Buying in an LLC name and/or transferring into an LLC after closing

Ok, so I want to get financing for property through a local bank. However when I talk to the guy I’m dealing with at the bank, he is telling me that he DOES NOT WANT me to transfer a property into an LLC name after closing because of a clause. How am I supposed to protect myself with an LLC if I can’t transfer the property?? He did say I could buy the property in an LLC name…How can I go about doing this if I don’t have any LLC currently. I also need to get my offer in, so my offer would be in my name and not an llc name. Also, how will this affect me when it comes to refinancing in either my personal name or with an LLC name?

How can I do this? He said alot of people do it with the bigger banks because they don’t really care as long as you’re paying on time, but he said they since they are a local bank, they watch over that stuff and he “would be offended if I did that”.

Do I need to just form an LLC QUICKLY and purchase the property in an LLC name? Is there something I’m missing when it comes to transferring a property to an LLC? Will I just need to refi after closing with a different institution or with this bank to get it into an LLC??

We set up our LLC once we knew we were going to make a move on a property. It doesn’t take the state very long to get things set up if you fill out your paperwork properly. We’ve now registered in two states; it’s not that hard. You fill out the proper forms, pay the fees, and the state registers you and send you your Articles of Organization. This is the legal paperwork stating you are authorized to conduct business in that state.
You can read in the legal forum the pros/cons and protection or lack thereof of setting up LLCs for REI.
If you’re going to do this under an LLC, set it up before purchasing the property and save the headache you’re already feeling with the bank. There will be a due on sale clause in your mortgage. Some people will say they’ve gotten away with it, etc. Why chance it? Just set up now and have all the paperwork drawn up in the business name w/ your personal signature as a guarantee.

How long would it take to form an llc? I want to put in an offer tomorrow and since I don’t have an llc formed I need to submit the offer in my name? Can I then change the offer after I get my llc setup?

When I go to refi this mortgage (in an llc name with me as a guarantee) with a different broker/lender/bank/whatever, should it be an issue if this llc doesn’t have established credit/history? It shouldn’t be a problem since I’m guaranteeing the loan correct?

I have actually been impressed at the amount of time the Secretary of State Office (in both states) have set up things. If you check online on the SOS website for your state, you can see if your desired business name is in use. If you pick one that’s not being used and it complies with their guidelines for names, I don’t think it’s unreasonable to have the state register it within a couple weeks. Considering you’ll have 30 days til closing, you have time. I would just be up front with what you’re doing. In the beginning, we told our Realtor and bank we were in the process of setting up an LLC for the purchase. The Realtor told the seller so everyone was on the same page. We did a search for the name we wanted and found it was available so we did the offer with our proposed business name on it since we were filing the LLC paperwork concurrently.
The business credit history is kind of a toss up. When we went searching for a loan for our current deal, a couple banks wanted to pull that card and say we hadn’t been in business long enough…fine that’s their perogative. We just kept looking until we found someone who wanted to do business with us. So even if you’re willing to personally guarantee the loan (and we were up front with that every time we talked to someone), some banks just may use that as an excuse of why they don’t want to deal with you. Places are pickier now than they were a few months ago. I called around to places in Aug. to ask how much down, rate, terms, etc. The answers I got then don’t match up very well to what we found over the past couple weeks. You may find you’re putting down more than you want to. The LLC will keep you from running up against that 4 loan Fannie/Freddie limit, but the terms will be different.

How should I go about picking a name? Could I just use my “<Last_Name> Properties” or something like that?? Or is there a better naming system possibly? I plan to have seperate llc’s for each property or each other property. Maybe certain naming would make it easier to keep track of the properties?

Also, is there anything specific I need to do/don’t do in the filing for my llc? I suppose it won’t hurt to go ahead and get one now, even if I don’t get this place so I’m better prepared for next time?! I will most likely file tomorrow if I can figure out all the paperwork and a name.

FYI, this offer is going to be for a property owned by Fannie Mae.

Ok was reading and maybe will form an llc name based on the property address e.g. “123 Dorothy LLC”.

One question about this is, I read that interest rate might be higher if I buy the property in the llc name, HOWEVER the guy I’m dealing with at my local bank made no mention of this when we were talking about it. He still quoted me about what the interest rate would be.

