Have you had a loan called after transferring a property to LLC?

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Have you had a loan called after transferring a property to LLC?

Robert Arnold
Investor · Los Angeles, CA · Member since 2016 · 15 posts · 3 votes

Purchased a property in my name with a 30 yr fixed mortgage (big corporate bank). Have sense formed an LLC. Planning to transfer into the LLC. Would love to know if anyone has done this and the bank called to load due to the due on sale clause? I know it CAN happen but would love to know if it does happen.

Pt 2: If it gets called can you transfer property back into your name?

Thanks in advance!

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Account Closed
Investor · Charlotte, NC · Member since 2016 · 374 posts · 189 votes
9y

The due on sale clause is a mythical beast like the Yeti and the Lock Ness Monster.  They are talked about a lot, but little evidence actually exists for them.  If you pay the mortgage on time nothing is likely to happen.  Even if they call you on it, call their bluff and ask when you can expect to be served.  Institutional lenders have tens of thousands of active foreclosures from people who don't pay.  They don't want to mess with someone who is actually paying.  If you had $500K in equity, maybe a greedy banker might consider it, but it is unlikely.

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  • Account Closed
    Investor · Charlotte, NC · Member since 2016 · 374 posts · 189 votes
    9y

    The due on sale clause is a mythical beast like the Yeti and the Lock Ness Monster.  They are talked about a lot, but little evidence actually exists for them.  If you pay the mortgage on time nothing is likely to happen.  Even if they call you on it, call their bluff and ask when you can expect to be served.  Institutional lenders have tens of thousands of active foreclosures from people who don't pay.  They don't want to mess with someone who is actually paying.  If you had $500K in equity, maybe a greedy banker might consider it, but it is unlikely.

    8Reply
  • Lucas Hammer
    Chicago, IL · Member since 2016 · 238 posts · 68 votes
    9y

    I've started to wonder if @Account Closed's point is true over the last couple of years. I've only had my loan for 9 months, so I haven't been willing to risk it, but I'd like to think that I could move it to an LLC soon. I don't know anyone busted with that clause either, but I don't want to be the first, so I'll be following this to see if anyone actually has had it called due.

    0Reply
  • Roman M.
    Investor · Miami Beach, FL · Member since 2016 · 486 posts · 216 votes
    9y

    Did it on 3 different properties 10 years ago. No issues so far.

    1Reply
  • Robert Sepulveda
    Lender · Newport Beach, CA · Member since 2013 · 264 posts · 97 votes
    9y

    People move title in and out of trusts and LLC's all the time. Not all lenders will lend to an LLC or trust so, they'll require you move to your name prior to the close of the new loan. It works in reverse as well. Lenders are the ones that require the title transfer most of the time, so they can't stop you from forming a legal entity and pledging your asset into it.

    I've been the one to have to ask investors to move their properties in and out of trusts and LLCs before. The key is not to buy a property and move title quickly. I'd wait 90 days or so, so that if your loan is sold, the underwriting review it will receive shows the title to remain the same as it was when the loan closed.

    Love how @Account Closed said the mythical beast! the truth is, no one reads their documents. Read your note and trust deed. Most don't even have that clause. Though it varies by municipality.

    7Reply
  • Lucas Hammer
    Chicago, IL · Member since 2016 · 238 posts · 68 votes
    9y

    @Robert Sepulveda Is that something that they'd find out if the mortgage was sold later? I ask because in the last 9 months, my mortgage has actually been sold twice, and I'm not sure if it's on the chopping block at my new servicer or not and I might give it a little longer before moving it over.

    0Reply
  • Jeff Brower
    Real Estate Agent · Willoughby, OH · Member since 2014 · 560 posts · 690 votes
    9y

    Great suggestion @Robert Sepulveda . I never thought of that, makes sense because most conforming loans are sold off fairly quick after issue.

    2Reply
  • Account Closed
    Investor · Charlotte, NC · Member since 2016 · 374 posts · 189 votes
    9y
    Originally posted by @Lucas Hammer:

    @Robert Sepulveda Is that something that they'd find out if the mortgage was sold later? I ask because in the last 9 months, my mortgage has actually been sold twice, and I'm not sure if it's on the chopping block at my new servicer or not and I might give it a little longer before moving it over.

     Banks buy and sell mortgages all the time.  How do you think 2007-2008 happened?

    0Reply
  • Lucas Hammer
    Chicago, IL · Member since 2016 · 238 posts · 68 votes
    9y

    Oh, I get that they do it. If they sell it though, will the LLC cause a problem if the deed isn't in my personal name anymore? I'm wondering if they do underwriting every time it gets sold.

    1Reply
  • Robert Sepulveda
    Lender · Newport Beach, CA · Member since 2013 · 264 posts · 97 votes
    9y

    It's easy for lenders to find out later for any future sale of your note that you've move the title into a trust or LLC. It never triggers anything. Your risk is higher that, if there's an actual due on sale clause in your note or deed, and you put the property in an individual name, you could trigger the clause. Stick with a trust or LLC, wait out your 90 days, and you'll be in the 99.99% that never get their loan called on when payments are made ontime.

