Subject To Rehab
In regard to doing a subject to on a property that needs rehabbing and then retailing it.
1) How would you handle insurance on it? Keeping the insurance in the name of the seller you bought it from doesn't appeal to me, since I doubt you would ever see a dime if something serious happened, plus I would be nervous if he stopped making the payment for any reason on the policy.
2) What if the seller doesn't move out, are you in the exact same rights to evict him and use the same processes as you normally would if you were buying it conventionally?
I asked norrist to write an acticle about sub2 insurance. He PMed it to me and I would assume it should post whenever the queue allows.
dis is a bump.
1) As far as the insurance goes, get a document essentially a power of attorney from the sellers authorizing you to act on their behalf on any future claims. Now you start making the insurance premium payments. It's your property. If you're not comfortable with this, then I don't know what to tell you with regards to the insurance.
2) With regards to the seller moving out. Let them know that you won't do the deal until they're ready. That means they're out. Ask them exactly when would they like you to start making the payments, and take responsibility for the property. If done correctly, you should never be in a position to have to try to evict the seller.
Has anyone actually ever even called an insurance agency and questioned them in regard to paying a claim under your power or attorney arrangement.
Insurance companies are notorious for not paying claims for any reason they can find that voids the coverage.
As for the second part, what about using an escrow company to hold any funds the sellers are going to get and them only being able to get them after they move out satisfactorily?
I'd just get your own insurance policy, no muss, no fuss. Nothing complicated about it. Yes, you'll need to list the lender as additionally insured, but I've done this on several occassions and haven't had a problem. In fact, on one occassion, my CFD buyer got a full blown homeowner's policy that the lender took over my landlord's policy.
Everyone makes such a big deal out of the DOS clause (which is the reason for the POA on insurance, etc.). IF the lender wants to call it, they will. Trying to hide the sell from them will usually only guarantee that it will be called when they find out about it.
As for the escrow, I always go thru the normal closing procedures for my state when I buy. Here, that means an attorney doing the closing.
Roger
Thanks Raj, I'm going to look into your insurance advice.
You can always tell when you are getting an answer from someone actually doing it, rather than a recitation from the last book they read.
Frogger,
It's OK by me if you post or PM the article...
Tim
My 2 cents..
Using a landlord policy can get you an insurance policy yes, but if the property is vacant, insurance companies do not consider it to be a landlord policy, since there are no tenants.
From very recent personal experience if you get a landlord policy while rehabbing and have a claim, you will have your claim rejected and the policy cancelled. The policy you want while rehabbing is one that allows a vacant dwelling. The problem with such is the number of insurance companies that write this kind of coverage is few, and the price is substantially higher (much higher risk of claims in a vacant dwelling)..I had to do a ton of research in order to find a company that would insure a non-occupied property.
You might be willing to roll the dice with getting a landlord policy, but to me it isnt worth hitting craps if they find out you are not a landlord, rather a rehabber.
When you get tenants and all the work done, then change to a less expensive and more available landlord policy. To me it isnt worth getting the policy rejected and possibly the lender informed that you dont have coverage..then who knows what else gets started.
BOL
Wallstreetcappers - all of this still seems to bring back up my original question, no matter what policy you get, how do you get a policy to protect yourself and still avoid the DOS clause with subject to investing.
Surely all of you subject to investors are doing this under the guise of taking the chance that nothing is going to happen are you?
Again, do it simple and get your own policy. Here, I get a "dwelling" policy. It provides general coverage (fire,elements, vandalism, etc.) and I don't have to change it when I get a tenant. Your insurance agent will know what you need IF you tell them exactly what you are doing. Keep in mind that you may have to have a separate liability/umbrella policy.
As far as the DOS, again, it's over-emphasized. What IF the lender does "call the loan?" The money isn't due immediately. They still have to go thru the normal foreclosure proceedings (read in "lots of $$$ lost to the lender, doubtful). You own the property. You've got the deed. Simply go and refinance the property. IF the property was a good deal, you should have no problem refinancing because it should have lots of equity.
Roger
Norrist's article is as follows. It shall post sometime within the next week or so:
.
I will do my best to clarify the timeless issue of how to properly insure a "subject to" property. The obvious dilemma with this situation 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 it's 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-owners 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 issues, 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.
Hope this helps your understanding. Feel free to PM me if you have any questions.
Happy Holidays!