Help. Mortgage says LLC is a no-no!

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Help. Mortgage says LLC is a no-no!

John G.
New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
Hi all, I'm purchasing my first property (Milwaukee) and asked my mortgage broker (Chemical Bank) about transferring the deed after the loan is secured. He said I can't do that. And that I'll need commercial lending. Is this something he HAS to say because I emailed him? And I can likely do it and he'll turn the other cheek? Or should I not have asked that? What do I do??? It's a $90 investment. Putting 20% down. Thanks!
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Brie SchmidtBusiness Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
9y

@John G. - Any residential loan has to be to a person, not a LLC. If you want the LLC to hold title it needs to be a commercial loan. You can always transfer it after, but be aware that is still not allowed and if they find out they can use the due of sale clause of your loan to demand the balance due in 30 days. Usually if you transfer it back they will let it go

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    9y

    @John G. - Any residential loan has to be to a person, not a LLC. If you want the LLC to hold title it needs to be a commercial loan. You can always transfer it after, but be aware that is still not allowed and if they find out they can use the due of sale clause of your loan to demand the balance due in 30 days. Usually if you transfer it back they will let it go

    Podcast Guest on Show #132
    Second City Real Estate4.821 Reviews
    WebsiteView Page
    8Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    9y

    @Brie Schmidt Hmmm. Then how do most investors structure this legally in to LLCs (seem most do)?

    Thought maybe it was a "don't ask, don't tell thing"

    1Reply
  • Mike CumbieBusiness Member
    REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
    9y

    @John G.

    They take out commercial loans through the LLC. You can still do it with a personal guarantee or build the credit of the LLC up first. Residential loans are designed to assist with home ownership which is why they have lower interest rates and usually much more favorable terms. If you are looking at making a profit from the mortgage they want it to be a commercial loan.

    3Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    The concessions on the need to have a LLC is about 50/50. Those that do use a LLC are generally in the group that do it because they hear others expounding on the need for protection. None have much in the way of first hand proof to support the theory. It is driven primarily by unknown fear.

    Insurance is always your first and best line of defence. A LLC is more for psychological reassurance.

    Provided you are a responsible investor/property manager there is little requirement beyond having full insurance coverage. If you need a LLC to sleep at night then you must assume the added financing and management issues.

    5Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    9y
    What about the whole "Quit claim to LLC" and no one cares? And that this is what most investors do. I've been hearing this on podcasts, BP, everywhere it seems.
    0Reply
  • Nicole A.Pro Member
    Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
    9y

    Is the interest rate for a commercial loan significantly higher than an investment property loan?

    Why are you against a commercial loan?

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    "What about the whole "Quit claim to LLC" and no one cares?"

    That does seem to be the common opinion. It is however mortgage fraud. Low risk until the industry changes their policy. In the mean time the risks although real are relatively low of being caught but then everything is risky in regards to real estate investing.

    4Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    9y

    @John G. - the only way to structure it legally is to get a commercial loan.  

    I would talk with your attorney, but it is my understanding that buying it in your personal name and having a loan in your personal name "pierces the veil" of the LLC and holding title in the LLC will provide zero liability protection sine you already co-mingled the asset

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    4Reply
  • Jessica Zolotorofe
    Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
    9y

    Interest rate shouldn't be any higher, problem is closing costs are far more expensive. But also far less expensive than mortgage fraud charges or having the loan called and default interest and penalties tacked on... and as "low risk" as it may be, I have seen it happen twice now. 

    3Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    9y

    @Nicole A. Commercial rates are about 2 - 2.5% higher.

    @Brie Schmidt I will look into that.

    I'm still confused about the route to take. All I've been reading about is LLCs, LLCs. Put in $Xxx amount of value in each LLC. Have each property in it's own LLC, then all of those LLCs owned by one main LLC...

    I guess an umbrella insurance policy is enough because, well, it's a small house and I actually don't have many assets anyway that someone could go after other than this house (I rent my primary residence and lease a car)?

    1Reply
  • Paul Bowers
    Real Estate Investor · Macedon, NY · Member since 2016 · 251 posts · 290 votes
    9y

    @John G., it's simple.  Call your attorney and your accountant.  Do as they tell you.  If it costs you an extra 2% that's the cost of doing business.  If that means the numbers no longer work, move on to a different property.

    4Reply
  • Nicole A.Pro Member
    Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
    9y

    @John G. Yeah, the more you read, the more opinions you'll get and the more confused you'll get. But to add to those opinions, I think it is extreme overkill to put one property into a LLC. It's ridiculous and you'll just have more paperwork to deal with and more things to keep track of and keep seperate. Keep your life simple. Especially in the beginning. Besides, if you were by the off-chance to be sued, you'd have to have plenty of equity in a property to be worth going after. And being your property is $90K I think you said, no one with a brain is going to expect much. No attorney is going to waste his/her time on that.