I guess I can verify with him tomorrow. I just wanted to get the paperwork started tonight in HOPES that it will be completed by closing (if my offer gets accepted). The other problem with this is, if my off is not accepted, I’m left with an LLC name of an address that I don’t even have!

Any thoughts?

OK, here’s some of my thoughts. Some here will agree; others will disagree. I want you to know I was in your exact situation about a year and a half ago. I knew I wanted to operate under an LLC for rentals, but I didn’t really know squat about how to do any of it. I tried finding books in stores and local libraries. Most REI type books only briefly mentioned this in passing & none of them actually gave instructions on how to OPERATE the LLC. My entering argument into this whole thing was that I was also going to have separate LLCs for EACH property to protect one from another if a tenant at one decided to sue. Boy, how my plans changed. If you read the Legal Forum here (especially BLL’s posts - he and mcwagner have been extraordinarily helpful w/ things and Mark will be doing my taxes now), you’ll find things probably aren’t quite the way you’re envisioning LLCs. That being said, operating one LLC for each property (if your goal is to by several dozen over the years) will turn into a nightmare w/ state fees for the set-up and annual fees of EACH one, all the associated paperwork, separate bank accounts, etc.
Filing the required paperwork (Articles of Organization) with the Secretary of State office is a piece of cake and you should not pay anyone ANYTHING to do this for you. If a person can’t fill out a simple state form, they shouldn’t be in business anyway. The “meat” of your LLC protection will reside mostly in your Operating Agreement as well as having a good amount of liability coverage on your properties (it’s really not much more expensive to bump the limit up to $1 million from what they’re quoting you) and operating your business as a business.
What else should you do besides filing the Articles of Organization? You should get an EIN number for the business. Think of this as the business’ Social Security number. It’s what allows you to set up a business bank acct. Speaking of that, set one up for your business. Keep your personal funds separate from the business funds. Don’t EVER EVER EVER pay for something personal out of your business acct. or vice versa. This is known as commingling and is probably the quickest way to pierce the LLC corporate veil and go directly after your assets. Also, set up your Operating Agreement. This is a document internal to your business. The state will not require you to have this, but view this as one layer of your protection if things ever go south w/ a lawsuit. It would be a good idea to have a lawyer draft or at least review it to help make it more robust. The state may not require you to have one, but if you apply for a loan from a bank, they’ll want to see this. If you don’t have one, well…maybe they won’t even want to work with you.
Remember there is probably a link on your SOS website where you can search for current businesses in the state that are in good standing. You won’t be able to use the same name or maybe anything even close to names of businesses currently operating. If you’re going to use one LLC for several properties (search on here for the pros/cons of this for paperwork hassle, asset protection, etc), don’t use an address as a name or anything like that. I would suggest not to include your name either. Try to keep some type of anonymity about this. Many advantages to having your tenants think you’re the “property manager.” Guess what, you’re still that if you manage it yourself. You just have other roles as well that frankly they just don’t need to know about.
Remember to always use your business name, LLC when conducting business. Have it on your receipts from businesses, loan/title paperwork, etc. If your business needs money for acquisitions, loan it to the business from your personal funds using a promissory note to the business. Charge a reasonable rate of interest. These steps help make the transactions “arms length” and will help protect you from the commingling funds argument. If you are ever sued and you’ve just been depositing/withdrawing money like it was your personal acct., the court may rule the business is simply an extension of yourself and all your LLC protection just went away.

Your rates & terms w/ banks, insurance co’s, etc. may be slightly different than if you bought in your personal name. Some places won’t even deal with you because you have an LLC. My favorite financial institution in the world - USAA - won’t deal at all w/ corporations. I hate this, but it just means I have to search elsewhere for financing and insurance for our units. You’re entering a new realm beyond standard home-ownership. Don’t expect people to be lining up to loan you money if you don’t have something to contribute to the deal. Don’t expect you’ll get financing for 30 yrs at the same rate you would for your personal residence. For instance, here’s what we were told for our most recent deal:
15% down, 10 year amortization, 5 yr balloon, 6.5%
This means the monthly payments are based off 120 equal payments, but I only make 60 months worth of payments on this loan. After 5 yrs, there’s a balloon payment due. I can pay this off, or if I can’t afford it, I re-fi at that point and do another loan under new terms. This is with a local bank. I may have been able to go longer terms w/ a big corp bank, but the ones I found wanted 25-30% down. That slows down our acquisitions so we chose the smaller bank instead. After we establish a positive relationship with them, they may be more willing to be flexible whereas a corp bank has their policies they stick to.

