Glendale, AZ · Member since 2017 · 1k+ posts · 238 votes
Hi guys!
I am really scared of this due on sale clause that happens when you transfer your rental into an LLC.
So Ive been postponing and postponing doing so with one of my rentals that is more expensive because I am worried that if I transfer that rental into an LLC and the bank does the due on sale clause then I wont have enough of money to pay the balance off or may not get financing quick enough through a different bank.
Ive tried to search this forum to see if somebody had that happen to them, but no luck. May be its all just in theory but in practice happens super rarely?
So Ive decided to ask. Has due on sale clause ever happened to you on anybody you know when you transferred your rental into an LLC or because of another reason?
1) How many rentals have you transferred from your name into an LLC ? Important part: did you buy it as a rental or you bought it as a primary residence for yourself?
2) How long did you own it?
3) Did you ever had due on sale clause happen to you?
I will start myself: I bought one property on my name and lived there for 6 months then transferred into LLC. No due on sale clause happened
Every now and then you do see someone on the forums that it has happened to. A very small number for sure, but I expect it to become more common as we are now in a rising interest rate environment.
But let me pose another scenario to you. Presumably you put the property in an LLC for liability protection. Well if the mortgage is still in your own name, and the LLC owns the property....to me that would appear to be a very easily piercable entity.
Every now and then you do see someone on the forums that it has happened to. A very small number for sure, but I expect it to become more common as we are now in a rising interest rate environment.
But let me pose another scenario to you. Presumably you put the property in an LLC for liability protection. Well if the mortgage is still in your own name, and the LLC owns the property....to me that would appear to be a very easily piercable entity.
Every now and then you do see someone on the forums that it has happened to. A very small number for sure, but I expect it to become more common as we are now in a rising interest rate environment.
But let me pose another scenario to you. Presumably you put the property in an LLC for liability protection. Well if the mortgage is still in your own name, and the LLC owns the property....to me that would appear to be a very easily piercable entity.
While everyone's distracted with DOS, the real risk is to your title chain and Title and hazard insurance. In the name of asset protection, the beneficiary of these is you and you no longer own it.
How does a high risk of no longer being insured align with asset protection? I hold commercial assets in LLCs from day one but do not back door qcd little houses into business entities.
@Mary Jay A transfer most likely will trigger the Due on Sale clause (DOS) - and while in the past, in an environment of falling interest rates and prices might been a rare occurrence, like they say, past performance might not apply to future results, and with rates increasing and "aged" loans (where the bulk of the interest was already collected, since you pay most at the beginning part of the amortization schedule) the banks might be more interested in collecting on the DOS clause and redeploying the money at higher interest (especially if the valuation of property makes for an easy sale in case of foreclosure).
Also, FYI - The Fannie servicing guide, for about a year now, explicitly excludes a transfer into an LLC you own from the due on sale clause. You still have to close in your personal name, however. Link.
Then, if you choose to proceed, at least you'll know what you getting into.
But...it takes two to tango, and this can be a two-way game: if the bank hits you with the DOS letter, you can transfer the property back in your name to cure the problem and play that game, back and forth, if you want/can/afford. Or you can refinance, if your position is solid. So there are ways to deal with it.
Be careful when/if choosing to use a Quit Claim Deed:
A person receiving a purported real estate interest via a quitclaim deed may receive no legal right to the property whatsoever. If the person seeking to transfer real estate with a quitclaim deed has no legal interest, nothing legally is conveyed. In the absence of title insurance--which is not available for a quitclaim deed--the person receiving the quitclaim deed has no legal recourse because the deed itself states that only the interest of the grantor, if any interest exists, is conveyed.
Whether title insurance terminates by transferring real property depends on the type of policy, and how “insured” is defined in the policy. You take a risk which could result in cancellation of your title insurance and complete loss of your real property without compensation in the event that a title issue regarding your real property arises.
Contact your title insurance company to determine coverage and if your policy does cover transfers , and when or how.
While everyone's distracted with DOS, the real risk is to your title chain and Title and hazard insurance. In the name of asset protection, the beneficiary of these is you and you no longer own it.
How does a high risk of no longer being insured align with asset protection? I hold commercial assets in LLCs from day one but do not back door qcd little houses into business entities.
