After reading a number of questions and articles on this amazing website I realized that it might be difficult to transer some properties into an LLC.
The properties are renting out successfully and I want to transfer them to LLC to protect myself.
Why would my lender object to the transfer of these properties into an LLC? What should I do? My primary goal is to protect my income and to be able to deduct my losses from high taxes. I’d appreciate any suggestions.
You kind of made mention of it in your own statement.
You want to move the liabilities associated with property ownership into an LLC.
Why would a lender have a problem with this? Because you’re trying to remove the liability out of your name, into another entity. You could do a contract for deed, which does not constitute a sale, where your LLC would pay for the properties, until the mortgage is paid in full, and then title would then transfer to the LLC.
But to be legal, and get all of the answers, call a real estate attorney, he’ll give you the answer you’re looking for, and for a small legal fee, the proper documentation would be prepared and recorded. Make it lega, and don’t do something that would trigger the “due on sale” clause in the mortgage.
If I were your lender, I would want to know that you lied on your loan application. I would call your loans due, payable in full within 30 days. If you don’t pay, I would initiate foreclosure. I would report you for loan fraud under applicable state and federal criminal and/or civil codes. If the loans are federally insured, then your maximum penalty can be up to $250K and 2 years in a federal prison for each count.
In general, I think that the Due on Sale clause (allows the banks to call a loan due if ownership is transferred) is the most over-hyped topic on RE websites. Most banks are interested in receiving payments, as opposed to creating more foreclosures. I DO think that honest disclosure is the way to go when transferring assets to an LLC - most banks ignore it, no problem in most cases.
Given that you APPEAR to have lied on the loan apps, disclosure presents a problem for you. I would strongly suggest talking to legal counsel familiar with bank fraud.
I am new hear…butI must be missing a post somewhere…where did the OP mention something about fraud/loan app. lies etc.?? IF the owner moves in/out and rents within a few months that would raise eyebrowse. How long has he lived in the principal residence before he rented it out? Job transfer and other reasons cause people (not just REI) to leave and rent out. Thats what I have done a number of times.
Something is missing here – the original post, intact. TorrePendente came back and edited his original comments to remove his public declaration of possible loan fraud.
I quoted the meat of his original comment in my first response.
Dear Dave T,
Thank you for taking my issue so seriously- I did change the content of the original posting so that no one else overreacts like you did. Now I have to chance to clarify to those who may find themselves in similar situations.
The properties were purchase as primary residences (i.e. first and second homes) back to back. As a matter of fact they were funded by the same lender. There is nothing wrong with purchasing a property as first and second home and converting them to rental properties. The lender didn’t care about my intentions; they wanted to sell me these loans. I didn’t have a home-so I bought two, their use is at my discretion as long as I make my payments on time.
Issues like these arise daily; properties go from primary residences and second homes to rentals all the time.
I appreciate everyone’s input on my issue including yours.
Wnen a borrower is applying for an owner-occupied loan, he/she will be asked to sign a statement certifying their intent to occupy the property as their primary residence for at least one year.
When you sign that statement to secure the more favorable owner-occupied interest rates, but never intend to occupy the property at all, you have made a false statement in your loan application – loan fraud in other words.
Let’s not promote this stategy in these forums where new, uninformed investors might think it is OK to perpetuate a fraud because you allegedly did it and got away with it. Some lenders don’t check, but HUD does have inspectors do spot checks on their FHA loans to confirm that the property is actually owner-occupied.
Unless I misunderstood the facts, David is correct. If you get “back to back” loans and represent that the homes are to be your residence, then you quickly turn around & rent them out, you have misrepresented yourself on the loan. That is also known as loan fraud.
Generally, if you live in the home for a year when you take out the loan, no problem. If you stay for a shorter period & have a good reason to move (i.e., something non-contrived, such as true job change), it’s unlikely to be an issue. If you buy several in succession (e.g., how I read “back to back”) and do not live in them or live in them for a very short period, you are developing a pattern of saying it’s a residence when it clearly is not. Representing something that is not in fact the case to a bank generally constitutes federal loan fraud. Not recommended.
If I have misunderstood the facts (e.g., back to back means “lived in each property for at least a year”), then I may change my opinion. And for what it’s worth, Dave T’s reaction was not extreme - it was and is perfectly understandable based on the facts as you presented them. That’s not a problem, we’ve all said things that did not come out as intended…but that’s on you, not Dave.
thank you for your input. The reason for this posting was not to get everyone to tell me what I did wrong, but how to make this right. Ignorance is a bliss and at the time I was purchasing those properties the lender didn’t ask for the reason I’m purchasing properties outside of my state and didn’t even ask for a letter of job transfer. To a new RE Investor that didn’t ring a bell-as far as I knew I could buy 2 personal residences. As far as what I do with them-well, that’s my business.
Dave T had all the rights to tell me his opinion and I appreciated that. That’s the point of this forum, isn’t it?
I am in the process of consulting with my real estate attorney on my next steps and in his opinion, as well as your John, he’s yet to see the bank foreclose on a property that is being converted from primary residence to a rental and has an excellent payment history.
So, for those of you in the similar situation - it’s okay to make mistakes-just don’t post them on the websites-ASK A PROFESSIONAL ATTORNEY!
Thanks to everyone who participated in this discussion.
I think that the “residential loan” & “fraud” issue rightly took priority in these posts, if only as a warning to others. Your willingness to post on those issues will help someone, somewhere, because they can learn from your mistakes and avoid them. There has to be some good karma in that!
The original question in re LLC’s has been oft-covered here. I am generally a proponent of putting rentals in LLC’s (or LP’s in certain states such as CA). But I also believe in keeping such structures simple and CHEAP for small to medium-sized investors, because the asset protection benefits of entities are very analogous to term life insurance - very unlikely to be needed, but extremely valuable if in fact needed. Run a search on due on sale clause to see the risk of transferring title into the LLC - quite a minor risk, in my view.