For liability protection purposes, I like to have real estate in an LLC. However, I am unable to find a lender that will officially authorize me to transfer my title to an LLC. I have been told by many lenders that once I close in my name, they don’t care if I transfer the property into a wholly-owned LLC, but they will not give me official permission to do so. I am informed by a number of sources that it is done all the time, and that the lenders are not anxious to call a productive note. However, in reading the “Due on Sale” clauses in the mortgage contracts, they clearly allow the lender to call the note if a transfer is made. Are there any solutions to this issue? Do most investors just make the transfer and take their chance? Another option is to obtain a commercial loan, but the terms are usually not good enough to make residential real estate financially attractive to hold for rent. This has only been an issue for me with residential real estate. When financing commercial property I have used commercial loans directly into an LLC without problem. However, commercial property is valued with the expectation of different financing terms than residential property (ie. you don’t expect to get 30 year fixed low interest financing for an office building, and that is reflected in the purchase price). Thanks for any wisdom on this issue.
I have the same problem, did you find out more info.
Haven’t learned anything new to date. Sorry. Anyone with some feedback?
I’m not an attorney but was a paralegal, you need to investigate LLC. They generally are not good for protecting assests legally. They are too easy to breach (pierce) and the laws in each state vary. If you going to bring the real estate into an entity other than personal it should be incorporated unless there are a few partners invovled.
What you need to do is to put it in a LAND TRUST and make the LLC the beneficial interest,
The lender can not and will not call a note due if it is put in a LAND TRUST.
You can also put it in another kind of trust will work also.
What you should REALLY do is put this post in the “Asset Protection/Legal” category where the folks that are most knowledgeable about this sort o thing hang out!
Learner, if you want to switch your deed to your LLC, then do it. Yes, it’s done all the time. Yes, as long as you’re paying your bills on time, then the bank will not care about the title. In fact, unless you tell them, they probably won’t even know that it has been switched, and even if they do, they are not going to call a performing note due. No, they won’t officially endorse the change because of the due on sale. IF they endorce the change, then they must enforce the due on sale.
On other points:
An LLC will NOT protect you from liability. Liability insurance does that. An LLC will separate your personal assets from your business assets, so if one gets sued, then the other is relatively safe.
They generally are not good for protecting assests legally
I’m interested to hear more about this one. Yes, state laws vary somewhat with LLCs, however they are no more easy or hard to pierce than an S corp. The main reason that entities are able to be pierced is because the owner/manager doesn’t keep the proper paperwork and/or doesn’t keep it up to date. That can happen with either entity.
It’s really just personal opinion on the land trust option, that is, if your state recognizes land trusts. From a paperwork statepoint, it’s a small nightmare, and I prefer to keep things simple.
Thanks for the feedback Raj. You have pretty much confirmed the conclusion to which I have come. The best approach is to simply move the property to the LLC, as the lenders are not likely to call the loan. I do understand the issue of liability protection. Assets within an entity are exposed but not personal assets. The latter is what I’m interested in protecting most. My personal property is worth far more than the few rental properties that I want to transfer into the LLC. The rental properties are also burdened with liens, further decreasing the net value available to a claimant. I believe there is also some protection even for assets within the LLC due to the way charge orders work and potential phantom tax liabilities for claimants.
kdhastedt - Thanks for the suggestion to post in the “Asset Protection/Legal” category. I actually do have the same basic question posed there within someone else’s thread, but have yet to see a response.
Just start over in that section with a new post.
My suggestion is still put it in a trust with the LLC the beneficial interest.
then you do not have to deal with the due on sale clause.
May I ask what’s a due on sale clause?
A “Due on Sale” (DOS) clause is a clause inserted into notes by the bank when you take a mortgage on the property that basically says if you sell or otherwise transfer the property they have the right to call the entire note immediately due and payable. This is an attempt to prevent unqualified buyers from assuming the loan and then not making the payments.
So is it possible for a lender to call a note if an investor has a property they are flipping but has a pre-pay penality, but willing to pay the pre-penality to sell the property. Shouldn’t it be safe to flip the property to a quailified buyer without the risk of them calling the loan due?
Hope that makes sense, I’m a newbie trying to learn as much as I can.
If the note has a DOS and title to the property is transferred, the lender can call the note due and payable in its entirety.
In reality, I am told, this does not happen often but the chance exists and it has to be in your planning…you need to have an ‘exit strategy’…
In response to RichMortgageBroker’s suggestion about making the LLC the beneficiary of the Land Trust, my concern is that the Grantor does not excape liability in a lawsuit. I’ve run this by a local attorney who is reasonably familiar with trusts, but not an expert. He also had the same concern. Since the Grantor has the power to unwind the trust or change the beneficiary, the Grantor could still be held liable and therefore expose all of his/her assets. If that is the case, it would defeat the entire purpose of the LLC. Does anyone have any thoughts on this? Perhaps I really should move this inquiry to the Asset Protection, Legal forum now.
Most people just transfer to the LLC and take the chance (slim) that the lender will call the note due. Be sure to change your insurance policy to make the LLC and not you as the loss/payee.
In Texas, the LLC gives you great liability protection. Not sure where the people are from who say LLC’s do not protect you legally.
What is the process to transfer property to a LLC from my name and how do you change the insurance beneficiary.
In Texas, you sign a Special Warranty Deed with you as the Grantor and the LLC as the Grantee. The Deed must be signed by you and your spouse if your spouse is also on title. The Deed must be notarized and recorded in the county real property records. Contact your insurance companyabout changing the loss/payee. Your agent may be able to do it for you. I would wait to record the deed until I have the insurance changed.
I had a question about changing the insurance loss/payee to the LLC once the deed is transferred to the LLC.
In general, do insurance companies care if you do this? Do they charge more if the insured is a corporation rather than an individual? And do they need to contact the bank to let them know the policy is now under an LLC?
Also, I was told that even after you change title to an LLC, it may be a good idea to keep sending your mortgage payments with a personal check rather than a check from the LLC to keep them from realizing that the title was transferred. Is this a good idea in your opinion? Or do you find it is not necessary?
I am ready to close on my first investment property and have to deal with these issues very soon.
You also have to be aware of the tax consequences. In Tennessee, corporations (LLC, etc) have to pay 6% of profits in taxes. That is pretty expensive for asset protection. And if you personally manage your properties, you are still personally responsible for any negligence. It may make more sense to simply raise your liability insurance.
In general, the insurance company doese not care. They may charge more if the property is not owner-occupied. I send an LLC check. I name the LLC a familiar name (ie Brown - 5309 Downs Drive, LLC. It does not raise a red flag, however, I do not try to hide anything from the lender.