Warning to Those Thinking of Taking 'Subject To' in a Land Trust (Long) - Posted by GregNorman

Posted by GregNorman on May 10, 2000 at 20:13:41:


Have you filed a big claim before?
If anyone has, please share their experience.

Like I said… insurance is one of those things that you don’t know if it’s going to work until you need to use it… and you know they aren’t going to want to pay if there is a big claim.

I’m just suggesting that folks do a little research, maybe pay an extra $300/yr, to KNOW that your house is covered (b/c you told the agent exactly what is going on).


Warning to Those Thinking of Taking ‘Subject To’ in a Land Trust (Long) - Posted by GregNorman

Posted by GregNorman on May 10, 2000 at 17:51:34:

I am in no way saying don’t do ‘subject to’ deals, but I did hit a rather big snag when taking title subject to that I wish I had known about before I started (this was my first one). This same month I assumed one of those ‘fully assumable’ loans in my company’s name and ran into a smaller snag, too. What was it?

Insurance. I thought as long as I had the right documentation to send the insurance company, or at least told them how to write it up, it wouldn’t be too big of a deal. Boy was I wrong. The story…

I went to my ‘usual’ agent at State Farm first. Told him exactly what I was doing: taking title in a trust with my company as a beneficiary. My agent has been around for a long time (but only with State Farm) and said he would call up underwriting to make sure. During this same conversation he tells me that they don’t insure properties dealing with Contract For Deeds in any way because they were currently getting sued by a guy who had bought via CFD after he let his ‘renters policy’ lapse and had a water problem that ruined his stuff. Even though the insurance company feels he’s in the wrong, they’ve decided they aren’t going to write anymore policies where a contract for deed is involved. (I’m not sure if this is a local, regional, national thing. Just letting you know you should look into it before you NEED it.) He calls me back about the land trust thing and says underwriting won’t cover it. Well, I had decided to shop elsewhere b/c I DO want the option of selling on a CFD and using a land trust.

Next, I’m driving down the street and pop into a Nationswide insurance agency after seeing a sign. I tell the agent my intentions and he calls underwriting. He mentions that he thinks it will be a commmercial policy b/c the ‘owner’ (beneficiary) is the company, so it may be more expensive. Couldn’t get a hold of underwriting right then so he says he’s going to call me back the next day. That was 3 days ago. Still no call.

By the way… when mentioning the ‘subject to’ deal to the agents, and how I wanted to get a policy that was ‘in addition to’ the owner’s first policy, BOTH thought there was a law requiring them to notify any mortgage company about ANY insurance policy on the property they had a loan on. I mentioned that he may be thinking of a contractual obligation between the original borrower and the mortgage company, but they quickly started saying, ‘No, I believe there is a state law.’ Anyway, back to the story…

So I call my ‘old’ agent up at State Farm again and ask for some recommendations. He gives me the numbers of some smaller firms. I finally find one who says they’ll do it (Thank God). I told them EXACTLY what I was doing. How I may be selling via contract for deed. No problem, they’ve written those before for other investors (great). I told them about the land trust thing, they called underwriting, and underwriting actually told them how the policy should be written (which was almost exactly how it is mentioned in Bill Brochick’s course)… (another ‘wonderful’). I mention that I don’t want the mortgage company on any of the paperwork, and don’t want them notified, because of the possibility of the loan being called due. She said that wouldn’t be a problem. The agent had been in the insurance field for 12 yrs and had never seen anything close to the type of transaction I had brought her and said she had to ask the head dog in the office and the underwriting department if it could be done. And, although strange, they said they could do it.

By the way, she also mentioned something that may cause further issue with PACTRUST users: She said the trust thing wasn’t a problem… ‘As long as you only have one trustee. If you have more than one, we won’t write the policy.’ Interesting.

Moral of story: Make sure you have a good insurance agent on your team BEFORE doing a ‘subject to’. Also, I’d like to add I’d make sure to you tell them exactly what you plan on doing through the whole transaction (including possible selling via CFD on the back end), just to make sure they don’t get nervous. Insurance is one of those things that you don’t know it sucks until you have to use it… and I’d hate to find out they won’t cover something AFTER you need them.

Another thought: I’m kind of worried about switching the original borrower’s existing policy into the name of the trust and having ‘beneficiaries as they may appear’ on the documents. You have no control over the company whom issued that policy and who knows how they’d cover it. I think I’d rather play it safe and get a whole new policy from someone I have chosen and who says they will cover it (my plan from here on out).

Again, I just want to reiterate that I’m still ‘all for’ doing subject to deals. Just be prepared.


Re: Warning to Those Thinking of Taking ‘Subject To’ in a Land Trust (Long) - Posted by JPiper

Posted by JPiper on May 10, 2000 at 22:22:33:


I?m not sure I exactly see the problem here?.other than the fact that you were trying to explain a real estate transaction to a bunch of insurance agents.

