Subject to and the insurance question. What do you do?
Guru A says do this, Guru B says do this, Guru C says both of them are crazy because he has done over 500 deals and hasn’t done anything and nothing has ever happened to him.
It all kinda reminds me of what we in the restaurant business used to say, “The restaurant business would be a lot of fun if it weren’t for all those dang pain in the tail customers!”
Wouldn’t taking properties subject to the existing financing be great “if it weren’t for the dang insurance?”
Well folks, if you know how to handle insurance, it is a piece of cake, easy as pie and like taking candy from a baby.
So how do we do it? Depending on whom you listen to, you could do it just about anyway but I am going to assume those of you reading this want to do it right. In this instance “right” meaning that if there is a loss, you will be covered and your chances of the DOS police minimized. These are the ways we are going to cover today. We will let all the Gurus sort the other ways out on his or her own.
First you should know some insurance fundamentals.
- The owner of the property, as named on the deed found at the courthouse, must be listed as the primary loss payee. Failure to make sure this is done after getting those sweet deeds will leave your backside (and your house) dangerously exposed. Exposed ain’t good when it comes to real estate.
- The policy you have in place and are relying on must accurately reflect the current occupancy status of the property. This means if the owner on the deed lives there, the policy must be an owner occupied policy and the owner must be the primary loss payee on the policy. If the property is tenant occupied (as will be the case in most cases here) the policy must be a landlord or “fire” policy and the owner/landlord (or his trust, corporation, LLC, etc.) must be named as the primary loss payee. However legal title is held, this is who must be named as the primary loss payee. The primary loss payee’s name is the name that will show through those mailing envelopes when they send the bills, renewals, etc.
- Most insurance company’s first response if there is a claim is to try to deny it. They look for ways not to pay you. Come on all you optimists out there think about it. How do you think they can insure your 200k house for a premium of 1k a year, have a 50k claim and make money? They can’t so they try to deny. They actively LOOK for ways to deny the claim. Don’t give them a reason to be able to do so.
You will find houses to buy sub2 in 2 different scenarios, those with insurance in escrow and those where the homeowner pays for their policy themselves. How you handle each of them will depend on how great your fear of the DOS police is and your tolerance for risk with it.
Some courses will tell you to send a change of address and info to the insurance company currently on record with the property and try to use that one. I even include such a form in my course (The Ultimate Sub2 Guidebook) for those who want to go this route. Let me tell you from personal experience with over 200 deeds taken to date that doing it this way is a tough row to hoe. I recommend you get your own insurance company agent and spend an hour with him explaining exactly what you do and how you do it and what his role will be in it. This way, when you need an insurance thing handled, it is YOUR guy you are calling. You are HIS customer and that relationship is there.
From my point of view, there are 2 ways to “do it”. Insurance that is. ;-)
For Properties with Escrow
The Tingle Way (Maximum Profit & Simplicity)
- I buy a property that has Allstate insurance escrowed in the payment. A couple of days before I take title, I call up MY agent (remember what I told you about YOUR agent?) and tease him about the latest house I just stole…ooops….got the deed on and tell him I will need him to do his thing on Sept 15 with Countrywide Home Loans (the mortgage company on the house). I give him the seller’s name, the loan number and the Countrywide Insurance Department Number.
Actually at this point, I don’t give him phone numbers as he has them all.
- I close on the property. Kitchen table or at my attorney’s office, it makes no difference. By this time my agent has been out and taken his picture and completed any paperwork that needed doing. He knows the date I was closing on so he knows on that date to fax to Countrywide a request for disbursement for payment on the policy and the new policy shows my trust as the primary loss payee, just like my new deed does. Countrywide is of course the lender named as additional insured as well as the seller. The seller added as additional insured will let any mortgage company who may stress over the name on the mortgage not being on the insurance relax a little. It is not always necessary. I didn’t add them for the longest but it just seems to make sense to me know.
No problem with them being on the policy if there is a claim because I use my Power of Attorney I get from the seller to sign for them any check that comes in. Escrow refunds, claims checks, it doesn’t matter. That POA can handle it.
The now useless Allstate policy? I use my POA to cancel that old thing by fax and direct the Allstate agent to send that refund right to Papa.
Papa…that’s me in case you were wondering.
So to recap…………
Get House under contract.
Inform my agent of house and closing date.
My agent issues policy and informs lender of change and need for payment.
I use my POA to cancel existing policy and get refund.
The new policy slides into place where the old policy was in escrow. The seller is happy because the house is sold, the lender is happy because the payments are being made on time in this property and insurance is in place, State Farm is happy because they wrote a new policy on a good property & good customer. I am happy because I just stole…..oooops…..bought another house. Everyone is happy.
Well, everyone except Allstate who just lost a customer. L
The Weenie Way (Twice as Expensive Just Cuz You’re Scared)
1. I buy another house that has Allstate as the insurance company. Again, I let me insurance agent know that I am buying a house and will need insurance on Sept 15.
- I close on the property and go to my agent’s office and write him a check for the premium for the policy. He writes the policy for me in the name of my trust and I tell him to name no mortgage company on the policy.
- I leave the Allstate policy in place, in escrow, being paid year after year. I write my agent a check each year, year after year for the second policy. Yes, I am paying double, paying for 2 policies when only one (mine with State Farm) is valid and will payoff in case of a claim. I do this because with no notice to the lender about an insurance change, there is virtually NO risk of anyone ever finding out about a DOS violation.
The cost to do this is small and I am only joking about the “weenie” business. If you need to do things this way to feel comfortable, do it. It just isn’t really nessessary to get things done.
Some people will tell you it is “illegal to have 2 policies on a property.” Bullchips! My agent will tell you unless you intend to defraud, there is nothing wrong about having 100 policies if that is what you want to do. Having multiple policies does not make them all invalid! If there is a claim, you will file on the only one that is valid, your “out of pocket” policy with State farm. The Allstate policy in escrow became invalid once you got the deed anyway.
In case of claim, you will file on your policy and the check will come to you and only you as there is no mortgage company on it and of course, you will do the RIGHT THING and make sure the lender is made whole, right? I thought so.
So to recap……….
- Get house under contract.
- Inform my agent of house and closing date.
- Close house.
- Go to agent’s office and have him write 2nd policy naming no mortgage company. Pay for it out of pocket each year.
- Leave existing escrowed mortgage in place doing nothing.
Make sense now?
For Properties without Escrow
For properties without escrow, the Tingle Way is really the only way to go. Unless you want to actually go out and pay for 2 policies with one in the seller’s name and one in yours you have no choice.
The great news is, 90% of the sellers you deal with will have an escrow so you won’t have many times to have to deal with it.
Remember, all these forms, faxes, etc. all go to people in the basement of some lender hundreds of miles away from where you are. They really don’t spend all their time around the water cooler talking about that investor in Richmond who just tried to slip the old “escrow insurance subject to” trick by them. They have forms with boxes on them that have to be checked off and that is what they do, check them off.
Property has Insurance? Check!
We are listed as lender? Check!
Today is Friday, We get Paid! Check!
And on it goes…………
I hope this answers some of your questions about how to handle insurance on a subject to deal. It really isn’t as complicated as it seems. After your first few, you will be doing it like an old pro.
Learn more about insurance and the Sub2 process of acquiring property with no banks and no credit needed right HERE.
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