Have you had a loan called after transferring a property to LLC?
Investor · Los Angeles, CA · Member since 2016 · 15 posts · 3 votes
Have you had a loan called after transferring a property to LLC?
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Investor · Charlotte, NC · Member since 2016 · 374 posts · 189 votes
9yThe 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.
66 Replies
- Investor · Berkeley, CA · Member since 2016 · 45 posts · 43 votes9y
First thought: If an LLC adds no asset protection, why do the wealthiest Americans hold so much of their wealth in LLCs? Second thought: Insurance companies will invariably deny coverage whenever they can. They will cover the garden variety premises liability claim, but not reckless or intentional misconduct. Are you as a real estate pro more likely to be hit with a slip and fall case, or a claim of nondisclosure of a defect in a property you just sold? Insurance will not cover the latter. You've got your umbrella policy but no LLC. Now what?
- Investor · Chattanooga, TN · Member since 2016 · 146 posts · 108 votes9y
@Bill Henley How will having the property in an LLC protect you from a non disclosure suit? Most likely the remedie will involve the property itself or paying for the repairs that were not disclosed. Punitive damages wouldn't be applied unless it was clearly a malicious nondisclosure which is something you don't have to worry about if you operate your business in an honest manner. All an LLC does is compartmentalize your risk to the extent of what is held in that individual LLC, which is why people say you have to have multiple LLC's one for each property if you really want to protect yourself. But then you run into the problem of the veil being pierced because if you run all your LLC's with the same employees using the same office using the same management software etc it will be easy for a lawyer to argue it is the same business and all those individual LLC's don't matter and all your assets are at risk in the lawsuit.
- Investor · Berkeley, CA · Member since 2016 · 45 posts · 43 votes9y
This "smart lawyer" trope seems to be sufficiently broad to negate all rules of law. In the real world there's no such thing. I have been a practicing litigation attorney for 30 years and I have never seen a successful effort to pierce the corporate veil. This includes scores of defendants whose business consists of a pickup truck, a box of tools, and a certificate of incorporation. You don't just stand up in front of a judge and say, "I'm a smart lawyer, Your Honor, and I think you should disregard the laws of this state and hold the owner of this LLC personally liable." If anyone is aware of a case where this actually happened, I'd like to hear more.
- Investor · Chattanooga, TN · Member since 2016 · 146 posts · 108 votes9y
@bill
@Bill Henley I am not an attorney so you have much more experience than me but can you explain how an LLC will protect you from a nondisclosure suit? As far as piercing the corporate veil here is an article that I read about with some cases from TN http://www.frostbrowntodd.com/resources-1468.html
Maybe those cases would not apply to LLCs ? Anyways so in your opinion if I own 24 houses and put them all in separate LLCs but i self manage them run them all out of the same bank account, us the same software have the same employee work on all of them I will still be protected and no one could pierce the veil?
- Investor · Berkeley, CA · Member since 2016 · 45 posts · 43 votes9y
@David Grabiner: There are at least two issues in play. First, is the LLC or corporate defendant liable to the plaintiff? This depends on the existence of a duty running from the defendant to the plaintiff, a breach of that duty, a resulting injury, and the dollar amount of damages required to relieve that injury. Second, with the entry of judgment in the amount of such damages, what are the assets that the plaintiff can reach, on which to levy and execute in satisfaction of the judgment? With this conceptual framework we can see that the liability and damages side is completely independent of the availability of assets side. An LLC does not create immunity from liability. It creates asset protection. It follows that anyone who chooses to do business with an LLC should know, going in, that the assets available to relieve an injury arising from that transaction will be limited only to those assets owned by the LLC. If the amount of damages potentially flowing from the transaction are likely to exceed the value of such assets, a higher degree of caution and due diligence are indicated, than if your counterpart is a deep pockets individual or general partnership. In short, the risk of loss is exactly where it should be: on the person who chooses to accept whatever risk the transaction presents.
