Accountant · San Francisco, CA · Member since 2020 · 35 posts · 13 votes
Hi all,
Im looking for any insight on insurance in a sub to / seller finance deal.
1. For sub to: Since I would be taking over title to the property, but the mortgage is still in the sellers name, how does the insurance company view this?
2. For seller finance: I wouldn't have a traditional mortgage, so would the insurance company treat this differently?
1. I don't know either, but I think its screwy. A fundamental "principal" of insurance is having an "insurable interest." Basically, you have to own the property. So, you have Title and thus all the interest in the property. So, your seller can't take out a policy. You need to take out the policy. I think you just need to add the mortgage clause as an additional insured. Its part of the standard mortgagee clause. As mentioned, to make that change, the mortgage servicer will have to be notified. Then, the Note Holder should/could know about it.
The Due on Sale clause is tricky since just about every Note is resold on the secondary market and usually resecuritized. So, it doesn't help the Note holder to call in the Note --- unless you default / become nonperforming. They always keep saying the "bank will do this.." But, the "bank" doesn't hold the Note, unless its a true "portfolio loan" (as I think is the current term).
2. Doesn't matter. Its a "normal" deal at this point. Its just a mortgage. The Note is held by a private individual and you gave the individual a mortgage. Your seller is acting as the "bank/lender."
1. I don't know either, but I think its screwy. A fundamental "principal" of insurance is having an "insurable interest." Basically, you have to own the property. So, you have Title and thus all the interest in the property. So, your seller can't take out a policy. You need to take out the policy. I think you just need to add the mortgage clause as an additional insured. Its part of the standard mortgagee clause. As mentioned, to make that change, the mortgage servicer will have to be notified. Then, the Note Holder should/could know about it.
The Due on Sale clause is tricky since just about every Note is resold on the secondary market and usually resecuritized. So, it doesn't help the Note holder to call in the Note --- unless you default / become nonperforming. They always keep saying the "bank will do this.." But, the "bank" doesn't hold the Note, unless its a true "portfolio loan" (as I think is the current term).
2. Doesn't matter. Its a "normal" deal at this point. Its just a mortgage. The Note is held by a private individual and you gave the individual a mortgage. Your seller is acting as the "bank/lender."
@Peyton From when you take over a property "subject to" there are several documents you need to create and you will need to adjust the insurance policy slightly as well. Are you working with someone that can help you structure your "sub to" deals?
For seller financing, are you asking about giving a loan to someone? Or receiving it? If you are receiving it, then it's up to the lender to notify anyone of what they need. If they don't, that's not your problem. If you are lending, then it would be in your best interest to be added as a mortgagee on the policy.
I hope these things make sense how I am describing them but I would also recommend getting with some type of an advisor/instructor on these techniques. If you don't do something right...it can get sticky.
Existing loan is in someone else's name you cannot get hazard insurance that the loss payee AND adequate coverage will pay you in the event of a claim. If you get insurance in your name/lender you notify the servicer/lender to call the loan. Any claim check is written to servicer/lender jointly with the borrower on the loan. You can't cash the check. You can't negotiate with the claims adjuster to get properly paid. Servicer will not talk to you.
Thank you for your input. If this is the case - how do investors structure creative deals like sub to? Considering the countless deals that have been done, im sure there must be a way to work out the insurance piece
You wrote there is no lender no bank no servicer involved, am I misreading that now? ? If is a single human they may not ask for the loss payee for months, or ever. Do you have a copy of the note? If is a human person they may have reasons to want to continue monthly payments to avoid capital gains, I suggest you talk to them or the heirs. If is a NonQM or conventional or even hard money lender type you can't get adequate coverage, you assume the risk that prior owner or single human keeps the check and no repairs ever get done an you can't collect rents or live there if red tagged. This is the risk of not legally assuming the note. You fold.