I have a friend with a few properties who bought in his name with an umbrella policy. Now wants to transfer to an LLC. Mortgages are with Chase and US Bank, and they are giving him the run around. Is there a way to do this without initiating the Due On Sale clause?One bank said he'd have to put in a commercial loan. He does not want to have to refinance either.
Why would he want to complicate his investing when he already has all the protection he needs with his umbrella policy. Is he doing it because "it is the thing to do" or does he actually understand what he is doing.
@Steve Christensen , there is no way to do this without violating the due on sale clause. There are ways to obscure what you are doing, but they are more complicated and expensive. The reality is the banks probably won't do anything as long as he keeps making payments. And if they do, they will probably just ask him to put them back in his name. But they don't have to do either. He will have violated the terms of the contract and they are well within their right to accelerate the loan if they choose to exercise that right.
I appreciate both of your feedback. Don't kill the messenger here!
My friend is incredibly smart. Due to some changes in his life, he met with a Financial Adviser. The FA did not necessarily say "put your properties in LLC's", but asked how they were titled, and he said he was considering transferring them, IF he even can.
I read a few blog posts on this subject, and I feel it is biased to house hackers. What I mean is this - if you are obtaining a property with an FHA mortgage, no way around it, you are buying in your name. And that's what he and his wife did, at the time. But they've since moved on from those 2 duplexes.
In my humble opinion and research, I don't trust an umbrella policy. I've heard of legitimate suits from accidents on properties that far exceeded 1 million (I know you can get more). But, the policy does not prevent the suit to go outside of that. So again, in my understanding of research, couldn't they then go after personal possessions? I understand if you are living in your first duplex, renting out the other side, there's not much to go after. But at his point in life, there is.
So, if the property is in an LLC, they can only pursue the LLC.
I was also told that most mortgages have in their writing that it is 100% ok to transfer to a trust. I know this is wikipedia, but per the Garn-St. Germain act: An important consumer change was to allow anyone to place real estate in their own trust without triggering the due-on-sale clause that allows lenders to foreclose on a current loan upon transfer to another. This greatly facilitates the use of trusts to pass property to heirs and minors. It may also protect the property of wealthy or risky owners against the possibility of future lawsuits or creditors, because the trust owns the property, not the individuals at risk. The bill states "... a lender may not exercise its option pursuant to a due-on-sale clause upon ... a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property[.]" (The Garn St. Germain Depository Institutions Act of 1982
Now, if you assign the beneficiary rights, I believe this can trigger it. So then, I have to ask, if you simply transfer your property from your individual name to a trust, and keep your umbrella policy, would this be the best of both worlds? I am not very familiar with trusts.
@Steve Christensen the Garn St. Germain relates to estate planning. If he changes from owning in his name to owning in a trust with the LLC as beneficiary he is not within the bounds of the Act because end ownership has changed. Do banks actually ask for the trust documents? I'm not sure. As people have mentioned, the DoS is not often called even when triggered, but he will want to weigh that risk for himself. Also, if he is self-managing the rentals his personal name will almost certainly be sued as well as the entity since they want as many liable parties as they can get.
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