Help. Mortgage says LLC is a no-no!

Private Lending & Conventional Mortgage Advice

Help. Mortgage says LLC is a no-no!

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

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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes

@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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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
9y
Originally posted by @Paul Bowers:

@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.
How likely are we to see that? Interest rates have been at historic lows since before the crash.
Will the cost to call loans / foreclose be worth it to achieve the new interest rates? Banksters are greedy, but they're not THAT stupid.
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
9y
Originally posted by @John G.:

@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.
You need to learn how to maximize your asset isolation ASAP!
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Austin Hendrickson
Investor · Minneapolis, MN · Member since 2016 · 139 posts · 143 votes
9y
You could always tell them you are planning on transferring the property to your LLC for estate planning purposes and see if they are fine with that (just tell them this before you close on the property!) - I have heard of investors who successfully used this strategy and the banks were fine with it. They will most likely have you personally guarantee the debt as well.
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Jill F.
Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
9y
Originally posted by @John G.:

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.
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Jill F.
Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
9y
Hi John,
No, our attorney did not try to scare us into the idea of an LLC. We do carry a high dollar personal umbrella policy. We feel that the additional risk (of holding the property personally) is sufficiently mitigated by our umbrella policy and was/is preferable to the alternatives of less favorable commercial financing terms or mortgage fraud. We didn't "need" an LLC for property management, however, we hold and manage other properties obtained with commercial financing in an LLC and it is convenient to manage all the properties through this company.
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Andy WebbPro Member
Rental Property Investor · Carrollton, TX · Member since 2013 · 750 posts · 538 votes
9y
Wow! The Citibank loan officer did not know what a "due on sale clause" meant...I would stay away from her...
I recommend skipping the LLC and getting a $1 million umbrella policy; you can increase the coverage as you grow.
Andy
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Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
Curious: given that they won't do a loan to an LLC, what made you think they'd be cool (if asked) about you simply moving it to an LLC after? Honestly curious. Also as I'm sure others have pointed out (I haven't read replies yet), moving to an LLC doesn't do what most people think it does. Protect your personal assets with good liability insurance. An LLC is not necessary and does nothing.
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Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
9y
Everyone else is correct about a mortgage having to be guaranteed by you personally. I'm not sure as many people use LLCs on their properties as you think. Everyone seems to think you have to, but you don't.
Here's tons of information on considerations for it (or against it, more accurately)- both in the article and in the comments-
https://www.biggerpockets.com/renewsblog/2013/08/1...
Financing is hard for LLCs, for sure. One of the many downfalls.
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Dan Schwartz
Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
9y
And remember, that "2% cost of doing business" is a 40-50% increase in monthly interest cost over conventional financing. It's hardly "2%."
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Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
FYI I find commercial loans to be easier to get. And they're not more expensive to get. Maybe you'll pay .5 - 1 point orig fee. I'm getting commercial rates in the mid 4s so not much higher there. The main downside is most are only fixed for 5 years. Maybe 10. No 30 year terms. Also most am are 20-25 years be 30 so you take a hit to cash flow (though with the right deal you should be fine). But it's not as simple as "I want it under an LLC so I'll get a commercial loan". If it's a 1-4 family they won't do it. The banks that will give me a $1 m loan no problem won't refi my $100k single family.
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
9y
Cody L. John Galang Cody is right on about commercial loans. My last conventional required $50,000 in reserves, took 3 months to get and to top it off most of the processors don't understand business structure (I have an LLC with property as well). It took multiple e-mails and copy's of every real estate or loan paper I've signed in the last 3 years. It was a horrible experience Commercial loans take less time they do usually have a balloon at 5-10 years interest on mine now are 5.25%. My conventional is 4.5% but I had to have the 50k in reserves. You don't pay the interest on the loan anyway. The tenant does. If 1% interest bothers you you need to remember if you bought the right property you will be refinancing in 7-8 years any how. If your trying to grow wealth then equity is not always your friend. Conventional loan is about 125 pages long. Commercial less than 50. I wanted the lower down pmnt of the conventional as I was buying a second home. That way I had enough left over to make a down pmnt on another buy and hold. The lender was convinced I was going to rent the second home. Not my intention at all. I just wanted enough cash left over to buy another property. I'll not do a conventional loan if I can use a commercial loan ever again. RR
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Ian WalshBusiness Member
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
9y
Private lenders should work with an LLC.
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Paul Bowers
Real Estate Investor · Macedon, NY · Member since 2016 · 251 posts · 290 votes
9y
@Account Closed talk to an account. You can write those expenses off either way.
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Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
9y
@Account Closed , talk to an accountant because you CAN'T write off those expenses before the property is being rented out.
I'm a little confused by your question. Let me give a bit more detail in what I'm trying to say.
If you purchase Property A, and spend $5,000 getting it rent ready, you cannot write off those charges. You can only write off the costs you incur after you start renting the property out.
If you purchase Property B, and you spend $10,000 getting it rent ready, you can also not write off those charges, because they are for a property you are not currently renting.
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Levi T.Pro Member
Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
9y
...
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Levi T.Pro Member
Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
9y
Originally posted by @John G.:

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?
Not legal advice, entertainment only, take at your own risk... Residential lender will tell you not to do that, but you can quick claim it... and yes they could go look it up, down at the court house or whenever you renew your loan, or they feel like scratching an itch, thus they would "call the loan in", meaning they tell you to pay it in full on the spot, which then you could quick claim it back to yourself, refi to another bank... who knows, that's the risk. Have I had that ever happen, no. Do I know of anyone that has had that happen, no.... so there you have it.
But really, if you want to have any level of success, your going to go commercial lending at some point. That extra percent is nothing compared to the upshot. I recommend doing it sooner than later. The small guys may not have an LLC setup, but anyone worth their salt, will.

End of the day, if the numbers don't work, they don't work. Now of days, today discounted interest rates don't matter (Anything under 6% is discounted compared to 15 years ago... them days are returning here soon), one day them rates will be higher, turnkey or not, ain't so great anymore. Keep that in mind!
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Account Closed
Houston, TX · Member since 2017 · 89 posts · 59 votes
9y
@John G. Anything the loan officer at CitiBank told you needs to be seen (and kept where you can reference it again) in writing. Get it in an email with the loan officer's name attached. A simple phone call has no future accountability and may not offer accurate information. You can't show a phone call to a lawyer to aid in intelligent decision making.
Back in '09 my husband's property got foreclosed on. At that time I knew nothing about REI or the foreclosure process in Texas. We tried sorting it out over the phone and it was a nightmare. Each time we called, the person we spoke to previously was never available again. Much of the information they gave us over the phone was either deliberately misleading or not accurate to our situation. Nothing they told us was later verifiable. We got nothing in writing and ultimately NationStar screwed us over, big time.
One of the many lessons from this experience.... get it in writing. If the banker isn't willing to put it in writing and sign their name on it, then the information cannot be trusted.
Good luck.
Liz
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
9y
Investors need to be aware that a LLC does not guarantee protection from being sued personally. It is simply one more layer of protection that any good lawyer will attempt to pierce. If your LLC is sued you should expect that you will also be sued.
Insurance is always and should always be considered your first and best line of defence. Everything else is simply another layer on the onion.
Also keep in mind transferring a property in your personal name with a mortgage that you are liable for into a LLC is counter productive in regards to liability protection. Like leaving the key in the lock.
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
9y
Originally posted by @Thomas S.:

Investors need to be aware that a LLC does not guarantee protection from being sued personally. It is simply one more layer of protection that any good lawyer will attempt to pierce. If your LLC is sued you should expect that you will also be sued.
Insurance is always and should always be considered your first and best line of defence. Everything else is simply another layer on the onion.
Also keep in mind transferring a property in your personal name with a mortgage that you are liable for into a LLC is counter productive in regards to liability protection. Like leaving the key in the lock.
That's only true if ownership of the LLC or the property can be traced to you. NONE of your business entities should EVER be owned by a human person. Properties should always be acquired in an entity.
Search YouTube for Mark Kohler and his videos explaining how it works. His 2-day Tax and Legal class in the Renatus education explains it great detail.
Insurance means almost nothing, but you won't survive without it. Insurance itself won't protect or defend you at all. It will, however, pay off certain settlements either entirely or in part. It can actually make you a bigger target because the bad guys know they can get an award in court and it WILL pay out.
If you personally are sued either because you own properties in your own name or property ownership can be traced to you, your ENTIRE ESTATE will be exposed during discovery and your net worth may make you a target for anyone who makes their living taking wealth away from others. "Control everything, own nothing".
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Jeremy Buttell
North Hollywood, CA · Member since 2016 · 23 posts · 9 votes
9y
Originally posted by @Jay Dean:

