"Subject to" how is it work?

Question

Great Saturday everyone!

I have a seller that have small loan took out last year at 6.5% and I'm trying to buy the property "subject to" and remained balance give him in cash. I haven't done this before and I don't know what's the best way to set things up as far as -

Is title under seller's name or my name? (due on sale clause issue)

--if it remains his name, then do I record option or memorandum?

--he gets tax deduction and it's good thing for them, right?

--I heard if house on "fire" then, insurance will pay who is on the title.

What if I want to refi out in 5 yr or 10yr and not able to hold of her to be okay to do so? What if I paid off in 20 yrs and how do I obtain the reconveyance?

Like I said, I'm looking for advise on best way to set up and pro & cons.

Thanks for your input!

Robert Brubaker · Answer

Best to get a Real Estate Attorney to look over the Deal and advise! My advice: Never Close on any deal that leaves your interests in Question!

Tim Norris · Answer

Hi David...you are welcome! Regarding your question, you are likely technically correct, however a lot depends on the state in which the property is located and how the insurance laws there may (or may not affect) this issue. The "guidelines" I promulgated are general in nature (and by no means legal advice). All that stated, in your example, technically the new owner would be one insured (on the "correct" policy), and the old owner would be another insured (on the "incorrect" policy). In other words, the 2 companies could possibly decline/deny coverage based on the clause I mentioned, each company insuring one or the other parties. Hope that helps...

Account Closed · Answer

@Tim Norris : Great information, thanks! One question, if new owner were to maintain two polices, isn't the previous homeowners policy totally invalid since the first-named insured no longer owns the property? If so, it's hard to see why the excess clauses would come into play since there is really only one valid policy.

Tim Norris · Answer

By no stretch is this legal advice, but handling the insurance is, as you know, a different animal relative to subject-to acquisitions. Hopefully this helps, at least relative to that piece: It is a commonly misunderstood challenge: clarifying the timeless issue of how to properly insure a "subject to" property. The obvious dilemma is the "Due on Sale" (DOS) clause being invoked and the mortgage company calling the note. Though seemingly complex, some common sense rules-of-thumb usually apply. 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 its interests protected in the event the property itself is damaged. (A mortgagee is inherently BOTH). If you decide to keep the "homeowner's" policy in place and be named as the additional insured, be advised. If it is discovered that the ex-owner, the first-named insured in this case, no longer owns the property, expect the insurer to deny based upon the fact the policyholder no longer owns the property. Even if you manage the claim to be paid, you are not the entity to receive the proceeds, as you are not the first-named insured. If you did attempt to be added as a loss payee as well, chances are the insurer will question the necessity for you being named as such. When the insurer discovers you now own the property, they will need to write a new policy. The proper way to insure the property, once you (or your entity) own it is to have a non-owner occupied "landlord" policy, with you as the new first named insured. The bank/mortgage company is named, as normal, as mortgagee. The prior owner should be named as the additional insured ONLY. Naming the prior owner as additional insured will usually keep the mortgage company happy. But, you may ask, why not keep the ex-owner's policy in place? 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... To further clarify the scenario here is a hypothetical example: 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, or new occupant), has personal property damage. He must also file claim, but against his "homeowners" or tenants 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... I wouldn't take the chance with 2 policies. If an insurer has an opportunity to mitigate, or deny, a loss if there are contractual issue s, be sure they'll try! (As an added note, if the prior owner moves out, the "homeowners" policy is no longer valid as the property is now "non-owner-occupied"). Bottom line: if you own it, you insure it. 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. 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.

Victoria E. · Answer

Thanks guys for your advises!!!

Account Closed · Answer

Personally, I prefer to only do sub2's for a short term (fix and flip), that way the loan pays off before much of anything bad can happen ... due-on-sale, seller having second thoughts, etc. I know there are sub2 investment models based on long term buy and hold and that's fine, just not my cup of tea.

Ned Carey · Answer

If the title stays in the seller name it is not a "subject to" transaction. You wouldn't be buying the property. You take title to the property in your name 9 or appropriate entity). This addresses most of you questions. You get insurance in your name with the bank as an additional insured. The risk is the bank may call the note (due on sale). There are many strategies to avoid that but as @Ellis San Jose said that is a book not a forum reply.

Ellis San Jose · Answer

The answers to your questions are too complex to cover all the intricate details here on a bulletin board. My choice would to have control of title to address many of the potential issues.