Good point.
But, if it comes to worse, lets say I transfer a property into an LLC, and a tenant sues that LLC, whatever is in that LLC could be used to satisfy the reimbursement to the tenant. But my other properties that are not in that LLC are not affected. I think that is the main advantage of transferring a property to an LLC. I may lose what LLC holds (a house) but I will keep my other properties and personal assets...
You are correct. Remember you still have insurance. So the LLC is providing asset protection. If you have multiple properties in the same LLC they would be exposed as well. If you do not have much equity in the properties then you are probably ok as there is no advantage for one to sue you as the property is highly leveraged.
If you are concerned about multiple properties in one LLC create a separate LLC for each property or if you are fortunate enough to be in a state that has the Series LLC then I would go that route.
Every now and then you do see someone on the forums that it has happened to. A very small number for sure, but I expect it to become more common as we are now in a rising interest rate environment.
But let me pose another scenario to you. Presumably you put the property in an LLC for liability protection. Well if the mortgage is still in your own name, and the LLC owns the property....to me that would appear to be a very easily piercable entity.
and paying the note out of a personal checking account along w/ other operating expenses...
bonus points for accepting rent into same account.
There are two types of transfers that can potentially raise an alarm about the due on sale clause: (1) the transfer to an LLC and (2) the transfer to a trust. A transfer to an LLC will trigger the clause and should therefore be avoided even though banks are hesitant to ever foreclose as long as the note is being paid. Even with the note being paid, the banks will still send threatening letters. This issue can be avoided completely by transferring the property into a land trust.
While a transfer to an LLC will cause alarms at the bank and prompt them to send you a letter, a transfer to a trust will not. A transfer to a trust is exempt from due on sale violations since banks will view transfers to a trust as an estate planning tool. You should not even receive a letter from the bank.
This is part of the reason I recommend people consider transferring properties into a Land Trust prior to moving the properties into the LLC, or Series LLC. The Land Trust is also a private document, so you can also keep your name from public record if you create it the correct way.
While everyone's distracted with DOS, the real risk is to your title chain and Title and hazard insurance. In the name of asset protection, the beneficiary of these is you and you no longer own it.
How does a high risk of no longer being insured align with asset protection? I hold commercial assets in LLCs from day one but do not back door qcd little houses into business entities.
Good point.
But, if it comes to worse, lets say I transfer a property into an LLC, and a tenant sues that LLC, whatever is in that LLC could be used to satisfy the reimbursement to the tenant. But my other properties that are not in that LLC are not affected. I think that is the main advantage of transferring a property to an LLC. I may lose what LLC holds (a house) but I will keep my other properties and personal assets...
Am I right?
Doubtful. How did you convey? Quitclaim deed? Warranty deed?
What type of LLC? Single or multi-member? Quitclaimimg to a disregarded entity doesn't sound real ironclad to me, especially if you didn't get the ok with the insurances I memtioned. Now you're just uninsured with an obvious attempt to disguise and cover IMO.
Operating agreement? Professionally done or none at all or online copied? A lot more to this discussion than what we hear on a podcast or see someone else post generically here.
I can never seem to get a simple clear answer on this.
What is the way to go about someone just starting his real estate business (no previous business history or credit)?
It seems banks will not loan conventional loans to an LLC, yet buying a property under your own name and transferring to the LLC has all the issues mentioned above (DOS clause, Insurance issues).
So..how to get started?
Forget the LLC? Commercial loan? Try to sign title in LLC but take the mortgage personally?
While everyone's distracted with DOS, the real risk is to your title chain and Title and hazard insurance. In the name of asset protection, the beneficiary of these is you and you no longer own it.
How does a high risk of no longer being insured align with asset protection? I hold commercial assets in LLCs from day one but do not back door qcd little houses into business entities.
Good point.
But, if it comes to worse, lets say I transfer a property into an LLC, and a tenant sues that LLC, whatever is in that LLC could be used to satisfy the reimbursement to the tenant. But my other properties that are not in that LLC are not affected. I think that is the main advantage of transferring a property to an LLC. I may lose what LLC holds (a house) but I will keep my other properties and personal assets...