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.
Many have looked into it, do it and advocate it. I've consulted my attorney and he has stated that this works fine as well. Its really silly that the banks would even care and seems to be a legacy bureaucratic mess. The loan, by being placed in an LLC, is still backed by the original mortgagee and if anything protects the lender as well. It isn't sold, you still remain in control of it, so if anything its borderline fraud on their part if they were to ever consider it a sale.
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Bryan O.
Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
9y
@John G. either way works just fine. If you want good 30 year fixed rates, buy in your name. If you want the added protection of an LLC, buy in its name. You will want to ask banks for their commercial department and ask if they do commercial loans on residential homes. Some do, some do not. It's really about that easy.
Regardless of how you do it, get an umbrella policy. An LLC protects you in one direction: Suit > LLC > Personal. An umbrella can protect in the other Suit > Personal > LLC. For example, if someone sues your LLC then the LLC can protect your personal assets (let's not go into SMLLC and charging orders). If someone sues you, then they have access to everything you own, including your LLC. Even if your asset is in an LLC they may put you personally in the suit for this purpose. The umbrella helps best in this case.
Everyone saying it's "mortgage fraud" to quit claim the deed is going overboard. It is not fraud; you simply trigger a clause that allows the bank to accelerate your note. It is not illegal, it is simply an option that the bank has in their pocket. They may be more proactive (i.e. as soon as they get the notice that the insurance has changed) and call it due, they may be more passive and only call it if they try to sell that loan on the secondary market and find that they no longer can because you changed the deed, or they may never care whatsoever. If you're coming into money, just keep enough on reserve to pay the loan if you really want. Otherwise, put enough insurance that you are comfortable and continue on your way.
Best of luck and happy investing!
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Paul AmegatcherPro Member
Rental Property Investor · Brookville, OH · Member since 2016 · 488 posts · 363 votes
9y
Originally posted by @Mindy Jensen:

@Account Closed , talk to an accountant because you CAN'T write off those expenses before the property is being rented out.
I'm a little confused by your question. Let me give a bit more detail in what I'm trying to say.
If you purchase Property A, and spend $5,000 getting it rent ready, you cannot write off those charges. You can only write off the costs you incur after you start renting the property out.
If you purchase Property B, and you spend $10,000 getting it rent ready, you can also not write off those charges, because they are for a property you are not currently renting.
Mindy,
The cost to get the property ready is part of the adjusted basis cost. You can depreciate it after you rent the property but it should be used in figuring out your adjusted basis cost.
https://www.irs.gov/publications/p527/ch02.html
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John G.
OP
New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
9y
All, just read a great article on "TheMoneyCommando" about Umbrella Policy vs LLCs:
http://www.themoneycommando.com/umbrella-policy-vs...
Makes good points for both and proved some scenarios. Leaning toward an umbrella policy after reading.
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John G.
OP
New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
9y
Thanks @Bryan O.. But if I formed the LLC FIRST, how does it qualify for financing, if it's sole reason for existing is to own the property it's trying for financing in the first place? Doesn't a business (in this case, the LLC), need to show financial for the past 3 years to qualify?
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Bryan O.
Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
9y
@John G. the loan to the LLC will qualify based on your personal finances. The loan will typically be a recourse loan, meaning that if the LLC defaults you are still personally liable to pay it back. As you get into bigger deals, or you put much more down, you may get into non-recourse territory where your LLC longevity and credit come more into play and you are no longer personally liable.
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