    This is your personal choice. You can own your rental property in your name and there is nothing wrong with that. Have home insurance (of course) and get an umbrella policy as well. You'll be fine.

    There is no need to be making life so difficult and jumping hoops of fire for some sort of end result that you're not even fully understanding yourself.

    Either pay the extra 2% in interest rates and have it in a LLC or just purchase the property in your name and get an umbrella insurance policy. Either way, know your local rental laws and follow them...or get a PM.

    4Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    9y

    @Nicole A. Yup. PM will be in place at closing.

    Ok, seems my options are 1) Form an LLC and see commercial financing with a higher rate. And if the number's don't work, move on (as per @Paul Bowers . 2) Residential financing with adequate insurance. 

    This however is a turn-key property, I probably won't be finding killer deals that way, so option 1 isn't looking good.

    Perhaps I'll check a couple of other lenders to see if they're warm to the idea of quit claiming a deed from a residential mortgage into an LLC...

    0Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    9y

    @John G.,

    It's not that no one cares, it's that as long as the payments are coming in the lender typically doesn't care beyond that. There are exceptions, of course.

    An important point about insurance vs. liability isolation: once a lawsuit is filed and the discovery process begins, your ENTIRE ESTATE becomes exposed and at risk, including your savings accounts and other assets of value. This may or may not discourage other potential litigants. Remember: for some people, their "way to wealth" is to take it from others.

    0Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    9y

    @David Dachtera This frightens me because I may be inheriting a significant amount of $ at some point in the near future. Now I'm afraid that may be at risk. 

    0Reply
  • Paul Bowers
    Real Estate Investor · Macedon, NY · Member since 2016 · 251 posts · 290 votes
    9y

    @David Dachtera, the banks may not care now but what if interest rates jump 3,4,5 or more points?  That's a very good time for these banks that have been looking the other way to start calling all these low rate, long term loans and forcing people to re-fi at much higher rates.

    1Reply
  • Jill F.
    Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
    9y

    We grappled with this on our first property and ultimately decided to leave it in our names, buy a personal umbrella policy, and to use and LLC for property management.

    0Reply
  • Shaune Faust
    Jamaica, NY · Member since 2016 · 46 posts · 8 votes
    9y
    Jill F. What did you end up doing?
    0Reply
  • Shaune Faust
    Jamaica, NY · Member since 2016 · 46 posts · 8 votes
    9y
    Jill F. Never mind you answered in your post thanks
    0Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    9y

    Just spoke to a loan officer at Citibank. She said I could do this as the loan would be in my name, but the property would be in the LLC. Seems logical, but I have a feeling it's not that simple. She also had no idea what a "due-on-sale" clause was. Is this simply a bank to bank thing or is she uninformed/inexperienced?

    0Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    9y

    Assuming that the mortgage and deed have to be in the same name?

    1Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    9y

    Hi @Jill F. And no one has scared you (your attorney specifially) into the idea of an LLC because of the possibility of being sued and all you assets put at risk? Including your primary residence, savings accounts and other investment properties?

    Why do you need an LLC for manage PM? Never heard that one before.

    0Reply
  • Jay Dean
    Investor · Manvel, TX · Member since 2016 · 133 posts · 54 votes
    9y
    Think of the extra 2% or so as the cost of doing business and the cost of security created by having everything in an LLC. Stop trying to "beat the system". Many have looked into this. There is no legitimate way around the rules. The rules are there for a reason.
    0Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    9y

    Aren't we all trying to beat the system in one way or another?

    0Reply
  • Frank Chin
    Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
    9y

    If this is your first property, don't bother with an LLC. Get adequate insurance.

    I witness first hand a couple who set up a business in a S Corp. They were sued, and the lawyer suing does what lawyers always do, he sues the S Corp and the couple personally, for several million dollars.

    Unfortunately, the couple put their faith in the S Corp, bought liability insurance for the S Corp, but not themselves. Their logic: we have the S Corp to protect us already. Their S Corp liability carrier told them to get an attorney for themselves, as they only represent the S Corp.

    Now, I spoke to my insurance agent, as I have businesses in LLC's and was advised that when I get liability insurance for the LLC, a sharp insurance agent will include an endorsement to cover the member owners.

    Just goes to show when you setup things in a more complicated way, you screw up somewhere if you're not careful.

    I spoke to attorneys about this, and their first question is "will I self manage?" If the answer is yes, both the LLC and I will be sued. If I use a PM they'll sue the LLC and the PM, the PM will be covered under their own liability insurance.

    2Reply
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