I have read that there are a number of obstacles when buying a SFH under an LLC (i.e. having to use a commercial lender, higher interest rates, shorter amortization and balloon payment after 5 years). As a result, many books/podcasts suggest buying the property in my own name and then transferring the title to an LLC after the fact. This makes me skeptical because of the "due on sale" clause but from everything I have learned, it is unlikely that a lender will call a performing note. My questions are:
1- How long should I wait to establish the LLC and transfer title? Should it be immediate or do I need to wait to show the note is performing?
2- Are there transfer fees associated with this method? If so, how much and does that amount change based on how long I wait?
3- Would you recommend going this route, or would it be smarter to hold the SFH in my name and get an umbrella policy instead of the LLC?
Caveat that I practice in Minnesota, but my sense is that national banks probably have similar policies. I am doing this process (transfer loan and mortgage responsibilities to LLC) for a Minnesota client right now.
Our assumption going in is that the bank is generally fine with this, so long as the creditworthiness of the LLC owner (presumably the original buyer) has not materially changed. If the bank wouldn’t write you a new loan on the original terms now (for instance if you DTI ratio has changed substantially or if other credit actions have impacted your credit in the meantime), then that might complicate the matter.
That being said, we are having the client request the consent of the bank. This loan’s due on sale clause (I think this is a version of Fannie or Freddie, can’t remember) says you can’t transfer or sale “without the lender’s consent.” The paperwork to make that happen is very straightforward, in Minnesota at least. We are expecting the bank to pass along its legal fees for our client to pay, but after that it’s typical deed drafting and filing work, entity formation work, and some written actions.
The bank will absolutely (we’ve never seen otherwise) require a personal guaranty, unless you have super strong balance sheet for another business or something. It needs a human to go after if the mortgage payments stop coming.
I’ve never done this personally, but I intend to in the next few years when we upgrade. As an attorney, it’s absolutely worth the costs in my mind to get the asset protection for our other personal assets.
I've asked my mortgage companies, several of them over the years, and none would grant permission to transfer to an LLC and keep my current loan. I would take the risk anyway if I knew I would always have the funds available to pay off the loan if they called it, but because I don't have that assurance, we did not transfer to LLC and went the higher liability insurance and umbrella route with our property.
@Tim Joyce let us know how this goes, in my experience most banks will not approve of this transfer. I have seen it work with a couple smaller banks but the red tape stops a lot of these with the larger banks.
What some people are doing is creating an agreement with their LLC as a management company to try and defer some of the management risk however the inability to transfer title leaves the property at risk for unrelated liabilities.
My client was on the ball today, so here’s the recap (sanitized to protect confidentiality):
- lender said transfer would absolutely trigger the clause (not a surprise to me), and that they wouldn’t allow it (surprising to me that it was such a hard line)
- client’s contact at another lender said he sees this often, where folks risk the acceleration under the due on sale clause, a d transfer anyways, and the bank doesn’t find out
- this other contact said they just make people transfer back before allowing them to refi
- outcome is an hour of lawyer time to draft deed to transfer and LLC written action to accept the property, plus deed tax (negligible if your attorney does it right in Mm), and recording fee ($46 I think?)
So I stand corrected.
I stand corrected also in saying that most banks will not approve of the transfer :)
Last time I talked to the county recorder's office it sounded like they record anything - they don't offer legal advice or care if things aren't correct. Their goal is to file paperwork. I have come to the conclusion that you could transfer it without the bank knowing however I can't advise on this as I know it triggers the clause and it could cause recourse if a lender were to find out.
One attorney I used to use for paperwork back in the day said if the bank won't give them permission he has them fill out the deed transfer, notarize, and just not file it. Not sure if this allows for any protection but this was from another attorney.
Before anything, why do you want to transfer it under an LLC? If for asset protection reasons, the mortgage itself should act like a deterrent (unless you have already high equity to protect) and you need to worry about proper management and insurance anyway. In other words, you need to make sure you covered yourself first with insurance, property maintenance and management before going to next level of protection.
To answer your questions:
1. I don't think it matters how long you wait to establish and transfer title. The concerns involved and DOS clause are the same one month in or 5 years in. You need to read below about DOS to be fully informed if you want to risk it or not.
2. Yes, depending on how you decide the make the transfer and into what kind of entity. I don't think the associated costs change based on how long you wait.
3. Depends on what your situation (do you have many other personal assets, lots of equity, risk tolerance, etc.) is and your goals.
An essential asset protection measure is to transfer investment property out of one's personal name and into an LLC–or, if a two-company structure is used, into individual series of the holding company. For real estate, this is done by means of a general or special warranty deed.
Are due-on-sale (DOS) clauses a problem in the transfer of real estate? Almost never, in spite of what lenders and Internet alarmists say. Lenders have their plates full with monetary defaults and generally do not accelerate a performing loan, especially if a property is being transferred to the borrower's personal company. But...
Transferring into a revocable living trust will not trigger a DOS enforcement however the property must be primary-owner occupied and the beneficiaries must be the original borrower(s) not a new name beneficiary like a LLC. So no matter how you slice it or try and circumvent the rule, if you change out the name of the beneficiaries, they can enforce the clause. Transferring to an LLC is not seen as estate planning or an inheritance event.
A detailed resource on Due on Sale: https://www.johntreed.com/blogs/john-t-reed-s-real...
I can give you more info on all this, including a letter if you want to request lender permission, and how to preserve title insurance and more on the asset protection subject. PM me if interested.
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