I can’t purchase an investment property in my LLC’s name because the LLC has no credit, and I do not want the property in my name.
Can I legally purchase the property in my personal name and soon after change the title to my LLC?
Doing that triggers the due on sale clause of the mortgage.
There are lenders who will loan directly to an LLC. You will just need to personal guarantee the loan.
Thankyou,
Can you tell me who these lenders are?
I spoke with Countrywide and Chase Home Finance and they both said they will not lend to an LLC.
Also, if I do get a mortgage in the name of an LLC I believe it has to be a commercial loan, which I do not like the terms. Correct?
Develop a realtionship with a local bank that keeps its loans or try BOA and WaMu. You will have to find a local office with someone who knows the banks’ products better than the average CS rep. Terms are may be 1/2 to 1 percent more than residential rates.
kjf,
loans to an LLC are not necessarily commercial loans, a loan is typed by the security property being offered not the borrowing entity. virtually all banks have a due on sale clause (DOSC) in their loan documents. if your LLC has no credit it can still get a loan if you will personally guarantee the loan.
I will admit that I don’t understand this subject at all, but what exactly does giving a “personal guarantee” mean? To me it sounds like a co-signer, so if the LLC defaults on the loan then the bank can go after your assets (home, car, etc…). Isn’t the point of buying a property under the protection of an LLC to protect you from that happening?
Just learning so be kind :smile
-Scott
Yes. It means you pay when the LLC doesn’t and it is very common with small businesses, even those that have been around for many years. Larger business have systems in place and the owner/founder isn’t involved as much due to the shear size of the operation. Smaller businesses with a few employees are prone to failure if the owner/founder leaves or dies.
The point of an LLC is create a firewall between the liability of the LLC and the LLC members. No matter what you hear, it doesn’t do anything more than that. It doesn’t protect your personal assets from your responsibility in a car accident. It doesn’t protect your personal assets if you are the person who did a faulty property repair that causes injury to someone. It doesn’t protect any property you put into it. It doesn’t protect the managers from personal responsibility and it doesn’t protect the members if they take active participation in the LLC. It only protects passive members.
The point of getting loans in an LLC is to prevent the bank from triggering the due on sales clause of the mortgage. Over time, a lender may decide a personal guarantee is not necessary.
Thanks BLL, that cleared it up very well. :beer
It generally makes sense to buy in your name b/c the interest is so much cheaper than would be the case for a commercial loan. After a few months of making timely payments in full (not to mention giving the bank a chance to sell the loan), I would transfer title to the LLC. When transferring, I would let the bank know what I’ve done (beg forgiveness, do not ask permission) in writing via certified mail return receipt (I have a template letter that I send to clients for this purpose). Two reasons to let the bank know:
-
The antithesis of deception (or fraud) is disclosure. We do not want to be accused of deceptive business practices.
-
Their is a slight risk that the bank will make an issue of it…but unlikley that they will press the issue in the present environment, converting a paying client into yet one more foreclosure. The upside: Bank traditionally use DOS violations as an excuse to forclose when the rates are higher. For example, if we re-elect Jimmy Carter in 5 years so that we can go back to 17% mortgages, the banks would very interested in finding excuses to foreclose on 6% loans to reinvest in 17% loans. Can they do that based on a 5-year old DOS violation? Yes if they did not know about it. BUT if they knew and you can prove they knew (hence the cetified mail return receipt notice), a court would likley rule that the bank waived its rights. In short, taking the risk of a DOS issue now by informing bank is much less than risk of later deceptive practice or later DOS issues. I’ve yet to see a client have issues from such a letter…I’m sure someone will at some point, but that will be the exception that proves the rule.
John Hyre
I like John’s approach here. I’ve owned many properties that have been Quit Claim Deeded to Trusts, etc. and never had a bank do a DOS clause on it. Granted, they have the right to. But if they were to do it, I’d just plead dumb and move it back into my name. I believe they will give you 30 days to do that if they have an issue with it.
We have single member LLCs on all of our properties now, and never had a problem with this. We use Countrywide for our larger loans and I am upfront with the agents and underwriters at the time of writing the loan that it is our intention to do this. They have NEVER said it would be a problem.
If it does become a problem, I’d certainly post about it here. But until then it is easy to assume that the DOS is a bit of FUD (Fear, Uncertainty and Doubt) that is floating around. Yes, banks COULD foreclose on a DOS but why would they do it if they are making money anyway? I mean the costs to them upfront in writing the loan is going to be written off if they just foreclose anyway, right?
V
I’ve been doing the same thing for a number of years and never had an issue. Also, if you go to re-fi they like you move it out of the trust, but then you can move it right back in after you close
Great insight John.
Another valid objection to the ownership transfer was, until last month, that you invalidated your title insurance protections. The new ALTA 2006 policy allows you to carry over insurance to the new entity. (some restrictions apply) I mention this because in most states this new coverage is now an option on the board approved purchase agreements. It has to be requested. You would make the election and still have the seller pay for the owners policy and buyer pay the mortgage policy.
-h
John,
I like the idea of notifying the bank (as if they wouldn’t find out anyway, say, from your insurance company). What would keep the bank from writing back by certified mail that they received your letter and reserved the right to invoke the DOS clause anytime now or in the future?
In a judge’s eyes, both parties would now be on notice. Nobody could claim fraud, which is great, but I don’t see how it would prevent the bank from successfully invoking the DOS clause.
Jeff