Hey, gang, this is Mike with My Real Estate DOJO and today’s about insurance secrets for ‘subject to’ real estate investing.
Understanding insurance when it comes to buying property ‘subject to’ existing mortgage. Let’s dive in and get started. Before I go on to this, let me tell you guys that I am not an insurance specialist nor am I a lawyer.
When I buy a property ‘subject to’ there is two ways that I have done it. In the beginning phase, I was so scared that the bank is going to call the note up, I was so scared, so what I would is I would buy additional policy for the property I just bought. The way it would work is, let’s say I just bought a property X from a motivated seller, the seller had an escrow, which had an insurance policy from it.
What I would do is I would go and buy additional policy outside of escrow that covered this property. In essence I was paying double insurance. The reason I was paying double insurance is two-fold. Fold number 1 was I understood that the underlying insurance policy that was in the escrow would not cover me or the property or the previous owner in case there was a loss.
The reason the insurance company would bullshit out not covering it is they’d make a claim that the previous owner doesn’t have an interest in the property, which is the true. The previous owner doesn’t own the property anymore.
Therefore, they are not going to cover the property because they’ve already sol their interest in this property, which I think is pretty fair, because they don’t own the property. The second reason why I’d buy double insurance is because I was scared.
I was scared that the bank was going to realize I just bought Mr. X’s house and since I changed the insurance policy, they are going to get notified. Here’s the secret here. The banks don’t have somebody looking at the records like “Hey, Mike just bought a property”. No, the way they get notified from my understanding is that once you change the insurance policy it is now going to reflect your name instead of the old sellers name, that’s how lenders get notified or get tipped of that the deed has been conveyed or the title has been transferred to some other owner. Therefore I bought double policy for two reasons: 1). I had fear 2). Understood that the underlying insurance policy that was under escrow was not going to protect my interests in this property. That is one way to do it.
The pros of buying double insurance is that you’re shielding yourself from the lender finding out that the interest of the property has been conveyed to you. That’s one of the benefits of it, which I like and that’s why I used it. The cons of it is you are paying two insurances and that is expensive. Say the insurance is $150 a month and now you have to pay $400, which eases up to your cash flow.
After a while of me doing it I realized I hate paying this double insurance and I’m going to switch to option number 2, which I am going to tell you just in a second. Now we talked about the pros. The pros are we buy double insurance, you’re going to cover yourself and increase your chances for the lender to find out that you actually bought this property, because every property you buy actually has a clause on the deed of trust, which says that if the seller sells his interest to some other party the lender has a right to foreclose on the property and accelerate the note. Therefore if you want to protect yourself to the most extreme, I would go with option number 1, because I did want to protect myself and I was scared, so I bought the double insurance.
The other way you do is that you actually cancel the sellers old insurance from escrow. Let’s go back to the same situation- you bought a home from Mr. Y and Mr. Y had an escrow set up before closing or right closing happens, I have my insurance company buy a new policy for this property and say, this is the day it needs to go into effective, right before closing.
Then what I do is I cancel the previous sellers escrow insurance and have my insurance agent send them the new declaration of interest, which includes me as the owner of the property now instead of the old seller. Yes, the bank actually gets notified and it does increase my chances a little more, but I haven’t had a bank call a loan call me. Is it possible? Yes, it is possible.
But I think honestly I am going to have a better chance of getting multiple car wrecks than a bank call a loan on me. For me it is definitely worth it. Option number 2 is that I cancelled the underlying escrow insurance and I’m buying my own policy and put it in place. The pros of that is that I will only have to pay 1 insurance policy and the cons of that is I increase my chances just a little bit more so the bank knows that the transfer of interest has happened between me and the previous owner.
Now for me, the way I have set it all up. I have had a couple of losses. They weren’t all losses and the insurance company has never had a problem with any of the losses that I had. I am not a big fan of insurance and I think they are a scam, but in America you’re going to need it. Even though my clients were paid it took a hell of a long time to pay for it.
I guess what I am saying is if you’re a buy and hold guy you cannot just have no money. You’re going to have some money stashed up to be a buy and hold guy, because even though there is an interest out there, let me give you an example, I had a roof that got damaged, I ended up paying about $5000, it’s a pretty big house.
Eight months later I finally received part of my money from the insurance and they are still debating whether to give me my check. Their story is: “Hey, I sent you the check, you never got here. I sent you another check it never got here” and in that stuff just comes around guys. So that’s what the insurance companies are.
What I am trying to tell you guys is, even though episodes about insurance, if you’re a buy and hold guy, you better be able to self-ensure yourself, because if you’re just to rely on these interest companies, then you’re going to be lying in a whole lot and its not a good feeling. You’ve better have your money stocked up, so if the roof goes out, you are able to help your tenants before the insurance actually comes in. Some insurance companies are really good, some are shitty as fuck.
Understand that just because you have insurance, doesn’t mean they are going to write you a check right away. You may end up paying for it, you may have to go back to them to get your money that you are already paying on your policy. Do think about that. Coming back to the subject, there’s two ways to structure a ‘subject to’ insurance that I do. Let’s recap, you could 1). buy the home that has escrow and the escrow whole seller has insurance in place. You leave that insurance and the escrow in place. Then you would have to go and get your own insurance from your own insurance company to cover the same house.
Technically that house is going to be double insured. Some people would tell you this is wrong or fraud. I’ll tell you its not fraud, its additional comfort in case of loss. The pros and cons that we discussed of option number 2 are that you find a motivated seller, he has escrow, there is interest in place. What you’re going to do in option number 2, what I do is I cancel the insurance that the escrow provides and I get a new policy and I have that agent submit it to the lender and have that as the official policy. Now we talked about the benefits and the cons of both of them.
Now this is why I love ‘subject to’ properties, because even though I didn’t go out there and get a loan under my name or didn’t have to use my money, I am still protected through taxes, being able to buy insurance. In reality this like any other transaction is not my social security and is not my money put up, it’s other people’s money. That’s why I love this technique, because as an immigrant to America, as a refugee to America, I really saw the opportunity to with whatever money I had to grow it without paying all these junk fees with the title company, because the seller that I buy the property from, they’ve already payed all those junk fees for closing costs.
Now if you don’t know what the closing costs are, please watch my video about closing cost, so that you understand what is the closing cost in every transaction as a real estate investor. I forgot to mention that if you want to know how to do the option 2, which is cancelling the online interest, what to put on the paperwork, which is submitted to escrow you have to actually put all the seller’s information on there too, so it doesn’t make the banks actually pissed off. If you’re doing it incorrectly, they are going to get more agitated giving you a higher chance of them calling a not in.
If you want to know exactly how I’ve done it on my multiple rental properties without the bank getting upset, then please let me know, I’ll upload those files for you or just a couple of pages, guys.
If you really feel like I am giving you value, please support me so I can get motivated. It is not because of the money, but it just pumps me up that you guys really like my material, so I can do more for you guys.
This is Mike with My Real Estate DOJO, go out there and hustle and bustle. Have a great day!