Question about due on sale clause?

Question

I know this is talked about a lot, my question is a little different.

I'm in the process of setting up a Series LLC to protect myself.  I'm working with a particular lender that is very investor friendly.  I'm preapproved, and discussed my plans of buying up to 10 1-4 unit properties.  According to them, my w2 income, credit score, and DTI are all good to go.  After owning a property for 1-2 months and having it rented, they'll use rent check receipts as income and allow me to have another mortgage.  The paperwork is a little more complicated, but you get the gist.

I'm planning on financing these in my own name, the moving them over to the LLC.  I'm not worried about them calling the "due on sale" clause.  What I am worried about is after I finance a property and move it over to the LLC, then go to do it again, they'll be like "hey, no more mortgages for you since you're going to keep transferring them to the LLC".  And I don't want to ask the lender for fear they won't issue me a mortgage at all  (maybe that's a bit extreme).

In short, does anyone have an opinion or experience on what lenders will do if you continue to use them but are constantly moving properties out of your name into a LLC?

Tom Gimer · Answer

@Hunter Sandlin The only benefit to having more than 1 name on the Note would be to the lender. Every person or entity that executes the Note would be jointly and severally liable for the entire obligation. In other words, the bank would not have to try to collect 1/3 of the funds from each of 3 borrowers... they could go after whoever has money for the full amount.

In your example I assume there is an LLC with limited assets and a person with assets (accounts, a job, etc.) Bank would follow the money.

Tom Gimer · Answer

@Hunter Sandlin A bank could simultaneously pursue the borrower and any guarantors for payment of the underlying obligation... demand letters and whatnot. But they typically can't go after assets unless and until they obtain a judgment. Sometimes this is accomplished by filing a confessed judgment but not always.

Ryan Murdock · Answer

LLC is for asset protection in the event of legal action against you (although an LLC is far from an automatic "get out of jail free" card).

On the lending side, even if borrowing as an LLC chances are good the bank will still require a personal guarantee from you. If your LLC defaults on the loan you and your credit are still on the hook.

Tom Gimer · Answer

If a member of an LLC personally guarantees a loan made to the LLC, that alone would not permit a third party to pierce the veil and get to the member's separate assets.

Tom Gimer · Answer

@Hunter Sandlin That is essentially correct... but they may have to pursue a guarantor differently than their borrower.

For example, the loan docs may give the lender the right of offset -- taking funds directly from deposit accounts of the borrower, etc. -- which would be an unlikely remedy to have with a guarantor.

Hunter Sandlin · Answer

@Tom Gimer, makes sense. Just to restate to make sure I understand.

If I am trying to buy something under an LLC, a bank may require my own personal guarantee to protect themselves. Although they will likely go after whichever entity has the greater assets first, they could potentially pursue both at the same time.

Sorry for jacking the thread, guys!

Hunter Sandlin · Answer

Thanks, @Tom Gimer. Could you clarify what the benefit would be of having both names on the note? Would they normally pursue both at the same time? Is it just because you could potentially mitigate potential damage to yourself by incorporating more names (and therefore more assets) for the bank to pursue?

Russell Brazil · Answer

Im curious if an LLC will even provide asset protection if the loan is in the individuals name. That seems like a pretty easy way to pierce an LLC.  @Tom Gimer do you know of any case studies where a property owned by an LLC, but with a loan issued to an individual were sued by tenants?

Hunter Sandlin · Answer

@Ryan Murdock, Ah, so an LLC being on the loan can take priority before the personal guarantee? I guess, for some reason, I was thinking a bank could simultaneously claim the assets of both parties until the lien was satisfied.

Question about due on sale clause?

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