    2Reply
  • Robert Sepulveda
    Lender · Newport Beach, CA · Member since 2013 · 264 posts · 97 votes
    9y

    Just to be clear - on @Account Closed comments of mortgages being sold all the time. The 08 mortgage crisis happened because bonds containing mortgages were sold en-masse all over the globe. And because they sold so well, and investment banks wanted to capitalize, they created derivatives of these bonds that were based on the original success of the bonds that actually had mortgages in it. But they were just mathematical speculations on the success of mortgage bonds as a whole. The bonds that were derivatives of real mortgage bonds had nothing in them but junk, if anything at all (called CDOs - derivative vs CMOs - real collateral)

    We can't confuse the mortgage bonding and selling that goes on now with what happened from 01-07. We have to be clear so that good debt and good bonding practices don't get lumped in with derivative crap that has not been allowed to continue as of yet. Let's hope that never does happen again.

    3Reply
  • Account Closed
    Investor · Charlotte, NC · Member since 2016 · 374 posts · 189 votes
    9y

    @Robert Sepulveda - Gosh I hope you are wrong.  I have the knowledge, skill and confidence to rock a market like that when/should it happen again.

    1Reply
  • Robert Sepulveda
    Lender · Newport Beach, CA · Member since 2013 · 264 posts · 97 votes
    9y

    @Account Closed apply that knowledge now!

    The problem with those types of markets is, everyone with a pulse and a $99 investment class under their belt thinks they're an investor. All they had to do was buy a property, hold it for 6 months and make $30 to $150k on appreciation.

    It's tough to replicate that market. But, there are deals to be had now. Apply your knowledge and skill to this market and you'll make money. Apply it to a down market and you'll make more money. Just watch affordability indexes in the markets you're in. When they get below 20%, be careful and start hording cash. When they get close to 16 to 17%, prepare for a market correction in that market. Once equity starts to reverse, buy and hold. Just one strategy, but don't let any market keep you out if you're skilled enough to work it. Go for it.

    1Reply
  • Account Closed
    Investor · Charlotte, NC · Member since 2016 · 374 posts · 189 votes
    9y

    I'm good.  I don't work or think like you do.  But I am good.

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    While everyone is looking out for the DOS in corners, the big fat elephant in the middle of the room is insurance.

    In the name of asset protection your title and hazard insurance is laying in the shade.

    5Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    I have heard that some local regional banks and credit unions may allow you to transfer to a LLC if you sign a personal guarentee to pay the mortgage if the LLC cannot, but not so much with the large national banks. I have no personal experience with this nor do I know offhand which banks, but you might ask around.

    Due on sale clause aside, you are going to pay $800/yr CA state franchise tax, plus bookkeeping fees, and extra tax prep fees? I sure hope that you have more than a couple million dollars worth of assets you are trying to protect, otherwise you are likely wasting your time and money with a LLC ... in this case as an alternate I have three words for you: umbrella insurance policy. Get one, and ditch the LLC.

    3Reply
  • Jo-Ann LapinPro Member
    Loan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
    9y

    well said Dave. Lastly the LLC can pierced so easily too and smart attorney can always try and go after you and the LLC. Nothing is full proof.

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    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y

    @Serge S. I believe had the due on sale clause called on one of his properties.

    I also am wondering here out loud......if the property is in an LLC, and the note on the property is in your personal name....would the LLC then be easily pierceable, thus making the whole point moot? Any litigators around to check that logic?

    Ive also been on the record as stating my belief that the due on sale clause is rarely called is because we have been in a falling interest rate environment, well for my entire life basically. When we enter a rising interest rate environment, I think the chances of it will increase because now there will be motivation from the lending side to mess with these existing loans.

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    6Reply
  • Shawn L.
    Rental Property Investor · Natick, MA · Member since 2015 · 128 posts · 188 votes
    9y
    Originally posted by @Steve Vaughan:

    While everyone is looking out for the DOS in corners, the big fat elephant in the middle of the room is insurance.

    In the name of asset protection your title and hazard insurance is laying in the shade.

    I've seen this argument a number of times and I'm beginning to wonder if I'm missing something. Before even forming an LLC I spoke with my Insurance Agent and ensured that the property policy could be changed from my name to the LLC. I set it up so that the transfer of ownership and the insurance policy transfer were effective the same date. I agree with you that if this is not done then there could be a serious issue in the event of a loss, but it seems that the fix is rather simple.

    Is there more to the elephant that I'm not seeing?

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Shawn L.:
    Originally posted by @Steve Vaughan:

    While everyone is looking out for the DOS in corners, the big fat elephant in the middle of the room is insurance.

    In the name of asset protection your title and hazard insurance is laying in the shade.

    I've seen this argument a number of times and I'm beginning to wonder if I'm missing something. Before even forming an LLC I spoke with my Insurance Agent and ensured that the property policy could be changed from my name to the LLC. I set it up so that the transfer of ownership and the insurance policy transfer were effective the same date. I agree with you that if this is not done then there could be a serious issue in the event of a loss, but it seems that the fix is rather simple.