If you know this is something you’re going to do and you’re ready to start doing deals, I would suggest setting up the LLC now anyway - regardless of if this deal goes thru or not - if you want to use an LLC. At least you’ll be prepared when the deal comes along.

If you are just stuck for a name, how about GUMBALL HOLDINGS? The name does not have to make sense, just be unique.

Justin has some good info. Let me add a few points to help you understand how an LLC works.

An LLC is like a prison. Prisoners go in the prison to protect society from them. The prison doesn’t protect prisoners. An LLC does not protect what it owns. It protects your other stuff. If you don’t have other stuff, an LLC does nothing. It’s OK to set it up now if your state has low fees. It’s a bad idea for a place like CA where the annual fee is $900/year. That is expensive for something that does nothing. Put that money into the business.

An LLC is like a parachute. It’s not needed unless the plane is going to crash and you don’t know if it works until you actually use it. If it fails, you are dead. If it works, you may get hurt anyway. LLC limited liability doesn’t come into play until there is a huge judgment to pay and the plaintiff’s attorney is coming after your non-LLC assets to satisfy the judgment. Insurance has paid what it will and the only thing between the real estate and your other stuff is the LLC. An LLC does not prevent a lawsuit. It doesn’t help win a lawsuit. It doesn’t make a judgment smaller. It doesn’t make a plaintiff settle for less. It doesn’t scare people. The people that will sue you know most investors don’t use the LLC correctly and they will have little trouble piercing it. Like a parachute, you don’t know if your LLC will hold up until it actually does or doesn’t. If it works, you may still have to pay. If it fails, you could lose everything.

An LLC is like a car. It needs maintenance in order to run properly. Ignore the maintenance and the car breaks down. LLCs are no different. They require maintenance in order to work properly and fail when it doesn’t happen.

The attorney who sets up an LLC is like a doctor. Doctors examine patients directly. They don’t do it by proxy. They don’t offer treatment in general terms. They send patients to specialists when the problem is outside their area of expertise. They don’t treat every patient in the same way. A complete history and examination are taken, the diagnosis is made based on those findings, and a treatment is prescribed based on current medical information. As new information is discovered/invented, they adjust treatment as needed. Like a good doctor, a good attorney who sets up LLCs will examine your complete situation and make recommendations based on it while considering current law and trends. A rental LLC is different from a wholesaling LLC is different from a lending LLC. LLCs for people with significant assets are different from those set up for new investors. That’s just in the real estate world. Things differ exponentially when an LLC owns a plane or the LLC is a retailer or service company. They shouldn’t be treated the same just like not all patients should be treated the same. However, that is exactly what gurus do. Give everyone the same thing without considering the individual and keep using the same techniques that are now outdated. Going the cheap route is OK as long as you understand you are buying less. The most important part of the LLC is the operating agreement and that comes from a qualified professional. A generic LLC operating agreement only goes so far. Unfortunately, that is usually not far enough. A professional will reach out to other experts when needed.

Wow, thanks for the explanations and break down!!! It does clarify a few questions I had. I’m still not sure if I should really have one/need one. Would you guys recommend it then for a new investor? Once I purchase the property in my name, it seems that I won’t be able to transfer it to an llc and will be stuck operating it that way. I understand if I run my rental properly this shouldn’t be an issue, however if I have an llc, it will at least be some protection (if I do it right)? I need to find out the annual fees for TX.

The other question is if I do want to put this property into an llc, can I submit an offer in an llc name that doesn’t exist yet so that if it’s accepted by closing time the llc will be formed (30 day closing and making sure the name doesn’t exist)??

Also, the owner of the property is Fannie Mae. Will they be less likely to accept the offer if they see a generic llc name on the offer vs my own name?

