Subject to deal - insurance & tax

[Adriana Rego]

I have a potential sub to deal - 5.5% amortized 30 years 5 year ballon. The seller will let me pay their current lender directly and then send them the monthly difference. The current mortgage / escrow includes taxes and insurance. I have 2 questions

1- What is best way to handle the insurance without triggering the due on sale clause ? I assume we can’t be the primary as that would trigger DOSC?

2- come tax season current lender will send 1098 to seller but since I’m paying I should be the one to reap any tax benefits so I should use that 1098 in my filings I just worry that they also use it for theirs. Will that trigger DOSC? Or even worse the IRS! Is there anything I can do to avoid this or at the very least add verbiage to contract about this?

Any advice / info is appreciated. Thank you.

[Roger Paschal]

First of all, if you can try not to do the Balloon, we just do not know what the future holds, interest rates could be over 20%+++ in 5 years. for instance, like after Sub Prime, 911 or Covid, most lenders were not writing new investment loans. We have a lot of crazy people in the World that have power and make really bad decisions that can and will effect us investors from getting loans.

Please make sure you have a clause in the agreement to extend the loan, maybe at a limited rate hike, like 1 or 2 points for another 5 years.

Insurance is the one area that get investors in trouble, you must be sure you understand this process, I coach insurance agents on how they write a policy for a Sub 2 often because this can be very foreign to them. 

This is the short version but there is more to this, first of all you must work with the insurance company to educate them on how to write the policy, what policy they need to write, educate the seller and get a POA. Make sure the mortgage holder stays on the policy as additional insured.

Tax, being you are moving the deed into your name you need to make sure you have control on where the Bank mails the Statements, 1098, escrow statements and so forth, talk to your CPA and they will make sure you are doing your Taxes correct, every CPA I have ever met knows how this works and how to make sure you can deduct the Taxes.

The seller can not take any deduction for a property they do not own, if you close on June 30th, the seller can deduct the first 6 months of the year and you take to deduction on the other 6 months.

Blogs are great to get basic info, and this is wonderful, I suggest you read any books you can find on Sub 2, and find education too. I work with too many people who screw up and take others down with them.

PM me if you have any other questions.

Rog..