Putting property in an LLC

[Charlesa F.]

At what point do you put your home in an LLC?

I found a multifamily and put an offer on it. I want to put it in an LLC but my realtor says that I cant until after closing, He said because the LLC isn't formed yet. So I would have had to form an LLC on a property prior to placing my offer. Is this true? It doesn't sound right to me.

[David M.]

@Charlesa F.

Your realtor and attorney (if you are using one) gave you bad advice. Your contract should have been written with the buyer as "Charlesa F or an entity to be formed." Then, once you are under contract you can go ahead and file to create your LLC.

You really need to do this upfront and early if you really want to go down the LLC route. You need to be ready to "pay for" having the asset protection afforded by a LLC. Legal entities aren't qualified for conforming residential loans. So, your LLC will have to obtain commercial financing. Just like some 90%+ of real estate agents are residential agents, some 90%+ of mortgage/loan officers are residential lenders. Any one who advises that you keep or transfer Title to your names to obtain lending then transfer it back (horrible) are obviously residential lenders. Remember, they have no fiduciary responsibility to protect the corporate veil of your LLC. They are there to sell you a loan.

Meanwhile, transferring Title to the LLC is another screwy situation that people create for themselves. To obtain and maintain the asset protection of the LLC, the LLC has to really own everything. Also, it has to function as its own entity separate from you. Co-mingling funds and using it as your alter-ego is the fastest way to pierce your corporate veil. So, if Title is held by the LLC and the mortgages are under your name, who makes the mortgage payments? You guys or the LLC? People who have done this have to patch it by having an attorney draft something up where the LLC informally assumes the mortgage payment responsibility from the people.

Since you maybe stuck since it seems like your transaction is going through, you will need to also consider your Title Insurance Policy and Homeowner's/Landlord Policy as well. Once you quitclaim the deed to your LLC, you may invalidate your Title Insurance Policy. Now its a different owner and since you don't have an insurable interest your policy may be null and void --- ask the Title company. You will need to update your Homeowner's/Landlord Policy as well. That may / should trigger a change to the insurance clause on the mortgage. That automatically tells the note servicer that Title has changed hands.

Be very careful how you operate when using a LLC. You have to use it as its own entity to maintain the corporate veil otherwise you'll have a nasty surprise when you get your first lawsuit.  Many people have done many things with a LLC, but you don't hear much about how well those actions stand up to a lawsuit.  Talk to a qualified professional or two, and not a public forum, honestly,.  Good luck.