Re: HELP!! Insurance Problem - Posted by Matt_IL
Posted by Matt_IL on July 10, 2001 at 11:46:53:
Hello,
Disclaimer: I have no experience with this.
Although I have not yet done a subj-to, I plan to start this year, and I have been studying it quite a bit.
It seems to me like one possibility would be to always make sure that the seller does have an insurable interest. I can think of two ways to do that:
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Give the seller some kind of second mortgage, even if it’s something dinky like $25/mo. for a year or something. That would give you time to get the new insurance (with them as additional insured) and get some title seasoning. I’m guessing that even after the second was paid off, their name would probably remain on the ins. unless someone (you) said something. If you can make it for 1-2 years, hopefully the title seasoning and/or the equity will be sufficient that you would be able to refinance the property IF the loan were accelerated.
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Record a performance mortgage. This would accomplish the same thing without having to give the seller any additional $$$. The performance mortgage would basically say that you will perform to the terms of the purchase agreement (i.e. make the payments on the existing loan) and pledge the house as collateral so that if you get like 90 days behind on payments or something, the seller can foreclose and take it back. Of course, don’t make it TOO strong! You might have some sort of weasel clause in the event of acceleration. Also make sure there is no recourse against you personally, only the property. The performance mortgage should expire whenever the existing loan is paid off (the seller will be off the hook at that point). I believe that this is a perfectly legitimate and legal strategy (comments?)
There was a large discussion about this topic not too long ago; search for ‘subject’ or ‘insurance’. As I remember, the general consensus was that most likely the lender WILL see an insurance change, but in order to make it as smooth as possible:
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Use your own insurance agent (that you train) to create a new policy, which will replace the existing policy. Homeowners change insurance companies all the time. This in itself shouldn’t be suspicious.
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Take title in a land trust, not in your personal name. You didn’t mention if you did this.
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The policy will have to be a ‘landlord’ policy instead of the old ‘homeowners’ policy if it is going to be used as a rental instead of an owner-occupant.
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The listed insureds will then be:
a. You or the name of the land trust or someone (you?) as trustee of the land trust. Exact wording varies by ins. company.
b. The seller (if you have done something to create an insurable interest for him)
c. The existing lender will be the loss payee
That’s my .02 worth. As I said I have no experience with this yet, but I hope to start buying sub-to and on lease-options (buy-and-hold) later this year. MOST of the creative methods involve triggering the DOS clause AFAIK except for a land contract wrapped around a VA loan and a PACTRUST (but I believe that involves to SELLING to an owner-occupant; not useful for buying RENTAL property AFAIK).
The experts say not to worry about acceleration, but I lie awake at night terrified of it (really), and I haven’t even bought a subj-to yet. But I hate working at a day job so much that I plan to try it. I personally wouldn’t mind that much if the house got foreclosed (as long as there was no other recourse), but I would feel bad/get a bad rep. for the seller’s credit getting trashed.
Let me know how this turns out, OK? Email offline if you like.
