Subject-To: What's the exact process?

Question

Hey BP,

So I'm getting pretty interested in this subject-to idea. It is creative investing after all, right? I understand you need a back up plan in case the loan is called on, but it seems some investors have had much success with only one or two ever having a loan called on, and usually they are able to work with the lender on it, or use their backup plan to pay the place off and do as they will. This part I understand. What I don't understand is the actual process from contract to closing, and the insurance. If someone could explain to me the process I'd be really grateful. I'm a bit confused as to what the insurance is that everyone refers to, and what they are talking about when they mention getting a landlord policy with so and so being listed first and then the old mortgage owner and lender being listed as second on the insurance.

All I understand is step one, which is going to an attorney and getting a contract drafted that says you will be taking over payments, they will be transferring the title to you, here's what happens if you don't pay, and here's what's required of both parties.

Also, is this considered speculative? I would imagine that this isn't the go to strategy when the homeowner has equity, so you could only do this on a home where they have paid a small amount of what the initial loan was, or they owe more than the house is worth. In that case, they (or I) would have to bring money to close, is this logical?

Thanks,

Jason

Jon Holdman · Answer

The purchasing process is exactly the same as for a normal purchase. The key is you get a deed that states its subject to the existing loan and the title insurance policy will have an exception for that loan.

A "landlord policy" refers to insurance. If you own and live in a house you want homeowners. If its a rental you want a landlord policy. Subject to isn't relevant here.

When you have an insurance policy on a house with a mortgage policy, the mortgage holder is named on the policy. When you have a claim the checks from the insurance company will have your name and the name of the mortgage company. You have to get the mortgage company to endorse them before you can cash them or give them to your contractor.

I've just been through this and it is a pain. I don't really see how you will even manage to collect on insurance for a subject to deal. What you really want is an insurance policy in your name and the lender's name. But if you ever get a check, you'll have to get the lender to sign it. Maybe they will if you have a power of attorney from the former owner (who's still on the mortgage.) Maybe you have to pull the former owner back into it. IDK. This, in my mind, and having gone through it recently, is the scary part. I think there's a real possibility you could have a legitimate claim, then insurance company is willing to pay out, and you just cannot get the checks endorsed.

If the house is underwater and you buy subject to you are assuming that liability. I guess it might make sense if its only slightly underwater and values are appreciating.

If there is equity, the seller may still be willing to walk away. Realize that "equity" is always less than "value - loan balance". Commissions eat up a big chunk of equity.

Jason Eyerly · Answer

I guess it's the closing process and what a title insurance and what not is what I don't understand. I'd ask for explanation but I would like to think that I will learn about this in my licensing class. Thanks for the info, I really appreciate it.

Subject-To: What's the exact process?

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