The insurance situation involved in a subject-to transaction seems to confuse and trip up a lot of investors, and rightly so.
If you’re going to be the new owner, but the seller’s name remains on the mortgage then who exactly should be insuring the house?
The answer is both of you. You see, I’ve done a lot of subject-to’s over the years and when I first started out I was just as confused as anyone. So I talked to lawyers, talked to insurance agents and talked to successful investors at my local REIA meetings.
Here’s what they all told me…
When you buy a house subject-to you are the new owner of that house and your name is on the deed. Since you are the owner of the house it is your job to insure it. Therefore, when you buy a house sub-2 you need to call your insurance company and get a regular landlord/tenant policy on the house.
However, once you’ve done that, you have one more step to do. You also have to tell your insurance company to add the seller as an additional insured on the policy. This is easy to do and should not cost you any money. (I’ve never been charged a cent).
The reason you have to add them as an additional insured is because the mortgage is still in their name, which means they still have an interest in the house.
Now, here’s how it works when I am closing a sub-2 myself. I set up a new policy to begin on the day of closing and I add the seller to the policy. Then I tell the seller to cancel their policy on the day of closing.
One question I get quite often is…
“Isn’t the bank going to realize the insurance is in your name and no longer in the seller’s name?” Yes, they will, and they don’t care as long as it is insured. Usually I just fax them a copy of the insurance document and the problem is solved.
But a few times I’ve been so busy that I have forgotten to send the bank the insurance document. I realized this when I got a letter in the mail that said, “we do not show you have insurance on 123 Main St., please send us proof of insurance in the next 15 days.”
When I’ve gotten those letters I simply faxed in my proof of insurance and everything was taken care of. I’ve never had an insurance problem with my subject-to’s, doing the steps I’ve described above.
Just remember to get insurance, add the seller to your policy and fax in the new proof and you shouldn’t have any problems.