even a single member LLC is a completely seperate and distince entity from you personally. you don’t own the property…the LLC does. that triggers DOS 'cause IT AIN’T YOU.
different trusts for different properties? sure. costly and a hassle, but yes.
I buy a rental property, then set up a LLC, transfer the property to LLC without notifying the lender. How would it affect the status of the LLC as a separate entity if:
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I continue to pay the note from personal funds, or
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Transfer funds from LLC to personal account to cover note
If you transfer the property to the LLC, the LLC needs to make the note.
yes, technically this violates the DOSC. However, I’ve never seen a performing note called for this reason.
If you bought it with a warranty deed. There is no reason to warranty deed back to your self…you already have it. You probably paid for title insurance when you bought it. Who are you giving a warranty to? Yourself? Just fill out the quick claim to your company and file it. If there is a mortgage on the property you will have to file a satisfaction of mortgage or you can’t file the deed (New York). Plus, one of the warranties is a warranty against encumbrances.
yep. which is why it’s always preferred to finance directly to the LLC rather than transfer after the fact.
choice of entity makes no difference here.
jagsterr,
No doubt any attorney could try to use any claim in a vigorous prosecution of his case. However, I think you need to look at your scenario a little closer.
For this discussion, I am assuming that the transfer of title to the LLC occurred long, long before any lawsuit appeared on the scene.
First, why are you “technically not supposed” to transfer title to your LLC. There is nothing illegal about the title transfer. Your loan documents DON’T prohibit a title transfer. Your loan documents DON’T even require you to notify the lender whenever you transfer title.
I don’t see anything that “technically” prohibits a title transfer. So, in my opinion your first premise is false. After all, if you “technically” couldn’t transfer title, how can you ever sell the property before your note is paid off ?
Next, you state that the title transfer is a breach of contract. I don’t think so. As I stated earlier, your loan documents don’t prohibit a title transfer and don’t require you to notify the lender if a tranfers occurs. Where is the breach? Your loan documents do say, that SHOULD a title transfer occur without the lender’s approval the lender HAS THE OPTION of calling your loan due.
I believe your second premise, that there is a breach of contract, is also false.
If these two false premises form the entire basis of that attorney’s argument, I don’t quite see how the court will pierce the LLC’s “corporate veil” and hold you personally liable in the absence of gross negligence on your part.
I am not an attorney so don’t take my comments as legal advice. If this question really concerns you, perhaps you need to have a conversation with your own attorney.
Because this topic has come up numerous times in different places, I wanted to be sure I understand things correctly.
Personally buying a property and then forming an LLC and then transferring title to the LLC:
- Transfer of property title to the LLC is done by warranty deed.
- This requires the property insurance carrier to re-write the insurance policy.
- The new insurance policy price probably goes up.
- The transfer of title could trigger the “due on sale clause” in the mortgage contract and the lender could call in the loan balance. However this is rarely (never?) experienced on a performing loan.
- The hassle and costs of having an LLC own the property is nothing when compared to the risk of having personal assets vulnerable to a lawsuit involving the property.
- It is a good idea to carry the maximum umbrella policy because again, the annual cost is minimal and is nothing when compared to having the umbrella coverage available in the case of a lawsuit judgment.
Forming the LLC first and then having the LLC buy and take title to the property:
- Requires a personal guarantee on the loan - assuming that the LLC is newly established and has no assets or credit history.
- Mortgage rates will be higher (maybe?) than for an equivalent personal loan.
- Property insurance rates will be higher than for an equivalent property owned personally and/or bundled with other personal insured items (residence, auto, etc.)
- No issue with “due on sale clause”
5 & 6 above apply.
Am I missing anything? Does anything need to be changed or added to this summary?
Thanks,
D Kame
Whats this then?
due-on-sale clause
Definition
A provision in a mortgage enabling the lender to demand full repayment if the borrower sells the mortgaged property.
Sells = title transfer
Sean,
The Due on Sale/Transfer clause allows the lender to call the loan due upon title transfer.
Jagsterr’s position is the due on sale/transfer clause makes a title transfer something you are “technically not supposed to do”.
Nowhere in that clause will you find any prohibition against a title transfer or any language that makes a title transfer illegal. Nothing that says you are “technically not suppose to do that.”
4. The transfer of title could trigger the "due on sale clause" in the mortgage contract and the lender could call in the loan balance.
D Kame,
A title transfer ALWAYS triggers the due on sale/transfer clause. Whether the lender chooses to exercise its option to call the loan due is up to the lender.
“Technically” thats the key word. Everyone knows it does…it’s just a matter of if they enforce it or not. I have never seen a state licensed residential mortgage lender close with a companies name on title on the mortgage broker’s or lender’s side. The moral to the story is that transferring the title does trigger DOSC.
The land trust is the way to go. You can place the property into the land trust without triggering the DOSC. It is considered a financial planning event. Personal judgment’s can not be filed against the trust. The trust protects the asset not you.
The corporation insulates your personal assets from your business. They function a bit different from the inside (LLC, LLP, INC). What you do is, put the property in a trust and open an S-Corp or LLC to manage the property. With that set up you virtually eliminate personal risk and asset risk. Of course you need insurance in the mix as well.
