LLC, Quit Claim Deed, and Due-on-sale implications
I acquired a SFR recently and would like to transfer it to an LLC for added liability protection of my personal assets. Before closing my lender told me I would simply need to do a Quit Claim Deed to transfer the property to my LLC...no problem. After closing (unfortunately) my attorney told me to get a letter from the lender giving me a release to go ahead and do the quit claim deed. I went back to my lending agent and asked for this letter and after reaching out to his superiors he was told that because the loan is held by Fannie Mae/Freddie mac they would be forced to invoke the due-on-sale clause if I did a quit claim deed on the property.
In the end I've beefed up an umbrella policy I have, but my question is whether this is a common problem people have when putting rental properties into LLC's? Everyone I've spoken to (including real estate agents and another lender) tell me that there shouldn't be any problem with quit claiming the property into a n LLC and it would NOT invoke the due on sale clause.
Will lenders write the loan with my LLC to avoid this the next time? Any insight is greatly appreciated.
Generally speaking, a due-on-sale provision is enforceable as written in the terms of the loan. There are very few protections against due-on-sale enforcement. There are two sources of due-on-sale restrictions in home loans; Federal Law and State Law. For an analysis of your state's laws you should speak with an attorney in your state for more information, or the state whose laws govern the loan agreement.
For information on the federal restrictions for due-on-sale clauses, read https://www.law.cornell.edu/uscode/text/12/1701j-3. This is the federal statute that creates exemptions for due-on-sale transfers. Given that I am not licensed in your state, I cannot applies these laws to your facts to tell you whether you have a case. However, you should speak with a local attorney.
#2 All Forums Contributor
- Real Estate Broker
- Lake Oswego OR Summerlin, NV
- 58,930
- Votes |
- 39,986
- Posts
#2 All Forums Contributor
- Real Estate Broker
- Lake Oswego OR Summerlin, NV
@Josh Bloomquist the other thing many folks miss when they quit claim is your title insurance you bought on the purchase extinguish's when you deed to another entity. the lenders policy stays in force.. and it might not matter .. just so your aware if you have a title issue in the future you may not be protected
Not sure who you were talking to, but most folks I talk to, say the transfer of the deed can trigger the due on sale clause. Most folks that do this, just doesn't notify the lender and get a away with it most lender do not follow up on the deed once the monthly mortgage payments starts coming in.
Originally posted by @Matthew Kreitzer:Generally speaking, a due-on-sale provision is enforceable as written in the terms of the loan. There are very few protections against due-on-sale enforcement. There are two sources of due-on-sale restrictions in home loans; Federal Law and State Law. For an analysis of your state's laws you should speak with an attorney in your state for more information, or the state whose laws govern the loan agreement.
For information on the federal restrictions for due-on-sale clauses, read https://www.law.cornell.edu/uscode/text/12/1701j-3. This is the federal statute that creates exemptions for due-on-sale transfers. Given that I am not licensed in your state, I cannot applies these laws to your facts to tell you whether you have a case. However, you should speak with a local attorney.
As Matthew stated, get an attorney, perhaps one well versed in trusts. The link above shows that there are exceptions on the federal level. I see a lot of folks putting their properties in a trust for estate purposes only (therefore not getting the due on sale) and this is one of the exemptions on the federal side. A possible side effect is that you don't personally own the property, therefore you may achieve the liability goals. Just an observation-no legal advice.
Originally posted by @Josh Bloomquist:
I acquired a SFR recently and would like to transfer it to an LLC for added liability protection of my personal assets. Before closing my lender told me I would simply need to do a Quit Claim Deed to transfer the property to my LLC...no problem. After closing (unfortunately) my attorney told me to get a letter from the lender giving me a release to go ahead and do the quit claim deed. I went back to my lending agent and asked for this letter and after reaching out to his superiors he was told that because the loan is held by Fannie Mae/Freddie mac they would be forced to invoke the due-on-sale clause if I did a quit claim deed on the property.
In the end I've beefed up an umbrella policy I have, but my question is whether this is a common problem people have when putting rental properties into LLC's? Everyone I've spoken to (including real estate agents and another lender) tell me that there shouldn't be any problem with quit claiming the property into a n LLC and it would NOT invoke the due on sale clause.
Will lenders write the loan with my LLC to avoid this the next time? Any insight is greatly appreciated.
Its not a matter of whether you can't transfer a property in to an LLC rather is what are the consequences of making such transfer. And its apparent your lenders has informed you of those consequences.
The vast majority of my transactional experience is in commercial real estate, and owning property in entities is standard practice in CRE but it should also be noted the properties are encumbered by commercial loans which are designed to accommodate entity ownership.
The research I've done by speaking with lenders and reading first hand accounts of using entities in residential real estate tells me there appears to be a barrier if the loans are not portfolio loans and even then I'm told lenders who use an underwriting framework that mimics Freddie/Fannie will not allow ownership in an entity.
Someone else posted about using a trust vehicle to limit your liability, and I too think this might partially serve your purpose. Through a trust you would get a limitation on ownership liability, but you wouldn't get the circumstantial benefits that pass along through entity ownership.
Originally posted by @Rich N.:
Not sure who you were talking to, but most folks I talk to, say the transfer of the deed can trigger the due on sale clause. Most folks that do this, just doesn't notify the lender and get a away with it most lender do not follow up on the deed once the monthly mortgage payments starts coming in.
This has been my personal experience. I had a similar situation when I first started out. I remember flip flopping the properties between my company and personal name initially until I understood what was what. My attorney told me to get the exact same letter from my lender, but was unable to because they were not a portfolio lender and had to make sure the loan sold. I waited until the loan sold and then I quitclaim deeded the property. You do need to have your insurance squared away also. That will most likely become an issue if the name of the insured does not match the deeded owner of record. As far as dealing with a government backed loan, I am completely unsure. All that I can do is tell you that of my experiences and how they have panned out for me doing what you are looking to do. That being said, there is always the chance that that letter telling me to write a check could come but just hasn't yet. It is definitely a calculated risk and a decision that only you can make. Like everyone else said though, talk to the underwriter and a good attorney. The attorney is most likely going to give you the same answer about the letter, but try asking him how often he/she has dealt with this situation where the lender has called the note. That being said, here is the disclaimer... This is not legal or financial advice. Best of luck.
Thanks all...Invaluable feedback that I will put in the memory bank! I think I'm going to stick with an umbrella policy for the added protection and know better the next time.