Does the terms of my mortgage prevent me from LLC'ing my rental?

Hi all,
I have a single family residence that I rent out. I would like to put it into an LLC, but there is language in the mortgage paperwork that said something to the effect that I can’t do that. I don’t have the language in front of me, but I could dig it up if you asked me to.

My questions is … Is that just boilerplate language that banks never care about and people ignore when they put their rental into an LLC? Or is it something I should renegotiate with the bank?


It’s called the due on sales clause and most investors just ignore it. They also ignore their states fraudulent transfer and corporates laws when they go about making the transfer.

Thanks BLL.
Has anybody heard of a bank executing on that clause when someone LLC’d their property? (and they didn’t do anything else like stop paying etc.) I was thinking that it might just be a clause that banks keep in to cover themselves. Since the documents of an LLC are kept public and the transfer to the LLC are also public, wouldn’t it just take a search by the bank to check that someone has done it.

ALSO … if someone were to sue me for XYZ and I had my property in an LLC to protect myself (and other property), could the attorney’s of the plaintiff claim that I didn’t have the ability to put the property in the LLC to begin with, so its protection is void?

The chance that the bank will call the loan is very remote, but I saw it happen in BK where the property was owned by a trust and the lender got the trust document and saw the beneficiary was changed to an LLC.

If protecting yourself and other property means preventing a judgment creditor from collecting a valid judgment, then that fact alone is enough to undo the transfer. It is called a fraudulent transfer and courts do not accept them. Worse, you will be branded dishonest and the judge will pretty much give the creditor whatever he wants. Buy the property in the name of the LLC or sell it to the LLC to avoid this situation.

I hope you realize that you are personally responsible for anything you do or fail to do wrt the property that causes an injury. Owning the property in an LLC provides no protection when you are the responsible party. Given that, every property in every LLC you own can be sold to pay the judgment. Even if you can prevent the seizure, the creditor can get a charging order that will hamper your ability to run the business in such a way you will either go broke or settle on his terms.

I was thinking about this and it seems like an LLC is an option, but it’s not very reliable given that the corporate veil can be dissolved (see BLL’s) comment because of the terms of the mortgage. I keep my rental in great shape and have no indication that someone could be hurt by it, but I still worry about frivolous law suits from tenants. Is there any other kind of protection that I can get in case they do? Like a general liability umbrella insurance policy or something? I have no idea what those things cover, but is it a legitimate option?

Your best defense is maintaining property in good condition, responding to repair needs promptly, and documenting such. You should always have insurance, even if using entities. It is cheap and does the job. As far as frivolous lawsuits, your attorney can get them tossed if they are truly frivolous.