A Subject To deal is a creative investment strategy that involves an investor acquiring a property subject to the existing mortgage, effectively taking over payments to the lender and assuming responsibility for the home. While Subject To deals can offer substantial benefits, including minimal upfront costs and quick closing times, it also introduces complexities in terms of insurance coverage. Understanding the risks that come with Subject To deals and how to properly insure these investments is essential for protecting your clients’ financial interests.  

Navigating the Due-on-Sale (DOS) Clause

Due-on-Sale clauses grant a lender the right to call the note due (demand full repayment of the loan) upon the transfer of ownership of the property. This clause is of importance to real estate investors engaging in Subject To deals, as the transfer of ownership without the lender’s consent can trigger this provision. There isn’t a guaranteed way to avoid the DOS clause, as calling the note due because of ownership change is within a lender’s rights. But generally, if payments are being made on the loan and the mortgage company is listed in the mortgagee clause, the lender is less likely to call the note due.  

The Wrong Way to Insure a Subject To Property

Under no circumstances do we recommend the seller of a Subject To property to keep their homeowners coverage in force. For one, the seller is likely already under financial hardship. Should a loss occur, and the seller somehow receives a claim check, they could take the money and run. Now your investor client is left with an uninhabitable building and no claim money coming back to them.  

Furthermore, your client being named as an Additional Insured on the previous homeowner’s existing policy is not sufficient coverage. If it is discovered that the ex-owner, the First Named Insured in this case, no longer owns the property, it is fully within the insurer’s rights to deny a claim since the policyholder no longer owns the property. Even if by some chance your client manages to get the claim paid, as mentioned above, they are not the entity that will receive the check, as they are not the First Named Insured. 

Additional concerns include carrying two insurance policies on the same property. As you may know, most policies have excess clauses, stating that the policy will only pay excess amounts if any other policy exists. If one of the two (or both) policies has such a clause, it can create major problems in getting a loss paid. Consider this scenario: following your client’s acquisition of the property through a Subject To deal, your client and the former owner reach a mutual agreement allowing them to continue residing in the property and remit monthly rent payments to your client. The investor obtains a non-owner-occupied insurance policy and the previous owner’s policy remains in place. A few months later, a fire occurs, and your client files a claim with their insurer, so far, so good. However, the tenant (previous owner) has personal property damage, so they file a claim against their existing homeowners policy. The respective insurance carrier on each claim is bound to find out about the other policy’s existence and could (more than likely, would) attempt to invoke the excess clause of its own contract, potentially leaving your client waiting for courts/arbitration to settle. In this scenario, we recommend the investor requires the tenant (previous owner) to carry renters insurance. A renters policy will protect their personal property, whereas a homeowners policy for a structure they no longer own, will not.   

The Correct Way to Insure a Subject To Property

The most important thing to remind your investor clients is when they acquire any type of property if they (or their entity) own, or have a financial stake in the property, they must be the First Named Insured. The First Named Insured is the primary recipient of any potential claim benefit or liability protection.  

The proper way to insure a property acquired through a Subject To deal, is to have a non-owner-occupied “landlord” policy, with the investor or the owning entity (whichever is listed on the title of the home) as the First Named Insured. The lender will receive notice from the carrier once the homeowners policy is canceled. If they are doing their job, they are hounding their borrower for proof of replacement coverage. This is where the policy your client purchased will suffice. When reviewing the Evidence of Insurance your client provides, the lender will make sure: 

• Their mortgagee clause is listed correctly to protect their interest in the property 
• The insured value meets or exceeds the amount of the loan to satisfy the lender’s interest in the location 
• Most importantly, their borrower must be listed somewhere on the certificates 
• The seller should be listed as an Additional Interest only on the liability certificate. Should there be a liability loss where the buyer (your client) and seller are named in a lawsuit, the seller would have protection. Once again, your client should not add the seller as an Additional Insured on the property coverage or list them as a Named Insured on the property policy. If the property suffers a loss and the seller’s name is on the property policy, it is also on the claim check. Investors do not want to have a check they’re unable to cash if they can’t reach the seller to get it signed.  

Bottom line: if your client owns it, they must insure it. If you have additional questions about insuring Subject To properties, please contact your Sales Manager.