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.