Changing Insurance When Lumped into Mortgage Payment?

General Real Estate Investing
1

I found a great house with a great couple selling it to me sub2. However the $700 loan payment includes tax and insurance. I’m going to have to get that insurance switched over to a landlord policy with me as the beneficiary or additionally insured. How am I going to do that without alerting the lender that something has changed? I’m sure the price will be a few dollars different so since it looks like the lender is paying the insurance they’ll know somethings changed. What should I do?

The taxes are included too, and I’m guessing they have a homestead exemption meaning that the taxes are around $1000 if you live in it yourself and $2000 if you don’t. That would have to be changed, I guess? Since that’s not as important as the insurance I could go without changing it, right? Homestead Exemption is something that in all the books I read has never been mentioned. I’m more worried about the insurance though.

Thanks in advance. I’m looking to get them to sign this one tomorrow!

2

Lenders are used to seeing primary residences turn into rentals and property tax increases are normal even without a change in ownership. As long as the property is insured for at least as much as is needed to pay off the loan, the lender probably won’t be concerned if the seller’s policy changes from a homeowner’s policy to a rental dwelling policy.

What you need to be concerned about is the hazard insurance policy itself. If the seller has given you the deed, then the seller no longer has an insurable interest in the property. The seller’s insurance policy will probably not pay any claims for any damage after the title transfer took place.

You need to get your own insurance policy in force with you as the primary insured.

3

Are you taking control of the property directly or through a land trust?

If directly then I would have the seller fill out a Power of Attorney letter and a Letter Appointing Management. The latter document can be sent to the insurance company letting them know that you are in a management position of the property and you have a right to change the policy.

Typically what I do is send in this letter to the insurance company and ask that my company be added onto the policy, keeping the original owners on the policy.

In any case, I typically ask the seller not to cancel their policy until I get a new one in place. On top of that, I also tell the sellers that I will cancel it.

If you are closing through a land trust let me know and I can outline the steps I follow when changing out the insurance for this as well.

Hope it Helps

Gary Graham

4

Hey, thanks for the replies guys. Yes, I’ll be taking title through a land trust and assigning their beneficial interest to me. I will be getting the Power of Attorney too, I already have the form printed for them to sign. I even have a letter to the insurance company which says, “please name tjdean01 as additionally insured and change the insurance to a landlord policy.”

Since they only make one payment, I’m not sure if I would be able to send this letter to the insurance company directly, and, if I were to find it and send it to them, would they change it, tell the lender about the change in the policy, and the lender would tell me the new price to pay? Seems a bit strange to me, but if you guys say that that’s how it works then I’ll roll with it! Is it normal?

I really appreciate the help. My life has been a mess recently and the only thing that seems to be going as it should be is my investing. I was smiling for a good 10 minutes when I hung up the phone with the seller today.

5

The insurance provider will tell you want the new monthly/annually difference is. The insurance company will send a notice over to the mortgage company or the escrow company (if not the same as the mortgage company) letting them know that a change to the policy has happened and that there is a price increase/decrease. The mortgage company will then either make an adjustment to the monthly payments immediately or they will wait until the end of year to make the adjustment.

Hope it helps

Gary

6

I still have a concern that the former owner’s policy will be worthless in this structure. The homeowner creates a trust then assigns 100% of his interest to you. The former homeowner no longer has an insurable interest in the property, and therefore can not collect any claims that may be filed against the policy.

The insurance company may sell the former homeowner a policy all day long and collect the annual premium. But, as long as the former homeowner remains the primary insured, his lack of an insurable interest makes the policy worthless since the insurance company won’t pay any claims that may be submitted.

Just how I see it.

Consult your insurance agent for specific details. Let’s hope I am wrong.

7

If you send in the notice to the insurance company adding the trust / trustee as an additional insured to the policy then the trust/trustee would have an insurable interest in the property.

Since the trust / trustee are on as additional insured, it does not matter if there is an assignment of beneficial rights as the trustee is the executor for the beneficiary, in this case tjdean01.

This would allow tjdean01 to file a claim if something where to happen that would require one.

Hope it helps

Gary

8

Are you sure?

The primary insured no longer has an insurable interest. Isn’t the primary insured the only one who can file a claim against the policy? Additonal insured may have liability protection as an extension of the primary insured, but I am not so sure that the additional insured has any standing to file a claim for loss.

Check with your insurance agent.

9

I just checked with my State Farm insurance agent. According to him, an additional insured is added as a convenience most often when there is a property management firm acting as my agent. When the management company is added as an additional insured, the insurance company will defend me against as lawsuit arising out of the actions of my management company

Essentially, liability protection is extended to the additional insured. Once the primary insured no longer has an insurable interest, the additional insured has no protection and no standing under the policy.

Additional insured can not bypass the primary insured and file damage claims against policy.

