A big sticking point for many real estate investors who like to use the Subject To strategy for property acquisition is: How do I handle property insurance? The issue isn’t as simple as you think, because:
- Home owner’s insurance is always required by every mortgage – it is not optional, so you can’t merely cancel the former owner’s policy without risking the mortgage lender placing a (very expensive) forced coverage policy on the property
- It may be unwise to simply rely on the former owner’s policy for coverage, because in the event of a claim, the former owner would no longer have an insurable interest in the property due to their transfer of ownership to you
- Making yourself the beneficiary on the former owner’s policy might work, but it’s also probable that such a change will give rise to scrutiny from the mortgage lender, and the more scrutiny your deal receives, the more likely it becomes that the lender may exercise their Due-on-Sale clause rights
Before I give you my thoughts on this, I’d like to point out that you must speak with your own attorney and insurance professional about this issue. Even after years of Subject-To real estate transactions being done on a daily basis, there’s still controversy about this issue, so seek out professional counsel to assist you.
I know of 3 different approaches to handling the issue of home owner’s insurance with subject-to transactions:
- Leave the existing policy in place, and get an entirely separate policy that fully protects you and is not associated with the mortgage. This option is by far the most conservative and arguably most reliable. Simply leave the former owner’s policy in place and continue to pay for it so as not to attract the attention of the mortgage lender (the lender is notified every time there is any change to the former owner’s policy). The only down side to this approach is that it’s expensive: You’ll effectively be paying for 2 separate home owner’s policies at all time.
- Add yourself as a co-beneficiary or a “named insured” party on the existing policy. This can give you some right to claim benefits under the old policy if a claim is necessary.
- If you placed the property in a land trust, change the beneficiary/named insured to the land trust itself. The notion of using a land trust to “hide” the transaction from the mortgage lender has some basis in law, as the Garn-St. Germain Act made it a federal law that a home owner can place their own property in certain types of trusts without concern for a lender using the Due-on-Sale clause against him, but lenders have also begun to scrutinize some land trust transactions to make sure that all of the requirements of the Garn-St. Germain act are being met – and in the case of most Subject-To transactions, those requirements certainly are not being fulfilled.
To reiterate, option #1 (purchase of an entirely separate policy) seems the most conservative and reliable. But confer with your attorney and insurance professional before you decide.
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