How Do I Buy Insurance For A Seller Financed Real Estate Investment?

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Here’s what to do if there’s an insurance policy on a property that you’re going to buy “Subject-To”.

“Joe, when buying properties Subject-To, how do you deal with a new insurance policy, escrow deposits and interest expense? I have no problem getting properties signed over but I’m concerned with how to document expenses.” – Wayne Malcolm, Lockport, New York

Joe: This is a pretty important part of the process. Most people have a hard time getting started. First of all, congratulations on getting this process going. I’m glad that you’re able to get these things signed over to you. It doesn’t take much as soon as you learn how to talk to sellers and know how to go after the right group of sellers.
 
Joe: There are so many people and free leads with FSBO’s, expired’s and for rent out there, and there are so many different websites with people that are advertising who are desperate to sell their home. They can’t sell them on the MLS, they don’t have enough money, they don’t have enough equity and they need to get rid of their properties.
 
Joe: But they’re still current on their payments. They’ll actually make the next payment for you, or the next two or three payments for you. Many of them that are late on their payments can still bring the payment current. Some of them that have a lot of equity in the properties will refinance the property to you and they can pull their equity out that way. There are lots of different ways to do this.
 
Joe: We have some really good structures to make this happen, whether its Subject-To, Multi-mortgage, land contract or contract for deed or lease option. Subject-To is the best way to buy and lease option is the worst way to buy, and then, when you’re selling, the hierarchy reverses. So, you sell on a lease option.
 
Joe: The reason this hierarchy is what it is because of the control that you have over the property. When you’re taking the property Subject-To, you have the deed to the property. When you’re buying it on lease option, you’re only a tenant with an option, so your ownership position is much weaker and the seller has more power over you.
 
Joe: So, what to do with a property that you bought Subject-To: You’re taking the property subject to the existing loan. All they’re doing is deeding you the property. There’s an existing mortgage on that property. You’re not qualifying them for that mortgage but you’re going to be making the payments for that person. The seller is still responsible for those payments and they’re still deeding it to you because they see the value of you taking over the property.
 
Joe: We’re doing this all the time. This is a very easy, doable process, especially in this market right now. It was working for us great in the boom market but right now in this down market – God, it’s just amazing – it’s the perfect storm for this process.
 
Joe: When you take a property, they’ve deeded you the property. Now it’s got an existing insurance policy on it. What I suggest you do is that you either leave it on there and make yourself additionally insured, or if you do it the way I do it, to where I have all of my insurance policies by the same insurance agent and I’m going to get a landlord policy which is different than a homeowners policy – a landlord policy is cheaper.
 
Joe: There are some other issues depending on whether you own an LLC or you own it privately, depending on how many properties you can buy and how much insurance you can get if your insurance guy knows what he’s doing. Let your insurance guy deal with that.
 
Joe: What you want to do is get a new policy and have the seller of that property write a letter to the mortgage company that says, ‘I’m going to cancel this policy and bring in this new company. Please cancel this one policy.’ That existing policy will then refund the balance of what’s left in there for their annual payment. They’ll typically send it to the seller, so you have to work out an arrangement with the seller to get that money to come to you because it’s your money. You then will make the payment on the new insurance policy that goes in.
 
Joe: Like I said, you can leave the old insurance policy in place and everything will be fine. But I like to have my insurance taken care of by one person.
 
Joe: Anyway, that’s it. Just make sure that the insurance is in your name and that you’re on there as additionally insured. The original mortgage holder is going to have to be on there as well because the lender demands that they are personally on there. I hope that helps.