Properly Insuring Your “Subject To” Property
Bottom Line: If You Own It, You Insure It
By Jacqui Price
A subject-to deal is a creative investment strategy that involves an investor acquiring a property subject to the existing mortgage, effectively taking over payments to the lender and assuming responsibility for the home.
While subject-to deals can offer substantial benefits, including minimal upfront costs and quick closing times, they also may introduce complexities in terms of insurance coverage. Understanding the risks that come with subject-to deals and how to properly insure these investments are essential for protecting your financial interests.
Navigating the Due-on-Sale (DOS) Clause
Due-on-Sale clauses grant a lender the right to call the note due (demand full repayment of the loan) upon the transfer of ownership of the property. This clause is of importance to real estate investors engaging in subject-to deals, as the transfer of ownership without the lender’s consent can trigger this provision. There is not a guaranteed way to avoid the DOS clause, as calling the note due because of ownership change is within a lender’s rights. But generally, if payments are being made on the loan and the mortgage company is listed in the mortgagee clause, the lender is less likely to call the note due.
The Wrong Way to Insure a Subject – To Property
Under no circumstances do we recommend the seller of your subject-to property keep their homeowners coverage in force. For one, the seller is likely already under financial hardship. Should a loss occur, and the seller somehow receives a claim check, they could take the money and run. Now you are left with an uninhabitable building and no claim money coming back to you.
Furthermore, being named as an Additional Insured on the previous homeowner’s existing policy is not sufficient coverage. If it is discovered that the ex-owner, the First Named Insured in this case, no longer owns the property, it is fully within the insurer’s rights to deny a claim since the policyholder no longer owns the property.
Even if by some chance you manage to get the claim paid, as mentioned above, you are not the entity that will receive the check, as you are not the First Named Insured.
Additional concerns include carrying two insurance policies on the same property. Most policies have excess clauses, stating that the policy will only pay excess amounts if any other policy exists. If one of the two (or both) policies has such a clause, it can create major problems in getting a loss paid.
Consider this scenario: following your acquisition of the property through a subject-to deal, you and the former owner reach a mutual agreement allowing them to continue residing in the property and remit monthly rent payments to you. You obtain a non-owner-occupied insurance policy and the previous owner’s policy remains in place. A few months later, a fire occurs, and you file a claim with your insurer, so far, so good. However, the tenant (previous owner) has personal property damage, so they file a claim against their existing homeowners policy. The respective insurance carrier on each claim is bound to find out about the other policy’s existence and could (more than likely, would) attempt to invoke the excess clause of its own contract, potentially leaving you waiting for courts/arbitration to settle. In this scenario, we recommend requiring your tenant (the previous owner) to carry renters insurance. A renters policy will protect their personal property, whereas a homeowners policy for a structure they no longer own, will not.
The Correct Way to Insure Your Subject – To Property
The most important thing to remember when acquiring any type of property is this: 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.
The proper way to insure a property acquired through a subject-to deal, is to have a non-owner-occupied “landlord” policy, with yourself or the owning entity (whichever is listed on the title of the home) as the First Named Insured. The lender will receive notice from the carrier once the homeowners policy is canceled. If they are doing their job, they are hounding their borrower for proof of replacement coverage. This is where the policy you purchased will suffice. When reviewing the Evidence of Insurance you provide, the lender will make sure:
» Their mortgagee clause is listed correctly to protect their interest in the property.
» The insured value meets or exceeds the amount of the loan to satisfy the lender’s interest in the location.
» Most importantly, their borrower must be listed somewhere on the certificates.
The seller should be listed as an Additional Interest only on the liability certificate. Should there be a liability loss where the buyer (you) and seller are named in a lawsuit, the seller would have protection. Once again, do not add the seller as an Additional Insured on the property coverage or list them as a Named Insured on the property policy. If the property suffers a loss and the seller’s name is on the property policy, it is also on the claim check. You do not want to have a check you are unable to cash if you cannot reach the seller to get it signed.
Bottom line: if you own it, you insure it.
Do your due diligence and make sure the insurance company you work with can insure your subject-to properties the right way.