- Jacksonville, FL · Member since 2017 · 5 posts · 0 votes9y
@Bill Henley What are your thoughts on purchasing properties into a land trust for purposes of anonymity instead of an LLC? My thought behind this is that there will be no public record of what assets I or my LLC actually own. Of course my self or my llc with be listed and the beneficiary but there will be no assets under my name or the LLC. Would this strategy offer more protection than an LLC?
- Investor · Berkeley, CA · Member since 2016 · 45 posts · 43 votes9y
@Kit Thomas: I have heard of this device but I have no opinion on it. It is my understanding that anonymity is the benefit of the trust, because the trust instrument can be nothing more than a word processor document on your hard drive. That said, I must now make the lawyer's disclaimer, that my posts to BP are intended to be for general informational purposes only, their origin is my own foggy and imperfect memory, offered without the benefit of any legal research, they do not constitute legal advice, and they do not give rise to an attorney-client relationship. Free legal advice is worth exactly what you pay for it: nothing.
- 9yMat SorensenPro MemberAttorney · Phoenix, AZ · Member since 2016 · 32 posts · 23 votes
I've transferred myself to an LLC about 10 times and have had over a thousand clients with real estate they personally own with a loan in their personal name transfer to their LLC and have never had a bank invoke the due on sale clause. They won't give you permission either though. I agree with the other comments that they don't care if the loan is current.
Yes, if they did invoke the clause it's a default in the loan and they'd have to allow you time to cure (like missing a payment) so you could deed it back to your name if necessary. Though I've never had a client who needed to do this.
- Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes9y
I have to say that John T. Reed gave an exhaustive analysis on "Due Upon Sale."
Here is the link: The truth about getting around due-on-sale clauses
It answers, I believe, ALL of the questions that was already posted here and included proof.
Here is an excerpt:
Rise in interest rates would likely increase enforcement of due-on-sale clauses
The Wellenkamp and de la Cuesta cases, both of which involved lenders aggressively enforcing their due-on-sale clauses, occurred in the early ’80s. At that time, mortgage interest rates were at record highs---about 18% at the peak. In contrast, the interest rates on the Wellenkamp and de la Cuesta mortgages were much lower. The lenders have a fiduciary duty to put that money back out at current rates.
Other lawsuits to enforce due-on-sale clauses during that period were Patton v. First Federal Savings & Loan Association (578 P 2d 152) in AZ, Nichols v. Arbor Federal (250 NW2d 804) in Michigan, Bellingham First Federal Savings & Loan Association v. Garrison (553 P 2d 1090) and Morris v. Woodside (682 P 2d 905) in WA.
A conversation among three investors might go like this during a period of increased interest rates.
Investor A: Boy, I'm sure glad I have fixed-rate mortgages with that run-up in rates last month.
Investor B: I don’t have fixed rates, but my lifetime caps are below the current rates so I’m partly protected.
Investor C: I may be in trouble. I have all fixed-rate mortgages, but they are all in technical default because I did lease options. The lenders could call every single one of them.
In his article on the subject, William Bronchick says that lenders don’t care about enforcing due-on-sale clauses these days because market interest rates are low. He says, “This trend will probably continue so long as interest rates remain within a few percentage points of existing loans.” That may be true, but it implies an unspoken corollary: “This trend will probably NOT continue if [market] interest rates rise more than a few points above existing loan [interest rates].”
I found an interesting, albeit legally meaningless, clause in the law. Section 1701j-3(b)(3) says:
That means would you lenders please go easy on the borrowers.
@Account Closed I found the law I was talking about: Garn - St. Germain Act, which allows 1- 4 unit properties to be put in a living trust without triggering the due on sale clause. I have no idea if it limits liability to just assets in the living trust. There are some types of trusts that are used specifically for asset protection.
This link shows legal exceptions to the due on sale clauses: https://www.law.cornell.edu/uscode/text/12/1701j-3
- SW Florida/Maryland · Member since 2016 · 89 posts · 36 votes9y
Originally posted by @Russell Brazil:
@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.
One way to pierce the corporate veil is to argue that an Individual is doing ‘business’ rather than the Entity. If you have a note that is not the entities name but rather your name only, you're probably going to see an attorney make the argument that the individual has blurred the line between him and his entity.
