Transfer of Property to LLC/Lender Considerations/payments/legality issues

General Real Estate Investing
1

If you structure an LLC as a partnership, is it prudent to

  1. create a LLc business account prior to transferring the property into the entity, notify the lender of the transfer, then make mortgage payment utilizing checks from your corporate/LLC account?

Or

  1. Is it feasible that after you place property int LLC, and notify the lender, you can still make mortgage payments using your own personal checks or amending the personal checks (in writing) by stating you and your partner position as member manager of the LLC?

example: Steve and Craig have a partnership LLC. Steve is the partner with the money. Steve pays the mortgage payments using his personal (non-business account).

Can Steve and Craig list their positions as member/managers on Steve’s personal check to the lender to

a) to set the precedence that their corporate entity has ownership of the property (and not them)
b)to prevent piercing of the corporate veil (in the case of a creditor or other litigation)
c)will the lender have issues with the above scenario?

Thanks to all for your responses.

2

I have wanted to do the same thing. I contacted my lender which is Countrywide and they will not permit the loan to be transferred to an LLC nor will they give a mortgage to an LLC even if I continue the payments and personaly gaurantee the load. I am looking for a new lender. Contact your lender and discuss it with them.

3

I would transfer the property into the LLC via deed after @ 3-6 months of making payments on the loan. I would let the bank that I have done so via certified mail. There is a chance they will send you a written objection - I would ignore it, as the chances of an actual foreclosure are very slim - they are interested in money, not foreclosures. The more payments they accept once the transfer has occurred, the better. In the unlikely event that they actually move to foreclose (as is their right), I would cure by putting the property in my name (if they accept that as a cure) or refinance. Payments should be from the LLC, not you personally - the whole point of an entity is to provide a degree of separation between you & the entity.

John Hyre

4

What about insurance?

I have a property I want to deed over to an LLC, but I am not sure about how to handle the issue of insurance. Do I just have my agent put the LLC as “additionally insured”, write-up a new policy, or something else? Thanks!

5

Thank you Sailorgirl and John Henry for your feedback, To John Hyre, I have one more inquiry. My investment strategy is to acquire (through the use of a hard money loan), rehab (hopefully the rehab process is no more than a three month time period) then refinance and cash out my equity, with plans to sell in a year.
In the example I am providing, I would have already refinance my property so I guess the only solution to the LLC dilemma would be to take the property out of the LLC and assume the property under my name to cure the loan. Do you have any other suggestions?

6

You would probably need to pull the property out of the LLC & put it into your name to refi, then later recontribute it to the LLC. I would NOT distribute a property from an S or C corporation (including an LLC treated as either by the IRS) because some seriously negative tax consequences occur at that point.

John Hyre

7

Thanks for the response John Hyre, my understanding from your response is that if I acquire, rehab and refinance (cashing out my equity) then transfer the property into the LLC (after making three to four months equivalent of mortgage payments) and the lender deems the transfer to be a problem, the viable solution to cure the loan in default would be to reassume ownership of the property under my name.

Note: I couldn’t refinance at that point because I already refinance the property and cashed out my equity.

8

  1. I do not think that the lender is required to allow you to cure, though they may in practice choose to do so.

  2. Insurance: Talk to your agent. You may have to search for one who is flexible. Mine simply adds LLC’s as additional insureds.

John Hyre

9

Thank you John Hyre for the response. Are you familiar with any articles or books that further investigate or discuss issues that pertain to the transfer of property to an corporate entity or Limited Liability Company and how to avoid potential legal and IRS issues?

10

Yours truly has put together an entities course for REI. Nolo also produces some excellent material.

11

Thanks alot John Hyre for all the information and your patience in regards to answering my inquiries.