LLC and Fannie Mae rates, can you have both?

I know there have been many posts on this, but after reading many and talking to various attorneys and banks I still do not have a clear picture. Multiple banks have told me you CANNOT buy property under the favorable Fannie Mae rates unless you are buying as an individual (and NOT buying as LLC). Same banks have said you CANNOT buy as an individual and then later transfer to an LLC, as this can/will trigger a mortgage due clause. They all say you just cannot have properties owned as an LLC and have Fannie Mae structured loans. As readers of this board certainly know, the penalties of commercial lending vs individual Fannie Mae rates are substantial on both down payment and interest rates. So one option is individual ownership and good insurance with an overriding umbrella liability package. In addition to that, if one were to create an LLC to manage the property, with the owners of the property being the owners of the LLC, does that offer additional individual asset protection? If something bad happens wouldn’t a good attorney for the other party go after both the LLC and the owners…thus just creating a second target (LLC) in addition to the individual owners? Bottom line, looking for another discussion on how to have both Fannie Mae rate packages up to the limit of 10 mortgages AND LLC protection, and still have not found the answers. Thanks.

I started my career in the credit field working with companies extending credit to small mom and pops. Back then, business is done mainly thru S Corps, before LLCs gained popularity.

In one large company, there were some dozens of us each handling our own accounts. The general rule is if a company is rated by D&B, a good rating, say over 2A1, they get a substantial line, like $100,000 and up. Blank rated firms, new ones get something like a $25,000, if that.

For small new firms with no history, owners gives us “unlimited and unconditional” personal guaranties, assuming their personal credit is good. This include spouses, so there’s no transferring the deed to the spouse.

My wife was also in commercial lending for a while. Firms and banks back then gives credit managers and loan officers wide latitude in implementing this. The downside of this latitude is if you extended too much credit to a new unrated firm, they go under, your jobs at stake.

What to do??

What some of these guys do is the most conservative thing. They either give no credit or little credit to new firms, such as an LLC that just opened up. Why?? We got families to support, and extending credit to an these guys, some of them just dreamers, would put our families at risk.

Talking about the using LLC’s as a shield, for a small operator like yourself, the shield will be pierced anyway. I subsequently did rentals and ran some businesses. One couple I bought a business from, who had it in an S Corp, was sued personally anyway, for $2MM. How did that happen??

I spoke to my attorney and others, and the first question they asked is if the couple actively managed the business. The real answer is the husband is an idiot, but he’s at the business everyday. I’m told that in that case, they can make the case that he’s actively managing the business, and he is guilty of total negligence.

Similarly, if I’m actively managing my rentals, such as hiring people to shovel snow, hiring contractors to do repairs, if they screw up, I can be sued not only as the owner, but as someone who MANAGED to rentals negligently. So the LLC and I personally will be sued.

I remember once I had to hire people to shovel snow after a big snow storm. The property was vacant at the time, so I had no tenants to shovel. Turned out the man I hired didn’t show up for a week, and the snow was frozen solid. He came, tried, then gave up and left.

When I finally found out about it, I had to get someone else over. The neighbors were furious, and if there’s any slip and falls in the meantime, they’ll be suing me for sure. Fortunately, nothing happened, but if something did, a sharp attorney will get after me for sure.

Now lets talk about Fannie Mae.

Most lenders who originate loans sell them, so they must follow guidelines. If that means no LLC’s, personal guaranty’s, 10 house limit, so be it. There were several banking crises in this country, the first one way back in the 1990’s, where numerous S&L’s went under, and taken over by the Resolution Trust Corp. the RTC. I bought foreclosed condos where the developer went bust, the bank that gave him the loan went bust, and finally from a large bank that took over the whole mess.

However, some small country banks keep loans in their portfolio, where these requirements do not apply, You’ll have to find who they are. But I have to warn you, these guys will not just throw money at you. Remember, their jobs are at stake.

In conclusion, while you may be concerned with YOUR asset protection, the banks are concerned with their asset protection.