagee (the lender) needs to be put on the insurance, even if you get your own policy.
In fact, in most cases, the insurance agent will ask IF the property has any liens. Not only would you have to lie to this question (not a good way to start a people oriented business), it's possible that the insurance would not pay out if there was a problem and the lien was discovered.
Add to that IF the seller cancels AND the investor doesn't send his policy in, the lender will put their own policy on it, which is always VERY expensive.
Roger
so what do you do and how do you do it. do you get insurance and who's policy are you getting your name added too.
One concern of carrying 2 policies on the same property is that most policies have "excess" clauses. In other words the policy will pay only excess amounts, if any other policy exists. If each of the 2 policies have such a clause it will create havoc in getting a loss paid...
Wouldn't a POA help. Keep the current insurance policy ( after converted to a landlord policy). IF there was ever a claim use your POA to cash the insurance check. I haven't personally done it but I do know someone who has.
Tom
Technically keeping the current policy, but "converting to a landlord policy", doesn't happen. The landlord policy will be a new contract.
Thanks for the technical correction Norrist. Any insight into the question at hand? Or just good at correcting.
Tom
If you (or your entity) own, or have a financial "stake", in the property, be the "first named insured". The first named insured is the primary recipient of any potential claim benefit or liability protection. An "additional insured" will garner liability protection only. A "loss payee" will have it's interests protected in the event the property itself is damaged. (A mortgagee is inherently BOTH). If the fact that a DOS clause is/would be invoked if the insurance policy changes, I would walk away before potentially diminishing or even sacrificing coverage by trying to "skirt" the correct way to insure the property.
Gentlemen and Ladies.
May I suggest a really sneaky way of handling the problem.
An example;
Mr. Kenneth Jones, aspiring actor had an elderly lady give him a house with a nice big mortgage on it. The this was a PMTD created at time of sale. Mr. Kenneth Jones obtained a policy of insurance on the property all was well.
Mr Kenneth Jones plotched due to his inability to repeat lines and the house went delinquent. I bought the house from Mr. Kenneth Jones who returned to the Abbey Players in England where he could hid his lack of talent and memory behind a fake nose and pantaloons.
I examined the policy of insurance and sent a letter to the insurance company asking them to include another name as co insured person. I also sent a check which was blank. (limited not toexceed $200) They took the check and in due time I received a corrected policy. They filled in the check in the amount of you will never guess. Right on $200. A month latter I sent another letter to the insurance company informing them that Mr. Kenneth Jones was no longer in title and would they drop his name from the list of people they would be paying on any loss..
This they did and all went well for a few years until I paid off the loan with a refinance. At that time I received a lovely letter from the insurance company thanking me for my business and their best to Mr. Kenneth Jones. I also received a letter from the old Lender thanking me for my many payments, most of which were on time and oh yes a copy of the Deed of Full Reconvayance they had filed removing the old mortgage.
Seemed pretty easy, not too complicated.
Pensively Lucius
hmmm...
My understanding is that if you take title subject to, then you are the owner of the property. This being the case, the old owner no longer has an insurable interest in the property.
If this was the only consideration, then a 2nd policy probably would not be a problem as the first policy holder (seller) could not collect due to not having the aforementioned insurable interest.
However, the lender still does have an insurable interest and therefore would be named on two different policies. I am not sure how that would be handled and I imagine the best thing to do in such a case is to contact an attorney and have her guide you.
In addition to statutes, there may also be some case law addressing this scenerio. When in doubt, talk to your attorney.[ Edited by Rogue on Date 11/25/2003 ]
The second policy is not a problem because you will not be filing on the first.
Of course if there is a claim, you will pay the mortgage off as you should do.
The problem with the seller's insurance (if it isn't with a company that will change it to a LL policy) is that once the seller sells, he no longer has an interest in the property, making the policy no longer valid.
There are many ways to handle this depending on which insurance company the seller is currently using. This is just a way that will work every time.
With insurance rules canging every day and companies varying the way they operate from state to state, you had best be open to creativity in dealing with this aspect of the business. It will continue to be challenging.
[addsig]
This is always a problem. The property's insurance has to be changed to a landlord's(LL) policy if you hope to have your insurance policy honor (oxymoron) a claim.
When I have trouble changing the policy with the existing carrier, I cancel the policy and have my agent write a LL policy with the required mortgagee clause, and with the owner of record and me as additional insured. Another document relinquishes to me the owner's proceeds if any loss should occur.
I like Lufos technique. He's one clever hombre. Hey Lufos, the thespian who wore pantaloons and fake nose sounds suspiciously like my father. Did he have a mustache and walk with a light limp???
The 2nd policy could create a problem if the 1st policy is a "homeowner's policy". If there is a personal property loss filed on the 1st, it may open up the "excess" dilemma.[ Edited by norrist on Date 12/06/2003 ]
What do you mean by that?
BAMZ
Would a good solution be to leave the current policy in place and purchase an additional policy to protect your interest? Yes there is the issue of having excess insurance but isn't it simply that you cannot file a claim to both companies?
The only downside I see is cost, and that could potentially ruin the deal.
Here is the hypothetical:
Property has a "homeowner" and a "landlord" policy (both) on it. Fire occurs. Owner files a claim under the landlord policy. So far, so good. However, "tenant" (prior owner), has personal property damage. He must also file claim, but against his "homeowners" policy. The respective insurance company on each claim is bound to find out of the other policy's existence and could (more than likely would) attempt to invoke the "excess" clause of it's own contract, potentially leaving the owner waiting for courts/arbitration to settle...
[ Edited by norrist on Date 12/06/2003 ][ Edited by norrist on Date 12/06/2003 ]
Norrist, who said the tenant is the prior owner. The tenant will more than likely be a different person than the former home owner.
Tom
The example was hypothetical. I wouldn't take the chance with 2 policies. There are better solutions mentioned in this topic. If an insurer has an opportunity to mitigate, or deny, a loss if there are contractual issues, be sure they'll try!
As an added note, if the prior owner moves out, the "homeowners" policy is no longer valid (non-owner-occupied). [ Edited by norrist on Date 12/07/2003 ]
The most likely situation is that the prior owner does indeed move out. With that in mind I think everyone recognnizes the the original homeowners policy that is still in place is no longer valid, and therefor there would be no claims against it anyway.
If you placed a second policy on the property that only showed you as the insured (no banks), and you do the right thing and pay the bank if there were any loses, wouldn't that 2nd policy hold the weight?
BAMZ
If the HO policy is still in place the validity issue is for the first named insured (prior owner). Usually the bank is protected with the mortgagee clause. It's still not the proper solution. In 12 years we have yet to have a loan called (knock wood) by insuring the new owner on a "landlord" policy and naming the bank (and the old owner) as mortgagee and additional insured respectively. I personally wouldn't take the chance of a claim being battled or uncovered by trying to skirt the insurance issue, or hoping something else falls into place.
[ Edited by norrist on Date 12/07/2003 ]