- Lender · Mesa, AZ · Member since 2017 · 26 posts · 1 vote9y
@Robert Arnold Doesn't hurt to ask your current lender if the loan if fully assumable.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Amy A.:
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.
To my knowledge, a trust will not insulate your property from the rest of your assets for limited liability the same way a LLC will. The only thing a trust may be able to buy you is some anonymity as the owner if you structure it properly ... as in purchase the property by the trust rather then in your personal name and then transfer it, and don't call the trust "Amy A's trust" of course :) This will make it more difficult, but not impossible, for somebody looking to sue the owner to come find them. Other than that, trusts are designed for a different purpose, namely avoiding probate when you pass and would like to leave the property to somebody. Living revocable trust is the most common way to do this, they are easier to setup and maintain than a LLC, and you will have no problem whatsoever from any bank transferring a property to a living revocable trust as it is a very common thing, and this is a must IMHO if you have children or other heirs you'd like to have inherent the property, but won't buy you much for asset protection ... LLCs and trusts are different legal forms, designed for different purposes.
- Gardiner, ME · Member since 2015 · 190 posts · 177 votes9ySo many people misunderstand LLCs it's crazy. If you take the steps to ensure you are treating company as a separate entity from yourself it's really pretty hard to pierce the veil. The problem is that many people don't do the legal things you need to do. These are items like commingling money like paying for your groceries out of your business account or not keeping up on the annual meetings and documentation. If you are behaving like a scammy, irresponsible business then the courts might be more inclined to listen to a lawyer saying that it's not a real business entity. I continually hear that the LLCs don't matter. But you have to realize that whether you are talking real estate or any kind of business there are two types of lawsuits. There is an inside attack and outside. An inside attack is when your business damages someone. Like say a slip and fall at your rental. Yes they may be able to get at all of the assets inside the LLC. But a properly structured LLC does prevent them from getting access to your house, your other investments, garnishing your wages, etc. An outside attack is the other way. Say you get in a car accident and kill someone. It goes way over your insurance limit. They can get at your personal assets but not your assets inside the LLCs. They can get a charging order against you for money YOU get from the LLC. That's nice because your business just never give you the money and it really gives the opposing lawyer incentive to settle. If LLCs didn't work then they just wouldn't exist. Do they 100% shield everything from everyone? No of course not, and they aren't meant to.
- 9yJeff CopelandBusiness MemberReal Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
It took me all of five minutes to find multiple examples of other BP members who have had their notes called by the bank based on the Due on Sale clause:
https://www.biggerpockets.com/forums/50/topics/386043-bank-called-my-due-on-sale-clause
https://www.biggerpockets.com/forums/83/topics/190300-due-on-sale-called-what-now
https://www.biggerpockets.com/forums/311/topics/183825-due-on-sale-clause-was-called-by-bank
Know the risks if you decide to go that route. And, like many other posters stated above, the rewards aren't all that great anyway.
@Shawn L. - Regarding your question about how changing your insurance impacts the situation:
1. You have to update your insurance policy, otherwise you are uninsured
2. Your insurance carrier is supposed to report to your lender any changes in the policy (the lender is a "named insured" on your policy)
It's not difficult to change over your insurance. But in doing so, you are more likely to tip off the bank to the title transfer.
Copeland Morgan LLC4.867 Reviews @Jeff Copeland Oh I agree 100%. If you read my post carefully, my point was that it is easy to change the property insurance and that's exactly what I did. Simple fix. And yes, the lender sees the change to the insurance certificate and they also see the change on property taxes as well.
The title insurance angle is a good point and a potential sticking point that people should be aware of depending on what their policy allows.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes9y
Regarding "Have you had a loan called after transferring a property to LLC?" This topic has been beaten to death. See also
Loans called for me or my members? No. They can't. Why? Because I (and my members) get 'bank permission' when I (or my members) bought or I (or my members) refinanced. If you transfer or sell w/o the bank knowing, then it's up to the owner of the note to call your loan due. BTW, they (the note holder people) use these things called "computers". They know what you are doing.
