Wow! Some great discussion and viewpoints here!
I would like to respond to some of the questions broached and continue the discussion.
TMCG- Due on sale clause; There is little doubt that the due on sale clause is murky. I have heard many different points of view on the subject from ‘gurus’ in the industry. Many of them tend to agree that their are enough loopholes that statistically their risk is minimal. I have heard the argument that ‘they can not call the loan unless they can prove that they were significantly adversely affected by the transfer’. I have heard that if they establish a history of taking payments from you, they can not call the loan. I have even heard the strategy of nipping it all in the bud and sending a certified letter to the servicer(your contact) of the loan that you have changed ownership interest. (the argument with this is it will probably never end up on the desk of someone who cares, and you can then certainly say you told them and they did nothing).
All this is fine for a larger investor that can handle the bumps in the road, but could be catastrophic for a ‘newbie’ investor. I make sure to discuss the topic completely with my investor clients so they know the potential pitfalls.
As far as ‘Freddie Mac’ and the due on sale clause. (Again I am speaking from my own limited knowledge) First of all, Freddie Mac establishes guidelines under which certain loans can be approved and while they certainly buy some loans, a large majority of ‘Agency’ loans are packaged and sold to investors on the secondary market…not all to ‘Freddie Mac’ (if my understanding is correct) This means there could be many different decision makers involved. Second, and perhaps more to the point, many investors simply don’t use ‘Agency’ or Freddie Mac financing. Agency loans generally require full documentation of income (often difficult for investors) and as a rule, do not allow more than 10 financed properties in an individuals name to consider them for financing. As a result, many loans go to less convetional or Alt A lenders with different and more flexible criteria (such as allowing title in the LLC, No debt ratio calculations, no limit on properties owned, etc.) These types of lenders are willing to take the risks associated with these “oddball” loans, but have that risk calculated into their pricing.
In regard to insurance…My cost for a $2M umbrella liability policy that covers (now) my primary, my first investment properties, and both my vehicles, costs me approx. $240/year and it will go up by about $15bucks each time I add a property. In my opinion, that is inexpensive piece of mind.
Redwing–Titling to LLC but lending to members…most of my customers have the goal of titling the property in the name of an LLC for “annonimity”. Yes, it provides them asset protection, but most of my guys do it because ‘I don’t want my name all over the county records and if someone wants to sue me, he can find everything I own’. In this case, their goal is accomplished simply by titling in the LLC and then having the ability to finance through typical residential lenders instead of using a commercial lender.(which is where you would need to get the money if you were using the LLC alone with non-recourse financing, since no residential lender that I know of will lend non recourse money to a business entity)
As far as titling of the properties, I may be jaded by the community property laws in PA. In this state, if I own and investment property as an individual, but my primary residence is in both my name and my spouse’s name, it is therefore community property and not attacheable(?) for and individual’s debt or obligation. (again to my understanding)
The last paragraphs of your reply sounded both knowledgable and confusing as !@##$. That sounds like some interesting and well informed information, but again I go back to ‘my little corner of the world’ where investors usually own less than 50 properties, and I think in that situation, an awesome insurance policy is your best defense(and probably a lot cheaper than attornies fees for all that other mumbo jumbo)
BPP- Thanks for sparking this lively discussion, and I will be interested to hear what the proffessionals you are dealing with advise you. Please keep us in the loop, and remember one of the key ways to be succesful in this business is to have your “power team” of experts in place…make sure you are comfortable with and trust those working with you, and allow them to work hard for you.