10

Guys,

Consider purchasing “Biker Jim’s” Sub to course to learn the ins and outs of insurance. He really has this down to a science.

Ted_IL

11

Ted,

Would you describe how Biker Jim handles the insurance?

12

I own the course and it’s been very helpful, even after listening to dozens of others. I just re-read the insurance section and noticed that a question I asked on here AFTER I read the course was answered in the course! No wonder they recommend to reread things! Anyway, what ggraha01 said is similar to one approach Biker Jim recommends:

And you could do this with an existing policy or else get a new one.

13

Biker Jim is telling you what you can do with the former owner’s hazard insurance policy to hide the property transfer from the mortgage lender. This strategy says nothing about the insurance policy itself.

The problem I am pointing out is that the additional insured does not “own” the policy. The primary insured, the former homeowner, is the owner of the policy. Once the owner of the policy no longer has an insurable interest in the property, the policy protections afforded to the additional insured no longer exist. Even though the “additional insured” may have an insurable interest under the trust structure, the former homeowner’s policy is no longer valid.

The benefit to being and additional insured is that when the primary insured loses the lawsuit brought about by an action of the additional insured, the insurance company will not chase the additional insured’s insurance carrier to recover the loss.

If you follow Biker Jim’s strategy, you as the “additional insured” will have a worthless insurance policy. You can never collect on a claim and you have no liability coverage afforded by the policy. If your only intent is to conceal title transfer so the lender does not exercise the due on sale clause, then Biker Jim’s suggestion probably works.

If you want an insurance policy that provides hazard and liability insurance protections that you can really rely on, then you need to get your own policy in place in addition to the former homeowner’s policy.

Check with your insurance agent for confirmation.

14

Hey, thanks for that, Dave T. I assume you meant to put “get your own policy in place” OR “in addition to the former homeowner’s policy.” There are a lot of small details to sort out.

So, if someone were to take title and was just “additionally insured” and the place burned down, who would get the insurance money? The policyholder…or no one?

15


Hey, thanks for that, Dave T. I assume you meant to put “get your own policy in place” OR “in addition to the former homeowner’s policy.” There are a lot of small details to sort out.

I meant “in addition to” if your intent is to keep the former homeowner’s policy in place to conceal the property transfer from the lender. in accordance with the Biker Jim strategy. In this case, you need your own policy in addition to the previous homeowner’s policy so that you as the primary insured have some damage and liability coverage. Of course if you don’t care to pay for a worthless insurance policy, you can always replace the seller’s policy with your own policy which names you as the primary insured.

So, if someone were to take title and was just “additionally insured” and the place burned down, who would get the insurance money? The policyholder…or no one?

If the named insured (primary insured) no longer owns the property, then the insurance company does not have to pay out anything when the place burns down. There is no named insured with an insurable interest on the policy to pay.

16

NOPE!
Let’s see, what would BikerJim do here…hmmmmmmmm, let’s ask him.

First, there have been some assumptions and statements here about my strategy for dealing with insurance when buying subject to the existing financing, that frankly, are dead wrong.

So, I’ll clear it up.

Here is EXACTLY how I advise to handle the insurance for a property you buy subject to, where the payment for the insurance policy is escrowed with the mortgage payment.

First, like was said, the old policy taken out by your sellers…this needs to be cancelled, because the minute they sell the property to you, they no longer own it and therefore have no insurable insterest.

The correct procedure would be to obtain a non owner occupied or rental dwelling policy, naming the new owner (the trust, trustee and beneficiaries of the trust as they may appear) on this new policy…and of course the lender. Because the payments are escrowed, you simply go to your insurance agent, secure the policy, give the agent the lenders info for mailing the bill etc.

As someone else indicated, the insurance agent/company will bill the lender, get paid, then the lender will asjust the monthly payments to cover the new policy…either right away or with an escrow adjustment down the road.

To sum it up in simple terms:

  1. Obtain new policy covering the property for fire and hazard as a rental or non owner occupied dwelling.

  2. Give the insurance agent the lenders info so they can get paid, and list the lender on the policy. (the lender will require this anyway).

  3. Cancel the old policy.

  4. Enjoy your new property.

  5. think about getting a liability policy for yourself, as rental dwelling/non-owner occupied policies do not generally cover liability. Umbrella insurance is always wise.

Naturally, I do cover this in more detail in my book, but this is a simple lay out of how, what, when, and why.

HTH,
Jim FL
a/k/a BikerJim

17

This is an article by “Norrist” an insurance broker AND a real estate investor. The post came from this site:

http://www.realestateinvestor.com/media/blog/4206/?action=search&keyword=subject+to&page=2

Also notice his business located at:

http://www.nreinsurance.com/

It is a commonly misunderstood challenge: clarifying the timeless issue of how to properly insure a “subject to” property. The obvious dilemma 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 its 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 (knocking 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 contact me if you have any questions.