    Is there more to the elephant that I'm not seeing?

     Glad you remembered to address your hazard insurance and it wasn't a problem.  Did it go that well with title insurance also? 

    My point was, insurance isn't mentioned. It rarely if ever is on these sophisticating my little houses discussions.

    8f it's not addressed one could be uninsured in the name of 'asset protection'.

    0Reply
  • Account Closed
    Investor · Dallas, TX · Member since 2016 · 67 posts · 22 votes
    9y

    I have to chime in here, not trying to thread jack but it is along the same line. 

    I have been thinking lately I would want everything to go under the LLC not for the supposed protection it provides (I am not risk averse.. I don't think most of us are..we are Investors after all ;) but rather so it keeps loans out of my name.

    I know I can go up to the 10 unit limit with Fannie/Freddie -- but why should i? Just because I can, doesn't mean I should. My theory is I want to keep my investments separate from my personal business. I don't want lenders to get a migraine when trying to calculate my DTI/depreciation and everything else that goes into rental units if I'm trying to refinance my primary residence or second home. Just having a tenant in the unit covering the mortgage isn't everything. I've seen rentals kill deals time and time again on primary residences. Last thing I want is to complicate my personal affairs.

    Am i wrong in my thinking? Does anyone else do this?  

    1Reply
  • Llewelyn A.
    Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
    9y

    There are other ways of doing things instead of using an LLC or Corp.

    You can use a Schedule E. Here is the form:

    If you used an Investment Loan, bought a Landlord's Insurance policy (can be both owner occupied or non-owner occupied), and took out an further Umbrella Liability protection policy, you won't have to worry about the Due Upon Sale Clause.

    You also won't have to worry about the DTI because the Banks will calculate your Cashflow using this Schedule E.

    Going back on topic, I have a friend, Steve. He normally puts his properties into an LLC after he buys it in his name. He told me he asked his bank to allow him to do the transfer. He ultimately did it when they refused.

    I believe a little while later, probably a year later, they told him he violated the Due Upon Sales clause and they told him to immediately switch it back to his name. He did that promptly because he didn't want to lose the lower rate he was locked into.

    I think a previous poster is correct. Not much Investors would post on here if it happened because they don't want to flag other properties that they may have in the same situation.

    1Reply
  • Account Closed
    Investor · Denver, CO · Member since 2016 · 736 posts · 582 votes
    9y

    While I have not heard the clause used for transfer to an LLC (and I suspect it would depend on whether it was a single member llc or a multi-member llc), I have heard of the due on sale clause being used on an investor that bought a house two doors down from my own. Essentially, the story I was told is he had 6 or 7 properties with different banks that he had told were either his primary home or a vacation home in order to get favorable interest rates. The banks eventually caught on and called the notes sending him into bankruptcy.

    The house across the street from mine also has an interesting title history-

    House was owned by Grandpa....Grandpa passed away.

    Granddaughter's mother-in-law purchased the house from the estate in order to help out son and daughter-in-law. ($173,000 in 2004)

    Son and daughter-in-law rent the house from Mother in law.  They decide they no longer want to live there and want to move it.  Mother-in-law quit claims the house into son and daughter-in-law's name so that they can sell the house. (August 2007).

    They can't sell the house because they are upside down on it.  They get behind on payments.  Bank finds the title shenanigans and the house is then quit claimed back into Mother-in-law's name (July 2008).  I believe they were asked to change the title back in effort for the bank to attempt to work with them and save the house from foreclosure.

    House is short-sold for $96,000 after a series of attempts to rent the place out to poorly screened tenants (including a relative of Mother-in-Law) in October 2012

    0Reply
  • Amy A.
    Portland, ME · Member since 2012 · 616 posts · 550 votes
    9y

    It depends on the state, but where I live they cannot call the loan if you place it in certain types of trusts (banks were doing so and this law stopped it). Instead of an LLC, has anybody considered trusts for asset protection? I'm still learning about them.

    1Reply
  • Jorge Rodriguez
    Pembroke Pines, FL · Member since 2017 · 1 post · 1 vote
    9y

    I think one thing to at least consider is that we have been in a falling interest rate environment for a long time.  Is it possible that banks will be more likely to call the loan (if they can legally do it) if interest rates were to go up significantly? 

    1Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Jorge Rodriguez:

    I think one thing to at least consider is that we have been in a falling interest rate environment for a long time.  Is it possible that banks will be more likely to call the loan (if they can legally do it) if interest rates were to go up significantly? 

     I've actually been wondering about that too. 

    When 6.5% or 7.5% is the 'norm' for an owner occupant again, anyone owed money at 4.5% is basically giving money away.

    Assuming people REALLY want to hold onto their 4% mortgages, there should in theory be less foreclosures all else being equal. 

    So you have a bunch of folks in the foreclosure department sitting around bored & collecting a paycheck, you are holding a bunch of 4% notes that you REALLY want paid off so you can re-lend the money at 7%.... there are many possibilities that can come from calling a note due, most would benefit the loan servicer in this scenario. 

    3Reply
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