Due on Sale

12 Replies

Is the due on sale clause a real issue (I realize it is a theoretical issue) when purchasing property and then transferring into a LLC?

I would like to buy 4 plexes and small multifamily but want to place them in a LLC. Thanks.

So, two things:

First - it is a very real right that the bank typically has. Virtually all mortgages include a due on sale clause, and virtually all transfers to an LLC will give the bank the right to trigger that clause.

Second - I have not heard a lot of stories of banks calling a loan due.  This is not legal advice, but I've heard experts (i.e. real estate attorneys) talk about the due on sale clause as if it is rarely if ever exercised.  

So, it's a risk. It's a risk that I personally will not take, and one that I would not suggest you take unless you have a lot of assets behind you.  But, it's also your call :)

So guys, I am going through this now. I have 7 investment properties in my name, and I've called two banks (Fifth Third) and Arvest that collectively hold 4 of them. They are both telling me that I have to refinance in order to actually do a successful move to an LLC.

They are both telling me that "per the terms of the note", if title is transferred it is reported and they can require the loan to be "paid in full", and that they WILL require that, thus forcing me to Refinance.

Here's where the BP community could really help. Since I have significant debt tied to these properties, how high is this "refinance risk"? I don't get the LLC protection I need if the properties continue to be held in my name -- but I also incur significant "other" risk if I have to Refinance at a much higher rate.

It seems like I'm "damned if I do, and damned if I don't" -- I either pay an IMMEDIATE cost of higher interest rates on each property via a set of Non-recourse loans -- OR I don't move my homes to an LLC structure and then I risk Negating ANY value from the LLC structure itself.

My impression is that the number of individual investors that truly maintain the LLC structure and format correctly must be small -- because the number of hurdles to correctly maintain the Corporate Veil across bookkeeping, asset ownership, and legal structure are many...

@Wes Thompson Why do you feel there is a significant risk if you are unable to put the properties in a LLC? I'd rather have a good umbrella policy and take care of the properties. If your properties are in the hood I'd understand.

I've read a couple of posts by people here on BP who have had their loans called due. So it does happen. And with interest rates rising, banks will have an increased interest in doing so.

Originally posted by @Wes Thompson :

So guys, I am going through this now. I have 7 investment properties in my name, and I've called two banks (Fifth Third) and Arvest that collectively hold 4 of them. They are both telling me that I have to refinance in order to actually do a successful move to an LLC.

They are both telling me that "per the terms of the note", if title is transferred it is reported and they can require the loan to be "paid in full", and that they WILL require that, thus forcing me to Refinance.

Here's where the BP community could really help. Since I have significant debt tied to these properties, how high is this "refinance risk"? I don't get the LLC protection I need if the properties continue to be held in my name -- but I also incur significant "other" risk if I have to Refinance at a much higher rate.

It seems like I'm "damned if I do, and damned if I don't" -- I either pay an IMMEDIATE cost of higher interest rates on each property via a set of Non-recourse loans -- OR I don't move my homes to an LLC structure and then I risk Negating ANY value from the LLC structure itself.

My impression is that the number of individual investors that truly maintain the LLC structure and format correctly must be small -- because the number of hurdles to correctly maintain the Corporate Veil across bookkeeping, asset ownership, and legal structure are many...

 Hey Wes,

There is an article that discusses how to use Land Trusts as a tool to transfer the property under an LLC without triggering the same flags that the direct transfer would trigger. This has been invaluable for many clients that I have worked with in the past. Beyond the financial benefit of the trust, you can also utilize a strategy while filing the trusts so that your name will not appear on public record, assisting even more with the asset protection that you are using the LLC for

Also, with the number of properties you have, I would recommend looking into the use of a Series LLC. It is a structure that has been under utilized, but is ideal for people with 3+ properties. You essentially just file the "Series LLC," and then can create separate "child/member" series under the "parent" filing through a private document. This offers the same LLC protection, while reducing filing fees of new LLCs and allows for streamlined operations.

This isn't legal advice, simply my personal opinion as an investor. If you have more questions feel free to connect with me!

@Marc M. @Dawn A. @Wes Thompson   Here is an interesting link from Fannie Mae stating exemptions to due on Sale clause to:

a limited liability company (LLC), provided that

  • the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and

    the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).

  • Here is the link: https://www.fanniemae.com/cont...