Am I right?
I do not think you are right. Like I said above, llc owns the property, mortgage is in your name....any lawyer will pierce that LLC in 30 seconds because of that. Everyone thinks an LLC protects them, but when the LLC is not maintained properly, the corporate veil is pierced and all your othet assets are at risk. Plus, most people who do this are not properly insured...they insure themselves and not the LLC (btw as soon as it is properly insured, the lender is notified of the change in insurance, then DOS).
So now your lawsuit pierces the corporate veil, and you have zero insurance because the LLC isnt insured....everyone doing this is actually creating a ton of liability for themselves when they think they are limiting it.
I have seen Due on Sale clauses get exercised by lenders.
Also, as @Steve Vaughan suggests, you can be creating title insurance issues, especially if you use a Quitclaim Deed, as opposed to a Warranty Deed.
The bottom line is simple. If you want your deal in an LLC, it should go in the LLC from the very beginning and the loan should be in the name of the LLC.
I can never seem to get a simple clear answer on this.
What is the way to go about someone just starting his real estate business (no previous business history or credit)?
It seems banks will not loan conventional loans to an LLC, yet buying a property under your own name and transferring to the LLC has all the issues mentioned above (DOS clause, Insurance issues).
So..how to get started?
Forget the LLC? Commercial loan? Try to sign title in LLC but take the mortgage personally?
Any clear advice would be greatly appreciated!
Hey Heshel,
This is the method I work with myself and have clients approach this topic. It does very on the specific needs of the investor, so this is not legal advice. This is just my opinion based on my own experiences and the clients that my firm works with.
An idea way to work this, especially for people with a growing portfolio, is to start with a Series LLC. This allows you to create "child" series that will house your properties legally separated, unless you do not maintain the corporate veil - we work with clients on this matter. This is where the Land Trust comes into the picture.
You will purchase the property in your personal name. This offers you all the normal financing options. From there you will transfer the property into the Land Trust, which will be nested into a "child" series of the Series LLC. There is a small chance that this can trigger the "threat letter" that was mentioned in my previous comment. At this point I have historically advised clients to disregard the letter, and even talked to some lenders who have become upset over this. Two reasons for disregarding the letter. (1) because the Land Trust is considered an estate planning tool, it is handled differently than properties transferred directly into LLC's. The letter is incorrect and my firm has provided several legal opinion letters to lenders detailing how the Due on Sale clause is not violated by this action. This tends to assuage lenders (2) though banks may threaten this, they have never taken action against a performing note placed within a Land Trust from either myself or my clients. I have 2,000 clients and have created over 10,000 Land Trusts - yet to have a lender take action on a threat letter that is still performing.
There are more benefits to the Land Trust than just the Due on Sale clause, but that is how I generally work through these issues. purchase property in personal name -> place into land trust -> house land trust in "child" series of LLC.
While everyone's distracted with DOS, the real risk is to your title chain and Title and hazard insurance. In the name of asset protection, the beneficiary of these is you and you no longer own it.
How does a high risk of no longer being insured align with asset protection? I hold commercial assets in LLCs from day one but do not back door qcd little houses into business entities.
Good point.
But, if it comes to worse, lets say I transfer a property into an LLC, and a tenant sues that LLC, whatever is in that LLC could be used to satisfy the reimbursement to the tenant. But my other properties that are not in that LLC are not affected. I think that is the main advantage of transferring a property to an LLC. I may lose what LLC holds (a house) but I will keep my other properties and personal assets...
Am I right?
I do not think you are right. Like I said above, llc owns the property, mortgage is in your name....any lawyer will pierce that LLC in 30 seconds because of that. Everyone thinks an LLC protects them, but when the LLC is not maintained properly, the corporate veil is pierced and all your othet assets are at risk. Plus, most people who do this are not properly insured...they insure themselves and not the LLC (btw as soon as it is properly insured, the lender is notified of the change in insurance, then DOS).
So now your lawsuit pierces the corporate veil, and you have zero insurance because the LLC isnt insured....everyone doing this is actually creating a ton of liability for themselves when they think they are limiting it.
