Getting title insurance for a sub-2 house - Posted by Brian_wa

Posted by Chris in FL on May 01, 2006 at 07:58:50:

Thanks, John… I see your posts on here frequently, and always very good! I guess I knew most of what you said here, and I concur. I have got comfortable with the subject-to idea once or twice before, but every time I get close to using subject-to the same questions return to haunt me. Then I forget the details that make it okay (if you can’t tell, I am normally a ‘get the best price, pay cash as is’ guy). I still prefer cash and lower price, but if a subject-to deal presents itself I won’t turn it away (though I will hit up someone that does them every day to walk me through the paperwork, etc.; I have a lot of local investor friends).
I think I mentioned above, I recently had a subject-to deal, and was preparing to do it, but the seller decided at the 11th hour that they wanted my lower cash offer instead (paying $70k cash instead of $77k terms for a duplex worth $90-105k; $1,080 rents; I can live with that).
I hope it is implied that I would perform my end of agreement if it did go subject-to. Fact is, if I did it subject-to, and the note got called immediately, I would pay the lender off. That is just how I operate. The deal, from the beginning, would have to work even if I was forced to pay it off immediately, because I take my responsibilities that seriously. Even though I warned seller of risks, I would never let it go into default. Those who are doing subject-to and not making the payments are slime, and my understanding is that many are starting to receive the fate they have coming to them!
John, thanks again. Best wishes!

Getting title insurance for a sub-2 house - Posted by Brian_wa

Posted by Brian_wa on April 26, 2006 at 13:59:27:

I’m currently buying a house sub-2 and presently hiring an escrow company to help me with the transaction. Well, the escrow officer just called me and asked if I have confirmed with the title company whether they would issue a title policy for a sub-2 transaction or not. I thought escrow was supposed to facilitate that. I ordered a title report via Old Republic. Is there anything I could tell Old Republic to ensure they would provide title insurance for this transaction?

Thank you for your help!


Not sure about Old Republic … - Posted by JT-IN

Posted by JT-IN on April 26, 2006 at 15:44:03:

But I have gotten title ins on Subj 2 purchases thru Lawyers Title. So if Old Rep doesn’t bite, then try another insurer.

You may also be somewhat at the mercy of the actual title company here, and what their comfort level is with closing Subj 2 deals. The title company, being an agent of the insurance company, will have some impact on the outcome, based on how hard they push for the coverage.

There is nothing unusual about Title Ins on a subj 2 purchase. The existing mtg is simply listed as an exception to the policy, thereby creating no unusual risk to the insurer than a typical purchase.


Re: Getting title insurance for a sub-2 house - Posted by Chris in FL

Posted by Chris in FL on April 26, 2006 at 15:31:56:

I could be off base here, but I don’t think most title companies insure subject to deals. Their job, boiled down, is to ‘square up’ all interests in the property, and guarantee the title is clean going forward. This means all lien-holders either a) get paid off if full, or b) state in writing that it is okay for the lien to be transferred to the new owner. Subject to, while it is becoming a routine method of real estate investing these days, is, at its core, deceiving lenders to avoid due on sale clauses. That being said, so much subject to is being done that the rules are changing. The demand in the marketplace is driving innovation. A local title company comes to mind that is owned by investors that do subject to routinely in their own portfolio… Needless to say, their opinions about what is acceptable in regards to title insurance is different from most title companies. They will walk investors through putting property into a landtrust, making the owner the beneficial interest, and recording it. Then, they transfer beneficial interest to investor/buyer, but don’t record it. They don’t require the investor to pay buy/sell taxes (doc stamps, etc.) Somehow in that whole process, they provide title insurance. However, ask yourself, how good is the title insurance that they write when, at its core, it intentionally deceived the lender (due on sale clause) and the government (from taxes due when ownership changed hands)? I don’t know, but I suspect there may be some issues for them down the road. I am not a subject to person, or an anti-subject to person, but I believe in calling a spade a spade. Best wishes!

Re: Getting title insurance for a sub-2 house - Posted by Brian_wa

Posted by Brian_wa on April 26, 2006 at 14:04:23:

By the way, this was the probate/preforeclosure deal that I’ve been working on the past 4 months. I’m hoping that it would come to an end this within the next 5 days. It’s been such a pain. I have never dealt with anything so complex. I had to initiate the probate process (something I have never done before), negotiate a discount with DSHS, working to postpone the sale twice, and also trying to buy this sub-2 as well.

Lucky I’m doing this full time otherwise I would have ended up in a looney bin a long time ago.


Re: Getting title insurance for a sub-2 house - Posted by John Corey

Posted by John Corey on April 26, 2006 at 19:28:42:


You are a bit off as you sort of guessed.

