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What Is A Subject-To Real Estate Transaction?

A subject-to transaction generally involves purchasing a property while leaving the seller's existing mortgage in place.

The buyer acquires ownership of the property, but the existing loan remains in the seller's name.

For example:

An investor purchases a property subject to an existing mortgage with a remaining balance of $180,000. The deed transfers to the investor, while the existing mortgage continues to be serviced through the original lender or loan servicer.

The exact structure of every transaction is different.  Because ownership and the existing mortgage may involve different parties, insurance needs to be addressed before or at the time of closing—not after a loss occurs.

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Does The Seller's Existing Insurance Policy Cover The New Owner?

Not at all.  An existing insurance policy contains specific definitions of who qualifies as an insured, provisions concerning changes in ownership, and other conditions that affect coverage.  For a subject-to transaction, we recommend addressing the insurance structure before closing whenever possible.

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Subject-To Insurance For Real Estate Investors

Sams One Stop/Sams Insurance Group works with real estate investors who use creative financing strategies, including subject-to transactions.  We understand that the insurance question doesn't exist in isolation.  You may also be dealing with:

• Existing financing
• Seller financing
• Wraparound financing
• Property management
• Tenant placement
• Repairs and renovations
• LLC ownership
• Trust ownership
• Loan servicing
• Property taxes
• Escrow
• Mortgage requirements

 

Our goal is to help you address the insurance component as part of your overall transaction planning.

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Subject To Insurance Structure

*Primary Insured:  This will be the new owner of the property.  Some insurance company underwriters require that the primary insured be a natural person.  If the deed has been transferred to an entity (Trust, Corp, LLC, etc), the primary insured will need to be either the trustee of the trust, or the owner of either the corporation or LLC to which the deed to the property has been transferred.

*1st Mortgagee:  This will be the loan servicer on the mortgage between the previous owner and the current lender.  Please make sure that the loan servicer's or lender's appropriate mortgagee clause is listed, along with the appropriate loan number associated with this mortgage.  This information can be found in the previous owner's online mortgage account, or on a recent mortgage statement.

*Additional Insured(s):  The previous homeowner that is the named borrower on the underlying mortgage needs to be listed as an additional insured.

I would be more than glad to provide you with a quote for insurance coverage if the property is located in the state of Texas.   Please feel free to shoot me a private message, or call me at 210-788-1034, and I'd be more than glad to assist.

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What Is A Mortgagee?

The mortgagee is generally the lender or other party with the mortgage interest in the property.  When obtaining insurance, the insurance company will typically need the correct mortgagee information, including the lender or loan servicer's appropriate mortgagee clause and loan number.

For a subject-to property, don't guess at this information. Use the current mortgage statement or contact the loan servicer to obtain the correct information.

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What Is An Additional Insured?

An additional insured is a person or entity added to an insurance policy under the policy's applicable terms. The appropriate policy status for the former owner, new owner, lender, trustee, LLC, or other party should be determined based on the actual ownership, contractual interests, and insurance company's underwriting requirements. In most instances, it is appropriate for the previous owner that is the named borrower on the underlying mortgage to be listed as additional insured.

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Subject-To Insurance When A LLC Or Trust Owns The Property

Many real estate investors acquire properties through an LLC or through a Trust.  That creates another important insurance question:

Who should be listed as the primary insured?

The answer can depend on the insurance company's underwriting rules and how the LLC or Trust owns and operates the property.  Before purchasing the policy, provide the insurance company with accurate information about:

• Legal owner
• LLC name
• Members/managers
• Property address
• Property use
• Existing mortgage
• Existing lender
• Occupancy
• Management arrangement

 

Don't assume that putting an LLC or Trust on the deed automatically means the LLC or Trust can be listed on every insurance policy in the same way.  The insurance company must confirm eligibility and the appropriate structure.

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Due On Sale Clause Considerations

The mortgage lender's interest in the property needs to be properly reflected in the insurance policy.  A mortgagee clause identifies the lender or other mortgage interest holder for purposes of the policy.  However, insurance coverage does not eliminate the obligations created by the mortgage agreement.