I quit using State Farm some years ago. Too expensive, and ridiculous underwriting criteria. I had one agent inspect a house, and decline it on behalf of State Farm because a dust cover was off the electrical box. It was propped against the wall just below the box, so I picked it up, put it back on?and that seemed to mollify this agent until she saw some peeling paint. Later, they offered to insure the property for roughly twice what they were insuring another of my houses, an identical house, roughly two blocks away.

Since then, I?ve dealt with a variety of other major insurance companies?.to include American Family and Farmer?s Insurance. American Family was my favorite. They managed to foul up coverage on two new houses I bought, getting the incorrect insurance on one house and leaving the other house uninsured. They also have the dubious distinction of insuring a buyer of a house from me, who had obtained a loan through a lender, and then cancelling this buyer 2 weeks later because of credit issues. It seems the bank liked the buyer, but American Family didn?t.

I finally saw the light, and took my business to an insurance broker. I would suggest you do the same. On your contract for deed issue, I have several insurance policies written in the buyers name, naming me or an entity as the mortgagee. These are free and clear properties. I also have some written where I am the insured?the buyer has a renters policy for contents. As far as I can see either way is acceptable and is only dependent on your loan situation?..either way, either party has an insurable interest.

If memory serves, I have some policies in the name of the seller (to satisfy the lender), with an entity as trustee on behalf of the XYZ Trust as an additional insured. This was the recommendation of the insurance broker. I have some where the beneficiary of the trust was also named?again at the suggestion of the insurance broker. I can?t fathom any circumstance where a claim would not be paid on any of these policies.

Finally, I would say that it?s fine to explain your deals to the insurance agent?but I wouldn?t expect them to understand the deal, explain it to the underwriter correctly, or for the underwriter to understand it either. I think you should know that the fact that you explained your deal verbally doesn?t mean anything to the insurance company when it comes to paying a claim. The most that it will accomplish is perhaps to make you feel better. A policy that is written on behalf of an entity, and accepted by the insurance company will not have a problem in terms of claims. However, I do think you need to make sure that the insurance correctly reflects who the insured is/are.



Posted by Bill Gatten on May 10, 2000 at 21:06:23:

You?re right about the difficulty in getting insurance on an interest in a simple “land trust” wherein you are the sole beneficiary, and in which the settlor has completely given up his ownership, voting rights, control and power of direction (that?s the kind of transaction we steer away from, and in which the Due on Sale clause is often and issue, being merely circumvented rather than avoided).

However, none of that or what you described (my condolences, BTW) has anything to do with the viability and function of the system known as the ?PACTrust.?

As Glenn from Ohio stated: With a PACTrust, there is nothing that is all that esoteric…the owner of the property (seller) merely places his property into his OWN inter vivos, beneficiary directed, title-holding land trust (and becomes the ONLY beneficiary). At that point, he notifies his insurance company of the trust (if he wants to…he doesn?t have to: even if he didn’t, his trust property would still be covered by the same policy as per insurance regulations?assuming he had the right kind of insurance on it:?Non-Owner Occupant? coverage). Next, he appoints someone to be a co-beneficiary with him in the same trust (such Assignment being by separate document, and being wholly silent and unrecorded).

Next, that co-beneficiary either moves into the property, or assigns another portion of his newly acquired beneficiary interest to a 3rd co-beneficiary, who lives in the property and makes all the payments, while handling all costs of ownership, in exchange for: tax write-off; a portion of the appreciation; equity build-up from principal reduction; etc. (i.e., all the incidents and benefits of Fee Simple RE ownership).

Note that in the PACTrust transaction, there is no sale of the property (no ownership transfer beyond the trust); and there is no point at which legal or equitable title shifts to the resident beneficiary until the trust terminates and the property is [either] sold or re-fi’d. However, note that the PAC Occupancy Agreement provides that as the monthly payments are made to the collection agency for the PACTrust, that aggregate payment includes the costs of the Settlor’s (mortgagee’s) hazard insurance, as well as the tenant’s contents coverage (Renters Policy). And…all along the way, the investor beneficiary (you) has all the benefits of owning an investment property; the resident beneficiary has all the benefits of owning a home; and the settlor beneficiary (seller) has all the same benefits as anyone who has sold a property via anyu kind of seller assisted financing arrangement?except a lot more safety and comfort.

I’ve done thousands of these transactions, and regularly deal directly with the insurance carriers (hazard, title, earthquake, hurricane and PMI) on all of them. And, there actually has never been a single glitch. Do note, however, that there are those restrictive carriers (e.g., AAA) who do not offer non-owner occupied coverage. In those cases we just switch carriers.

Hope this helps.

And BTW, in answer to your question about folks who may have filed insurance claims re. PACTrust properties…'Ever hear of the Northridge Earthquake? In it my PACTrust home had a wall missing; one three story chimney in my neighbor’s daughter bedroom; another chimney in another neighbor’s swimming pool; a cracked slab and all my wiring ripped out (along with thousands of dollars worth collectables, crystal, etc. that had been turned to blorghus). That one was a PACTrust property…and the insurance paid just like clockwork (and hazard and contents both?two different companies). We could even have had $5,000 in FEMA money if we?d wanted it. And note that during that same period of time we had many dozens of Active PACTrust properties in and around the Earthquake zone…never a problem. Don?t know of any fire losses, but they?d be the same companies.