I agree entirely. A lot of people approach this DIY style - but only a few have the knowledge to execute a good strategy that truly covers them. It really takes a team of experienced real estate investors to come up with a strategy that is both protected and effective. You want a good insurance agent, attorney, CPA and banker. If you can find good people for all those positions, you can find a solution to just about any problem you face.
I have seen Due on Sale clauses get exercised by lenders.
Also, as @Steve Vaughan suggests, you can be creating title insurance issues, especially if you use a Quitclaim Deed, as opposed to a Warranty Deed.
The bottom line is simple. If you want your deal in an LLC, it should go in the LLC from the very beginning and the loan should be in the name of the LLC.
I agree with you that risking the Due on Sale clause is not recommended. However, I feel that you would benefit a lot from looking into Land Trusts. They do not violate the Due on Sale Clause, but you can still nest a Land Trust into an LLC by creating the LLC as the beneficiary.
I have seen Due on Sale clauses get exercised by lenders.
Also, as @Steve Vaughan suggests, you can be creating title insurance issues, especially if you use a Quitclaim Deed, as opposed to a Warranty Deed.
The bottom line is simple. If you want your deal in an LLC, it should go in the LLC from the very beginning and the loan should be in the name of the LLC.
I agree with you that risking the Due on Sale clause is not recommended. However, I feel that you would benefit a lot from looking into Land Trusts. They do not violate the Due on Sale Clause, but you can still nest a Land Trust into an LLC by creating the LLC as the beneficiary.
A Land Trust in my area is what municipalities and local government uses to protect open space. Designate your property as a Land Trust? May have to remove any improvements and grow a garden or something...LOL
I rarely use LLCs so do not have any experience transferring properties into LLCs. However, I have sold several properties that had underlying mortgages on land contracts. The memorandum of land contracts are recorded in the public records. I have not yet received a letter concerning the sales or the due on sale clause from the banks that hold the mortgages. I have received, and accepted, refinance offers on properties that have been sold. Either the bank offering the refi did not check the public records or did not care about the land contract sale. I recently received another refinance offer for a property I refinanced ~15 months ago and sold on land contract terms 18 months prior to that refinancing. I am not accepting this refinance offer because the term of the land contract expires in a few months. I expect the borrower will pay off the contract and I will pay off the mortgage loan at the time.
I have seen Due on Sale clauses get exercised by lenders.
Also, as @Steve Vaughan suggests, you can be creating title insurance issues, especially if you use a Quitclaim Deed, as opposed to a Warranty Deed.
The bottom line is simple. If you want your deal in an LLC, it should go in the LLC from the very beginning and the loan should be in the name of the LLC.
I agree with you that risking the Due on Sale clause is not recommended. However, I feel that you would benefit a lot from looking into Land Trusts. They do not violate the Due on Sale Clause, but you can still nest a Land Trust into an LLC by creating the LLC as the beneficiary.
A Land Trust in my area is what municipalities and local government uses to protect open space. Designate your property as a Land Trust? May have to remove any improvements and grow a garden or something...LOL
Sounds like you are talking about a conservation land trust - which is a piece of property bought by a non-profit or government entity and placed in a land trust to preserve it. They dictate their own terms in the trust agreement.
You do not need to structure a Land Trust with requirements like that - I structure them in a way that the client can use the land how they want.
I've retained at least 6 local RE attorneys over the years for different matters. Of all of them, I asked the most knowledgeable one by far regarding asset protection and entities about holding real property inside a Land Trust about 12 years ago. He looked at me incredulously after i explained, no, this isn't regarding a bequeath or donation.
Why the heck would you ever want to place income property into a Land Trust he asked, shaking his head. Whether one puts Conservation in front of Land Trust or not, it is seen as being one in my area and many others most likely.
Recommending Land Trusts to anyone and everyone regardless of their location, the asset type (residential or commercial), whether debt is involved or not? Ok then. I disagree.
I can never seem to get a simple clear answer on this.
What is the way to go about someone just starting his real estate business (no previous business history or credit)?
It seems banks will not loan conventional loans to an LLC, yet buying a property under your own name and transferring to the LLC has all the issues mentioned above (DOS clause, Insurance issues).
So..how to get started?
Forget the LLC? Commercial loan? Try to sign title in LLC but take the mortgage personally?