The title insurance is to cover unexpected claims against the title. As the underlying ‘subject-to’ lien will show up the title insurance can be issued to exclude that lien.

I think a better way to look at the situation is the title policy is to ensure that the title is how the buyer expects it to be (liens, easements, etc). The policy is not to say the title is clear or free of all liens and easements.

Insurance is regulated so a company offering insurance has to have met the state requirements for assets, etc. That is to protect the holders of a policy if they present a valid claim.

John Corey

Re: Getting title insurance for a sub-2 house - Posted by Joe

Posted by Joe on April 26, 2006 at 16:16:26:

I believe I’ve seen people talk about getting title insurance that excludes certain liens. So whatever loans are being subject to-ed would be excluded from insurance, but any other claims would be covered.

Re: Getting title insurance for a sub-2 house - Posted by Joe

Posted by Joe on April 26, 2006 at 14:42:53:

Any advice on initiating probate? I’ve never done that before and have no idea how I would even start.

Re: Getting title insurance for a sub-2 house - Posted by Chris in FL

Posted by Chris in FL on April 27, 2006 at 24:40:25:

John & Joe,
Any idea what percentage of title companies will insure subject to?
I appreciate your feedback, and you make it apparent that you can get title insurance on subject to deals, but I stand by my statements all the same. A partner and I recently looked at a subject to deal (eventually negotiated lower cash price), and talked to three title companies. Two, including one I have dealt with at least a dozen times the past couple years, said they could only do it if lender provided written approval of us assuming the loan. Only the more progressive title company (owners are subject to investors) would do title insurance without that lender approval. Also, your thoughts on my statement that subject to, at its heart, purposely misleads lenders to avoid due on sale clause, and, as done by most investors I know, also purposely avoids buy/sell taxes when beneficial interest is transferred? You don’t agree that the title insurance company could get itself in hot water for intentionally helping investors defraud lenders (due on sale) and the government (doc stamps, etc.)?
Thanks for any feedback. I am curious how others see this issue…

Re: Getting title insurance for a sub-2 house - Posted by Brian_wa

Posted by Brian_wa on April 26, 2006 at 14:52:13:

I went and hired a probate attorney to represent both the seller and I. It costs me nearly 5k for his service. What a drag. But I’m happy as long that I reach my objectives.


Re: Getting title insurance for a sub-2 house - Posted by John Corey

Posted by John Corey on April 29, 2006 at 18:42:07:


Lets split the question.

I would say that transfer taxes needs to be paid if that is how the law is set up. In one county I know of there is an exemption for when you transfer a property into a trust. The county does not want to collect a tax in that case.

The ability for someone to put a property into a trust for estate planning purposes was set up by federal law as a specific exemption to the DOS clause. Hence it was intentionally created and it is further assumed that as part of the estate planning process the beneficial interest can and will change (immediately or over time depending on how someone is doing their tax planning). Hence the county I am referring to wants to avoid the collection of the tax for a transfer into a trust. The trust is the legal owner and switching the beneficial owner is not something this specific county cares to tax.

  1. I am not a lawyer so this is not legal advice.

If you buy a property subject-to and then the lender sends a letter asking if there has been a transfer do not lie.

One Lawyer/CPA who sometimes posts here will tell you they recommend you send a letter to the lender saying you are taking over the property subject-to. That puts them on formal notice. In his experience no lender has ever called due a loan they received a letter on.

My speculation now…

Maybe they do not know how to handle the notice. Maybe the lender does not care as they are being paid to service the loan so any loan that is called due is going to reduce their servicing fees and otherwise cost them money. Assuming the loan is in good standing the lender makes no money when they call it due. The cash passed to the entity they sold the loan to so what is in it for them to enforce the DOS? You will likely refinance some where else so they are looking at a net loss compared to receiving payments on time each month.

You should never commit fraud. If you buy subject-to you have done nothing wrong as the contract with the DOS is not something you are a party to. The borrower is the one who committed to the contract and they did so without any intent to sell to you so they did not commit fraud either. You need to be clear with the seller that the loan could be called. That if you fail to make the payment or pay off the loan and there is a foreclosure their credit gets hit.

One state’s attorney general rules on a couple of cases presented to his office. He said there is nothing illegal about subject-to transactions if the buyer taking the property subject-to performs as agreed. This means that you make the payments in a timely fashion and do no damage to the seller’s credit as it relates to the loan. You might be committing fraud if you buy subject-to and then fail to deliver on the promise of timely payments (the 2 cases involved buyers who had a bad track record for making the payments).

John Corey