A subject-to transaction can raise separate mortgage and legal issues, including provisions concerning transfers of ownership.  A federal due-on-sale provision generally gives a lender the contractual ability, subject to applicable law and exceptions, to declare a loan immediately due after certain transfers of an interest in the property.

Sams One Stop/Sams Insurance Group provides insurance services, not legal advice. Consult a qualified Texas real-estate attorney regarding the legal structure of your subject-to transaction and any due-on-sale or transfer issues.

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What About The Existing Mortgage Escrow Account?

This is another issue investors should understand.  If the seller's existing mortgage includes an escrow account for taxes and insurance, don't assume that the servicer will automatically pay a new insurance policy simply because the property has transferred.

The insurance policy and mortgage-servicing records may need to be coordinated.

The investor should verify:

• Whether the existing escrow account remains active
• Who is responsible for paying the new policy
• Where insurance notices should be sent
• Whether the mortgage servicer will accept the new policy
• Whether the investor needs to pay the premium directly

 

Get confirmation from the mortgage servicer rather than relying on assumptions about the escrow account.

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What Types Of Insurance Can A Subject-To Investor Need?

Depending on the property, investors may need to explore:

Homeowners Insurance

For eligible owner-occupied properties.

Landlord Insurance

For eligible rental and investment properties.

Vacant Property Insurance

For properties that will remain vacant under circumstances requiring specialized coverage.

Builders Risk Insurance

For certain properties undergoing construction or substantial renovation.

Flood Insurance

Flood damage is generally excluded from standard homeowners policies and may require a separate flood policy. Texas Department of Insurance recommends considering additional insurance based on property location and risk.

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Common Subject-To Insurance Mistakes

Mistake #1: Assuming the Seller's Policy Automatically Transfers

Ownership changes can affect insurance.  Always have the insurance company review the transaction.

Mistake #2: Not Telling the Insurer the Property Is a Rental

Occupancy matters.  If the property will be rented, tell the insurer.

Mistake #3: Forgetting About an LLC or Trust

The policy needs to accurately reflect the ownership structure and applicable insured interests.

Mistake #4: Assuming Escrow Will Pay the New Policy

Verify this with the mortgage servicer.  If the underlying lender does not pay the new policy out of the escrow account, the investor will be responsible for paying the new policy directly.

Mistake #5: Ignoring Flood or Windstorm Exposure

Standard property insurance doesn't necessarily cover every type of property loss.

Mistake #6: Waiting Until Closing

Insurance should be addressed before the transaction closes whenever possible.

Mistake #7: Treating Insurance as Legal Advice

Insurance, title, mortgage, and real-estate law are related—but they're not the same thing.  Use qualified professionals for each part of the transaction.

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Subject-To Insurance In San Antonio And Throughout Texas

Sams One Stop/Sams Insurance Group is based in San Antonio, Texas, and provides insurance services to property owners and real estate investors throughout Texas, subject to insurance-company availability and eligibility.  If you're an investor acquiring a property subject to an existing mortgage, we can help you address the insurance side of the transaction.  We work with investors who may be dealing with:

• Subject-to acquisitions
• Rental properties
• Owner financing
• Wraparound transactions
• LLC-owned properties
• Trust-owned properties
• Vacant properties
• Investment properties
• Property renovations

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Why Work With Sams One Stop?

Real Estate + Insurance Experience

Subject-to transactions don't fit neatly into a traditional real-estate box.  Sams One Stop/Sams Insurance Group combines experience in real estate, loan servicing, property management, and insurance-related services, giving investors a place to discuss the insurance component of their transaction.

Investor-Friendly Approach

We understand that investors may use creative financing strategies and may own properties through different entities.

Local San Antonio Service

We're based in San Antonio and work with Texas property owners and investors.

One Point of Contact

Instead of trying to figure out the insurance questions on your own, talk with someone familiar with the subject-to transaction environment.

Mr. Aaron C. Sams, USAF Vet.

Texas Licensed Insurance Agent

(210) 788-1034

aaron@samsonestop.com