A key point is that you need the LLC to be the beneficial interest of the land trust. I’m sure that is what Sean meant to say. If you use a land trust but own the beneficial interest in your name, a successful plaintiff could still use a debtor’s exam to ascertain your beneficial interest in the trust and execute on those interests. In other words, a land trust does not offer real asset protection without the beneficial interest being a protected entity, i.e. an LLC.
Keep in mind that if you manage or maintain the property, the plaintiff can and will sue you personally as well as sue the Trust/LLC.
Mike
This is how the land trust protects the asset. Once the property is put in the land trust it is protected from all judgments. Even if they examine your assets and find the trust. The trust can not be mentioned in a suit because it’s held in a third name. ( Under a Land Trust, the publicly recorded title of the property is held by AA Bank as the trustee. However all the rights and benefits of the property’s ownership are retained by you.) The same way that if you are sued they can not get your retirement monies (OJ is a great example of that).
This how the management company protects you. Once the company takes on management responsibilities it is responsible for oversight. They can not sue you personally because, the management company is liable.
If you are talking about commercial real estate it can be closed with the companies name on title. So theres no DOCS issue. It only happens in 1-4 unit properties. The last REIT I worked for owned and managed almost 20,000,000 SQ FT of retail space in New York and Mass. and was owned by one man with one company for management, and every center was it’s own entity. He’s in the Fortune 500 BTW.
I don’t know about you but I’ll do it the way he did. Not to mention he has plenty of lawyers on staff.
But I thought a Quit Claim does not transfer ownership only a Warranty deed does? Correct?
Also, say I do file a Warranty deed and transfer title to an LLC and pay the mortgage using my LLC checking account, wouldn’t that alert the bank that Title has been transerred to the LLC ? If I instead pay the mortage from personal funds, wouldn’t that be a comingling of funds and pierce the corporate veil and expose me to personal liabilty??
paying the mortgage from the LLC checking acct will have no effect. The payment processing is largely electronic and they are posting thousands of payments a day. No one is going to notice what account your payment is drawn on.
No, A warranty deed is a deed with warranties as to the quality of the deed. There are four warranties attached to a warranty deed; Covenant of Seisin & Covenant of Right to Convey, Covenant Against Encumbrances, Covenant of Warranty and Covenant of Quiet Enjoyment, Covenant of Further Assurances.
There are different deed types that give all warranties (warranty deed) and no warranties (Quick Claim deed). There are a few types in between the former two.
A QC deed transfers just as well as a warranty deed with more risk. My point was that you have a warranty deed already you do not need to give your company a warranty deed. If you don’t understand why I would consult an attorney.
Good Luck
This is how the land trust protects the asset. Once the property is put in the land trust it is protected from all judgments. Even if they examine your assets and find the trust. The trust can not be mentioned in a suit because it's held in a third name. ( Under a Land Trust, the publicly recorded title of the property is held by *AA* Bank as the trustee. However all the rights and benefits of the property's ownership are retained by you.) The same way that if you are sued they can not get your retirement monies (OJ is a great example of that).
This is absolutely wrong. The land trust is not protected from all judgments, that’s just totally false. If a tenant slips and falls, they will sue the land trust. They can win and they can collect. If you do something wrong personally and a judgment is awarded against you, then your beneficial interest is at risk if you are the beneficial interest personally. In fact, land trusts are not even statutory entities in the United States. They originated in English common law and came over with the pilgrims.
Land trusts make it difficult for predators to determine who owns the property. Using a multi-member LLC as the beneficial interest makes it more difficult for a plaintiff to collect on a judgement. Insurance is the final layer of protection.
This how the management company protects you. Once the company takes on management responsibilities it is responsible for oversight. They can not sue you personally because, the management company is liable.
A management company will help protect you IF you are not managing the properties yourself. If you are actually involved in the property management, then a plaintiff will sue both you and the management company.
Mike
Let’s face it. For a slip and fall the plaintiff will rarely get past the insurance phase. For a wrongful death suit they may but, your issues are on the criminal side. When they sue, lawyers always sue everybody.
To think that land trusts are for just hiding your name makes no sense when you think about it logically. I agree hiding your name can be beneficial though.
http://en.wikipedia.org/wiki/Land_trust
Look at the benefits it’s not just for hiding your name.
So, based on what I have read here, this is my plan of action for the SFH I just purchased. (I financed through a traditional bank and this is my first investment purchase):
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Transfer title to the LLC using a Quit claim deed.
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Use funds from the LLC checking account to pay the mortgage payments.
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Obtain Liability insurance on the property.
Correct? …Anything else that I need to do? Thanks!
More land trust questions…Please don’t stone me…
I have been reading Land Trust for Privacy & Profit by Mark Warda…Anyhow in it it gives different cases for each state and how the duties of the trusteee must be handled for the trust to be valid…In my state NY,it makes clear that the trustee must have active duties such as collecting rents and profits,and exercising discretion…So how do I get around these issues if I’m making either my attorney/accountant/or anyone else my trustee?..The book gives good info but not enough in the loophole success area…Thank you for any responses…
Your LLC is the trustee of the land trust. It collects rents and manages the details of the property such as paying the underlying mortgage and paying the plumber to unstop the toilets.