Mortgage Called Due Upon LLC Transfer

50 Replies

Hi.

I have 4 rental properties financed through 3 different mortgage companies. 2 of the 3 told me today that they would call the mortgage due if I transfer the property to an LLC.

I am waiting to hear back from the third.

Has anyone else ran into this?

Jeff

Jeff, In your other topic, I replied that we found out the exact same thing for our properties, and also that it would be almost impossible to get new mortgages in the LLC's name instead of our own if we wanted to purchase more, so you might want to research that as well. Apparently, before 2008, it was common practice to transfer your rentals into your own LLC and mortgage companies either allowed it or didn't care.

I heard that it is very rare for them to call a current mortgage. There are several threads discussing this here on BP. Also, in CA it is $800 a year for each LLC so I would consider an umbrella liability insurance policy instead especially with if you net worth isn't that high.

@Nick - My reasons are based around asset protection and not exposing my personal assets, "real" business, etc to any litigation. Both my financial adviser and estate lawyer recommend it as do many on this forum.

I do realize that it has been discussed many times and everyone states that it is rare for them to call it. However, they emphatically told me they would call it and that it is a violation of my agreement.

If you have enough assets, credit, and contacts, it is possible to refinance the properties with commercial loans in the LLC's name. BB&T actually told me they would do that with the mortgage we held with them should we wish to continue with the LLC, but it was a much higher interest rate, points, terms, etc. for commercial refi, so we just increased our umbrella policy and kept our low rates.

You can transfer the property to a trust and assign the beneficial interest from the trust to your LLC. If the lenders won't let you transfer them and you are trying to protect yourself there is no other good solution.

I don't think that I would give the Lender a head's up. They usually discover this thru the insurance policy change. I might add the LLC as an additional insured rather than call the Lender. I'd also have a back-up lender just in case. Remember, it's only breach of contract - nothing criminal. I'd bet these lenders have much bigger fish to fry than going after a paying customer.

Jeff, Separate policy, but minimums required on all auto, home, landlord policies, no matter the carrier, to meet requirements for umbrella. Also, watch out for teenagers. Ugh. After 3 car wrecks (no major injuries, thank goodness!), we lost our really great umbrella and had to go with a much higher price policy from another company. They say I have one more year to go to get back to the good one with my primary insurance, barring any other incidents.

Originally posted by Bryan Hancock:
You can transfer the property to a trust and assign the beneficial interest from the trust to your LLC. If the lenders won't let you transfer them and you are trying to protect yourself there is no other good solution.

Scott Horne was just telling me about doing this. Did you hear about it from him or is It a pretty common technique?

Scott Horne is one of the best attorneys in the state to advise you on such matters Jon. This technique is quite common though and is written about all over the place in conjunction with subject-to purchases.

@Jeff L.

I just heard this pod-cast which really explained it well!

http://itunes.apple.com/us/podcast/epic-real-estate-investing/id446611090

EPREI 028 : How to Invest 'Subject To' and Overcome the "Due on Sale" Clause
ReleasedFeb 26, 2012

Taking ownership of a property subject to the existing financing excites the hell out of most investors, however... the fear of the dreaded "due on sale" clause stops them dead in their tracks. There's nothing to fear but fear itself, and on this episode Matt explains why

I have beat this to death in the past here on BP.

1. You signed the note personally, any transfer of the property will note keep a lender from going after you personally in the event of default or deficiency, regardless of who else or where the collateral sits...

2. Generally, if you transfer a property as part of an estate planning scheme and there are no other members in your LLC, banks usually will overlook the transfer.

3. Since the popularity of investors transferring properties to LLC and then selling the LLC or doing similar pops, lenders are cracking down. Use to be, I'd say do it (as I have in the past) but now I'd say proceed with great caution. If they see that you are in the business and especially if you have done similar deals in the past, I'm sure they will win out using the DOS clause.

4. Depends on the lender, your ability to deal with the lender and what is legally customary for your area, that will be true in all cases.

I understand that my name is on the mortgage and am not trying to pass on that responsibility. I just want to "do the right thing" which "everyone" tells me is to transfer the properties into an LLC. I just didn't realize that it would be such a daunting task.

I fixed it, sorta;

1. You signed the note personally, any transfer of the property will not keep a lender from going after you personally in the event of default or deficiency, regardless of who else or where the collateral sits...

2. Generally, if you transfer a property as part of an estate planning scheme and there are no other members in your LLC, Trust, or other entity, banks usually will overlook the transfer.

3. Since the popularity of investors transferring properties to LLC and/or Trusts and then selling the LLC or doing similar pops, lenders are cracking down.

4. Depends on the lender, your ability to deal with the lender and what is legally customary for your area, that will be true in all cases.

Bill Bronchick is an attorney and has an official opinion written on this in an article with legal citations. John T. reed also have a huge write-up about it for "getting around the due on sale clause" where he talks about skirting rules having many negative consequences.

If you are transferring the property to protect your assets I find it very hard to believe that a court would allow the lender to accelerate the note. This isn't explicitly "estate planning purposes," but it is pretty darn close. Your intention is not to sell the property with the existing financing and thus the intent of Garn St. Germain isn't met in my non-legal opinion.

There are probably 20+ threads on this issue alone on BP with tons of citations. Do a bit of digging.

Thanks everyone. I've done a lot of digging (probably too much). It's just a bit overwhelming for us non-experts who do not not deal with this on a daily basis.

You are right to dig. The trouble is that there are not clear-cut answers for the questions you are asking. Super technically the bank could try to call the note citing the laws passed. If you transfer the property to a trust and assign the beneficial interest they can also figure it out if they want to dig heavily, but it is unlikely they will.

In practice if your mortgage is sold off and you are solely dealing with a servicing company where payments are made you'll be fine. If this is a portfolio loan then you my have more cause to worry, but it is still a small risk.

The problem is that the small risk makes their note callable!

Two of the easiest ways for any lender or mortgage servicer to know you transferred a property are notices of hazard insurance and taxes being paid. A good servicer will check these items to ensure taxes and insurance have been paid. The tax bill will be in the name of the property owner, like ABX, LLC. Your insurance policy will be in the name of the insured.....and by the way, talk to your agent about the coverage.

IMO, the best way is to come clean up front and finance it in the company name with your personal guarantee.

Originally posted by Jeff L.:
But.. would transferring the titles into a trust provide any kind of liability protection?

No. You would still need the beneficiary of the trust to be a limited-liabiliity entity such as an LLC or Corporation.

Yeah, our choice at the time (2008) was either refinance with commercial loans under the LLC, which apparently the banks would let us do at much higher rates and balloons, etc., to get the liability issue handled, or go against the current wisdom at the time (2008-2009), forget the LLC, keep the low interest rates fixed for 30 years and just up our umbrella policies and hope for the best. Actually comforting to know we aren't the only ones in this situation as I was perturbed that it all seemed to change right when we decided to do it.

We plan to change it all and establish a trust once we get settled again, feel like gypsies right now moving across country and re-establishing ourselves with properties scattered across the U.S., but the last 3 years have been very interesting, to say the least.

Originally posted by Mitch Kronowit:
Originally posted by Jeff L.:
But.. would transferring the titles into a trust provide any kind of liability protection?

No. You would still need the beneficiary of the trust to be a limited-liabiliity entity such as an LLC or Corporation.

Sounds interesting. I just don't have enough knowledge on the subject to understand how that even works. The whole "having the LLC as the beneficiary of the trust" is a bit confusing to me.

I found this article to be pretty informative though:

http://clintcoons.wordpress.com/2011/01/26/transferring-real-estate-into-your-llc/

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you