Listen to BLL. You are buying your first investment property. My sense is that you are buying this to be used as a rental. If you are going to manage the rental property yourself, then you don’t need an LLC.

As BLL has told us many times in these forums, the LLC does not protect you or your assets when you manage your own rental property. Since you are just starting out, bypass the LLC. Take the property in your own name for now. Use the money you would spend on the LLC for your working capital.

If you are planning to use this property as your primary residence, the an LLC is probably the least desirable title holding entity for you.

To your other question about when to form the LLC. If you are signing a purchase contract in the name of an LLC, I suspect the contract will not be valid if the LLC does not exist at the time. One of the elements of a legally enforceable contract is that the parties to the contract are both legally able to enter the contract. If the LLC does not exist, then it is not legally able to enter a contract.

So, if you are still intent upon forming an LLC to take title to your investment property, make your purchase offer as “Ballgum and/or nominee”. Now, if your offer is accepted, you can form the LLC and then have your settlement attorney take title to the property in the name of the LLC as your “nominee”.

Disclaimer" I am not an attorney. This information is not legal advice. If is presented for educational use only and is not a substitute for a attorney.

Yes, you are correct that this would be a rental property (a duplex). So if I manage this property myself (which I’m planning on doing), then an LLC will not protect me or my assets?? In which cases will it protect me and my assets? Is it primarily used for protection when you have multiple properties in separate LLC’s?

Chances are you are the one who did something that caused the injury that generated the liability. That makes you personally responsible and personally liable. The LLC is also responsible you were acting on its behalf. Managing the LLC or taking in active part in the operation creates a way around it to your personal assets and other business assets. You can manage the property. You just should own nothing and speak to a qualified expert to implement your plan.

If you generate a liability outside of your duties with the LLC, the plaintiff will not be able to force you to liquidate the LLC to pay the judgment. This goes back to my point about the operating agreement. You need certain clauses in order to get this protection and the typical guru LLC (including legalwiz.come and legalzoom.com) don’t have it.

An LLC is a tool just like a hammer or a screwdriver. It works well in some situation and is a poor choice in others. It can be combined with other tools to get the job down. The one LLC per property is guru nonsense. There are much better ways to isolate property.

Avoid using your own name. Just make up something that is catchy and consistent with the brand and image you want to present.

You need a good operating agreement. Filing some paperwork with the state and getting an EIN from the IRS doesn’t make an LLC any good. It’s like saying getting an SSN (the personal equivalent of an EIN) and a birth certificate (the personal equivalent of articles of organization) will make you a good parent.

Some other things to consider: You may be required to use an attorney to evict. You face higher financing costs. You have more complicated tax returns. You must maintain the corporate formalities. All of these things cost time and money. Make sure the benefits of the LLC are less than the costs.

I don’t recommend it because it takes time and money away from the business without adding any value. Very few judgments exceed insurance limits, meaning the LLC doesn’t come into play. For the cases that do, are you prepared or have $50K or more to defend the LLC? Your attorney won’t work on contingency. He will want a retainer of at least a few thousand dollars and expect you to pay for services rendered on a monthly basis.

I have only heard of a few cases where the lender actually called the loan. In two of them, it allowed the LLC to assume the loan for a fee. The other was a bankruptcy case and the property was going back to the lender anyway.

The LLC must be in existence before you submit the offer. The offer is not legal because the LLC is not authorized to conduct business.

Ballgum,
This is reposted from one of my posts in another thread. Should answer all your questions about fees:

You can use the following link to view LLC fees by state:
http://www.bizfilings.com/products/statefees.asp

For an LLC, you’re concerned with the first two columns. The second column is the filing fee for the initial formation of the LLC. The other is the annual renewal fee. You’ll see some states have very high filing fees. As others have posted, you will need to file the LLC in the state you intend to do business. In addition, you will need to have a registered agent in that state. The registered agent is someone who will be able to have any legal documents mailed to them at a legal address in that state. Don’t just go off of LLC fees for deciding where to do business. I do business in IL which you can see has a very high filing fee. The flip side is that property values in my area are very low and make it very afforable to buy real estate.
You can find the state specific forms online for your respective state’s Secretary of State website. They are easy to fill out and you can file them yourself.