Can I buy a property first, then roll it over into an LLC later?

Question

Hi all,

I haven't set up my LLC yet. I'm just getting started in this business. Is it possible to buy a property first, then roll it over into an LLC? For example, if I live in it first. Or if I find a good deal that I want to make an offer on immediately.

Edward B. · Answer

@Jennifer Bowen, yes it is very common, but I am surprised that this got this far without someone mentioning the dreaded - dun dun DUUUHHHHHH - Due on Sale Clause!!!!!

You at least need to understand the potential consequences of your actions otherwise you could be back here lamenting about no one telling you about it. This is how so many people get turned around with LLCs.

When you transfer the property to an LLC you are violating the Due on Sale clause in your mortgage. This gives the lender the right to accelerate your mortgage and call the entire balance due. Now, do they normally do that, no, but they absolutely have the right. And as I like to point out, they have the right to do it at any time. So if your loan gets sold and the new lender decides they don't like it they can call your loan. There are stories on BP of that very thing happening. At that point they may ask you to put the property back in the borrower's name or they may simply demand payment in full, it is up to them, not you, you violated the clause in your contract.

Personally, I have transferred several properties and have had no issues in almost ten years. There are properties I did not transfer though because I was afraid the lender (a credit union) would be a stickler and/or I could not afford to remedy the situation if they demanded payment in full.

So, you just need to understand that while it is indeed common practice, and rarely has had negative consequences, it certainly could and you should be prepared to deal with that. Go in with your eyes wide open.

Jake Thomas · Answer

@Richard Bradshaw if you have a mortgage the mortgage stays in your name but the the LLC now owns the property legally.

I am not a lawyer nor will ever be one so this is my best explanation to your question. Some may disagree or have different experiences but I have done these several times with no issues.

Richard Bradshaw · Answer

How does that work with your mortgage? @Jake Thomas

Jake Thomas · Answer

In Michigan its very easy. You just have to sign a Quit Claim Deed and move ownership of the property from one entity to another.

Title companies take care of that here.

Edward B. · Answer

@Jennifer Umbaugh, @Jennifer Bowen,

I tried that. Most just outright refused . Those that said it was fine would not put it in writing. Meaning, legally I was still bound by the clause. There are ways to do it such that it is not blatantly obvious, but no way to gain the protection of the LLC without violating the due on sale clause. Short of getting their written permission. But why would they grant that? They will more likely than not sell your mortgage in the secondary market and certainly wish to retain that right. If they removed that protection their asset would not be worth nearly as much.

Jennifer Bowen · Answer

Thank you all. The legal stuff is all very confusing. Doing lots of studying. I'll get there someday,

Jennifer Umbaugh · Answer

To avoid any Due on sales clause problem I would contact my lender before transferring the property over.

Jennifer Bowen · Answer

So, what I'm hearing is it is not only accepted but common to buy as an individual and roll over to LLC?

Can I buy a property first, then roll it over into an LLC later?

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