Benefits of “Subject to” and Insurance

[Patricia Moore]

This post pertains to purchasing property “subject to” an existing mortgage. Investors seem to have strong opinions about the legality of this type of purchase. However, it is not helpful for people to state their unsubstantiated opinion that such a purchase is illegal. Making another investor feel stupid or dishonest has a chilling effect. The purpose of this forum is to share ideas and encourage camaraderie.

The legality of a “subject to” purchase depends upon state law. However, the law is not static and subject to interpretation. On more than one occasion, I have been surprised by a court’s interpretation of a seemingly clear statute or case. Moreover, it is not uncommon to have a split in authority among appellate courts in the same state.

If you want to know how to get a deal done with creative financing, then contact an experienced real estate attorney in the state where the property is located. There are ways to structure deals that accomplish your financing goals and comply with state law. As an investor, I have paid thousands of dollars to real estate attorneys to help me structure deals in their states.

I find there are many benefits to purchasing property "subject to" the existing mortgage. It allows me to leverage my IRA investments, does not require an invasive review of my finances for loan qualification and does not appear on my credit report. My goal is always to pay the mortgage thereby improving the sellers' credit rating. However, I cannot predict the future and managing risk is an important consideration for a real estate investor.

First, I have never had a lender enforce the due on sale clause. Enforcement of a due on sale clause is a right and not an obligation. Second, as a purchaser of defaulted mortgages, I have never enforced a due on sale clause. When a local investor brings my loan current, I am thrilled. I recently had a borrower pay $37,000 to come current on a defaulted mortgage a few days before the foreclosure auction. I checked title and the property had been sold to Lazy Day LLC in Texas. The investor kept the mortgage current for a few months did a beautiful rehab and paid off the loan. A win-win for both of us.

Now, for the real reason that I wrote this post. Insurance. I agree that an insurance policy in the seller’s name does not protect the “subject to” buyer. The policy protects the lender but it no longer protects the seller because the seller sold the property and does not have an insurable interest. Since the policy no longer protects the seller, I cannot be added as an additional insured or loss payee.

My solution is to buy insurance to cover my interest in the property. In Florida, Citizens Property Insurance will insure the buyer’s interest in the property. Yes, this requires me to pay for two policies. I have to keep the seller’s policy in force because it protects the lender. But I need the new policy to protect me.

Citizens is an admitted carrier and will write the policy in an individual's name in Florida. It will not write a policy for an LLC but will write a policy for an individual trustee and name the LLC (beneficiary) as an additional insured. If you want the LLC to own the policy directly, then Lloyds will write the policy. On a $180,000 house, Citizens quoted me $1,600 for an individual (trustee) policy and Lloyds quoted $2,300 for my LLC.

I’m not giving anyone legal advice. Only sharing information.