How do I structure this LLC?

Question

Hey guys - how do we structure this business agreement where there are 4 homeowners on the Title but only 1 borrower? The loan borrower wants bought out but agrees to not sell or refi the house since interest rates are high. How do we structure this so that all 4 parties are secured?  (ie. 3 partners investment is safe, and the borrowers loan is safe)

It'd be 3 people holding 100% equity in the home and taking rental business profits, while the borrower who the loan is under gets residuals for putting his credit up and also gets profits from the rental business. How do we remove the borrower from the Title without causing a Due on Sale? Do we need multiple LLCs? Something else? HELP! Thank you.

Account Closed · Answer

What you are describing is a partnership. What I avoid are partnerships.  I'd use Joint Ventures. Four people holding title means ALL Four have to agree to sell when the time comes. You can't get four people to agree on what kind of pizza to get. Each of the four assume the liabilities of all the others in a partnership.How will the loan borrower be bought out? Do you mean the borrower will put down 20%, close the loan and then each of the others gives him 5% of the down plus closing costs?Who is going to make payments when the property is vacant? Banks assume 80% to 90% vacancy rates. (missed payments from tenants) What happens if you have to evict because a tenant isn't paying?Who pays if the roof needs to be replaced or the furnace goes kaput?Only owners can refi the house, it doesn't matter who is on the loan. If someone is on the loan but not on title they can't refi the loan unless they are added to title during the refi. I know, it's a little confusing.Title and loan are two different things. I'm a little confused by what you want to do here.Is this an existing property with an existing loan or a property you would buy in the future?If you remove the borrower from title, yes the bank can exercise the due on sale if they choose to. It doesn't have to be immediately. It can be anytime from now to when the loan gets paid off.

Nathaniel Dodson · Answer

Don't use an LLC in this case since transferring the property could trigger the due on sale clauses. However, you can do a participating promissory note that has a return based on profits which also has a due on sale clause on the sale of a property.

Sean Morrison · Answer

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

If I understand correctly, the owner that has their name on the mortgage wants out, but you don't want to refinance the mortgage due to the rates. Is that about right?

One option, depending on your state, could be a contract for deed, or bond for deed. It's a form of seller financing where the seller (in this case the person trying to get out of the deal) contracts with the buyers (the rest of you) to sell the house, but the buyer's name stays on the deed until the house is fully paid off. An escrow agent then handles the monthly payments and makes sure the PITI is paid. Since the deed never changes name, the mortgage company doesn't complain as long as they are getting paid.