Bill Gatten


Posted by Soraya on May 10, 2000 at 20:36:08:

1- Keep the seller’s policy in his name, just pay for it to keep the lender from finding out about title transfer. DON’T TRY TO COLLECT ON IT IF SOMETHING HAPPENS.
2- Buy another policy and have the beneficiary in your name or the name of the entity in which you took title and do not list the lender.

3- Read attorney Bronchick’s advice on this subject

Boy did you make that hard - its simple - Posted by Glenn-OH

Posted by Glenn-OH on May 10, 2000 at 18:43:19:

  1. Seller converts owners policy to landlord policy.
  2. Puts into trust
  3. Resident buys renters insurance.

You are also wrong about PACTrusts. There is one trustee, multiple beneficiaries.

As the person sandwiched in the middle, you had no reason to get insurance. Seller who is on mortgage must carry insurance to satisfy requirements of mortgage. Any claims would be made by the title holder, who is the trustee, and would be handled within the trust, based on contractural arrangements there. Resident is just a tenant, so just needs tenant insurance. His beneficial interest is protected by the landlord insurance policy, just like everyone else’s.
You probably can’t write a second policy on the property, if any of the insurance companies find out. That is double insurance - what do you think the incidence of arson would be in double insured properties vs. singly insured if it was allowed?
As far as the land contract or contract for deed, unless your trustee is signing for the land contract, you are not doing one. Once the owner sign property over to the trust, the trust paperwork defines the structure (i.e. multiple beneficiaries, lease agreement, etc.), thus by saying to State Farm that your were doing a land contract, you shot yourself in the foot.
My last residence is in a trust, and it took about 5 minutes to convert the policy - with State Farm - and with choosing to explain the trust to my agent, who is a friend.

Re: Warning to Those Thinking of Taking ‘Subject To’ in a Land Trust (Long) - Posted by GregNorman

Posted by GregNorman on May 11, 2000 at 07:43:16:


Thanks for the input.

The person I ultimately used was an insurance broker, as you suggested.

Also, WRT the last para in your post… I think this was my intention from the begining: I wanted someone who could at least understand what is going on (just a bit) so that THEY could put together the paperwork correctly (where I have an idea of how it should be stated). For example: I could find an agent that says ‘Sure, we can do that.’ They write up the policy and it just doesn’t seem to look the way it should. You may think nothing of it until it comes time to make a claim and then you find out things aren’t going to happen the way you thought.

Who knows… maybe I’m wrong. Like you said, maybe the whole thing doesn’t make a difference and all this amounts to making me feel better (when you look at the big picture). I admit, I do feel much better now than when I started. And the next time I call up the insurance broker to tell them what I’m going to be doing and have her write it up, I have a little more confidence that it will be done correctly (and that underwriting won’t have an issue with it). Of course, I will be looking it over before signing the thing.



Posted by GregNorman on May 10, 2000 at 21:16:47:


As I responded to Glenn’s post, I apologize about getting the trustee/beneficiary thing mixed up.

Good to hear about the insurance paying out!

Thanks for the info.


You better check on that… - Posted by GregNorman

Posted by GregNorman on May 10, 2000 at 18:58:47:


Transfering into a trust may not do anything to the insurance, but when they ask the trustee who the beneficiary is (and I’m sure the lawyers will do that if the house burns down) and they find out the original owner of the policy isn’t the ‘owner’, are you positive they will cover it?

There is nothing wrong with having 2 insurance policies… but there is something wrong with trying to COLLECT on two insurance policies. I don’t plan on doing that. And I do have Power Of Attorney from ‘old owner’, just in case there is an issue with the insurance.

I’m not sure if I explained myself properly regarding the CFD. But I know I didn’t shoot myself in the foot. I just told him the plan (buy subject to, have trustee sell on CFD or L/O later) and asked if they would cover.

I was wrong on the PACTRUST thing. I got the beneficiaries and trustee thing mixed up.

And you said ‘last residence’. I’m not talking about my personal residence here. Things may be a lot easier if beneficial interest wasn’t transfered into a company (and just kept in the original owners name).

I just want to keep everything out in the open with everyone in the transaction (except mortgage company).

I’d tell your insurance friend exactly what you plan on doing and see what he says. If he doesn’t understand, or hasn’t asked underwriting, you could be rolling dice.


Re: You better check on that… - Posted by David Alexander

Posted by David Alexander on May 10, 2000 at 19:45:19:

Greg, You are making it harder than it has to be. Just call up your insurance guy and have then put a Landlords policy on it. It’s none of their business who the beneficiary of the property is and it’s also none of their business the way you bought the property. The checks will be made out to the Trustee.

Now considering you make a quick 20k a whack or so, i’d say that these deals are worth it. Put the problems that you have to solve in perspective.

David Alexander