Let me put this in perspective. Illegals have lived in the US for ever. All the sudden... a politician says 'hey, they are breaking the law.' Presto. Deported. All the note holder needs to do is actually enforce their own rules... and Presto. Defaulted. I have talked to the Wake county clerk of court about this, as in a case I saw about 8 years ago. And the facts of 'default', when presented to the court, are clear. If the borrower signed the documents, and there is an 'investor loan' on the property, with the 1-4 family rider recorded, where per clause "E" the borrower acknowleges "BORROWER'S RIGHT TO REINSTATE" says DELETED... then you are ****ed. Sorry. Game over. . Black and white. Case closed.
The court rules by facts and law. And if the note holder invokes the DOS, then you are toast. And yes, the loan in question was current. Suntrust decided to call it and they did. And they won. See also https://www.biggerpockets.com/forums/49/topics/582... from 6+ years ago. This.. .after the Suntrust experience was only a few years old and still in our minds.
I saw a lot of carnage in 2008-10. 99% of BP members can't relate. Good luck with your transfers 'under the covers'. In the off chance that things go to hell, I'll be buying up your called property at the courthouse steps;)
See also my posts on this BP topic several years ago.
https://www.biggerpockets.com/forums/52/topics/933... and
https://www.biggerpockets.com/forums/50/topics/105...
There are tons more. Just have to go back 6-9 years ago when we were in the 'fun' of a correction. Again, 99% of BPers can't relate. Well, threads like this sure make me a bit uneasy about what I just did. I have a 30-year fixed rate investment mortgage at 4.875%. I recently quitclaimed the property to my single member LLC. I notified my insurance company to have my LLC listed as an additional insured (they sent EOI back with the LLC listed as an Additional Interested Party), instructed the PM company to start depositing rent to the LLC bank account, updated my automatic mortgage payments to be debited out of the LLC bank account, etc.
Before doing this, I read a bunch of threads (with a much different vibe than this one), listened to a bunch of podcasts, talked to the title company, and even talked to my attorney, where the consensus was pretty much not to worry about it, investors do it all the time, and if it gets called, just quitclaim it back to personal name.
I’m wondering if I just screwed myself because rates are/will go up and there could definitely be an incentive to call the loan due as others have stated.
The title company did mention that they can't call it due if you quitclaim to single member LLC, but I'm not so sure this is correct.
I feel like I'll sleep a little less easy at night now because of this. Going forward, I'm not sure I will do this with additional properties and am thinking of possibly just dissolving the LLC and saying the hell with it.
I guess the biggest question I have is whether or not I’ll even have THE OPTION to quitclaim back to my name if it gets called, or if I’ll pretty much be forced to refinance or pay it off. Does anyone know the answer to this?
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes8y
@Mark S. check your mortgage documents and see if you signed a . If you originated the loan as a rental (non-owner occupied), then most likely there will be a Rider form that limits your reinstatement on defaults, monetary or (in this case) non-monetary. If you originated as owner occupied, then the boilerplate FNMA (and Freddie Mac) documents allow you the right to correct the default.
Personally, if I were you, I wouldn't be too worried about it. You have a SMLLC, a disregarded entity. If you are in non-financial default, and they call the loan, and you signed the 1-4 Family Rider, then get an attorney and file a case with your state banking regulators. While you will lose the case on the factual details, you may get relief from the state banking commissioner.
@Chris Martin, I do remember signing a 1-4 family rider and the loan was originated as an investor loan.
- Real Estate Broker · Northeast PA · Member since 2017 · 2k+ posts · 3k+ votes8y
Inter-vivos revocable trusts which, according to
Garn-St. Germain Law, prohibits a lender from enforcing a due-on-sale (or transfer) clause.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes8y
Originally posted by @Marc Winter:
Inter-vivos revocable trusts which, according to
Garn-St. Germain Law, prohibits a lender from enforcing a due-on-sale (or transfer) clause.
... .except the transfer to an LLC (not a trust, therefore not recognized under (d)) already occurred.
@Mark S you could also go talk to an attorney and that may set your mind at ease.
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