Any clear advice would be greatly appreciated!
Hey Heshel,
This is the method I work with myself and have clients approach this topic. It does very on the specific needs of the investor, so this is not legal advice. This is just my opinion based on my own experiences and the clients that my firm works with.
An idea way to work this, especially for people with a growing portfolio, is to start with a Series LLC. This allows you to create "child" series that will house your properties legally separated, unless you do not maintain the corporate veil - we work with clients on this matter. This is where the Land Trust comes into the picture.
You will purchase the property in your personal name. This offers you all the normal financing options. From there you will transfer the property into the Land Trust, which will be nested into a "child" series of the Series LLC. There is a small chance that this can trigger the "threat letter" that was mentioned in my previous comment. At this point I have historically advised clients to disregard the letter, and even talked to some lenders who have become upset over this. Two reasons for disregarding the letter. (1) because the Land Trust is considered an estate planning tool, it is handled differently than properties transferred directly into LLC's. The letter is incorrect and my firm has provided several legal opinion letters to lenders detailing how the Due on Sale clause is not violated by this action. This tends to assuage lenders (2) though banks may threaten this, they have never taken action against a performing note placed within a Land Trust from either myself or my clients. I have 2,000 clients and have created over 10,000 Land Trusts - yet to have a lender take action on a threat letter that is still performing.
There are more benefits to the Land Trust than just the Due on Sale clause, but that is how I generally work through these issues. purchase property in personal name -> place into land trust -> house land trust in "child" series of LLC.
Thanks for this advice! Actually, the first time I heard of this strategy was listening to the podcast episode that you were on. I have to do more learning on that it seems. Does this seem to be a smart plan for someone just starting off or is this something more advanced (and more expensive) that only makes sense once someone has a sizeable portfolio under their belt?
Another thing I am thinking of, is just to create an LLC as my operating company (right away, and use this for all income and expenses) and down the line create LLC's to hold the properties. Does that make sense?
It seems from what I am hearing that purchasing a property with an LLC and the mortgage under one's own name doesn't really offer asset protection as it can be easily pierced.
I have seen Due on Sale clauses get exercised by lenders.
Also, as @Steve Vaughan suggests, you can be creating title insurance issues, especially if you use a Quitclaim Deed, as opposed to a Warranty Deed.
The bottom line is simple. If you want your deal in an LLC, it should go in the LLC from the very beginning and the loan should be in the name of the LLC.
I agree with you that risking the Due on Sale clause is not recommended. However, I feel that you would benefit a lot from looking into Land Trusts. They do not violate the Due on Sale Clause, but you can still nest a Land Trust into an LLC by creating the LLC as the beneficiary.
So, if I am understanding this correctly. I would create an LLC that holds no assets does no business. I would create a land trust in which I would then place the property, and designate the LLC as the beneficiary.
Is this correct? How would the state feel about having a single-member LLC that does zero business and holds zero assets?
I have seen Due on Sale clauses get exercised by lenders.
Also, as @Steve Vaughan suggests, you can be creating title insurance issues, especially if you use a Quitclaim Deed, as opposed to a Warranty Deed.
The bottom line is simple. If you want your deal in an LLC, it should go in the LLC from the very beginning and the loan should be in the name of the LLC.
I agree with you that risking the Due on Sale clause is not recommended. However, I feel that you would benefit a lot from looking into Land Trusts. They do not violate the Due on Sale Clause, but you can still nest a Land Trust into an LLC by creating the LLC as the beneficiary.
So, if I am understanding this correctly. I would create an LLC that holds no assets does no business. I would create a land trust in which I would then place the property, and designate the LLC as the beneficiary.
Is this correct? How would the state feel about having a single-member LLC that does zero business and holds zero assets?
Way easier to just get an umbrella policy than make yourself crazy with an LLC when you are just starting out.
@Scott Smith. In your scenario, are you saying title starts out in the name of the individual owners?
Then you deed it into the land trust? Do you use a quitclaim, or a warranty deed?
Are your land trusts revocable or irrevocable?
Then does the land trust contribute the land to the LLC, or do the individual owners simply contribute their ownership in the land trust into the LLC in return for a membership interest?
