Need to move duplexes to LLC but loans can be called due??
Investor · Grosse Ile, MI · Member since 2017 · 37 posts · 4 votes
Hello everyone. I am fairly new here, so thank you in advance for your patience with my questions. I have a duplex that I purchased using cash down and a conventional loan. I need to move the property into an LLC. However, the lender has indicated that the loan COULD be called due. The lender also indicated that she has not actually seen a case of the loan being called due...but I don't want to risk that it would happen to me. Does anyone have experience or advice about this? This property is a partnership investment, so I THINK it needs to sit in the LLC I have with my business partner. We file a partnership return, and get K-1s.
Second, I am closing on another property that I need to place into a newly (yet to be created) LLC. However, my lender said that I cannot put the loan in the LLC's name and same goes as above if I move the property into the LLC after closing.
What the heck do people do in these cases? I just don't get it.
Again, thanks in advance for your patience and help!
@Amber Hooks I think @Account Closed over states his case. Yes there are Gurus who recommend LLCs and are setting you up for expensive courses or legal fees. Depending on your personal situation and LLC may not be the ideal choice. LLCs often do not provide as much protection as people expect them too. However that does not mean they offer no protection.
To simply say not to open an LLC without knowing more about you, your current and your projected future situation is irresponsible. Every lawyer I know that owns property, owns it in an LLC and not in their own name.
Hi, @Amber Hooks, I'm not an attorney (and you should definitely speak with one), but hopefully can help.
What your lender told you is correct, the loan COULD be called due. It is unlikely because you are still personally responsible for the loan, even if you move the title to an LLC. Also, the lender has little incentive to call the loan, as long as you're up to date on the payments. Why anger a paying customer? With rates still so low, they can't really make any more money off of you with the current loan. Better to keep you happy and try to sell other services.
One approach is to have the paperwork on your loan updated with the bank. Or just refinance and do the title transfer at the same time (again, time to talk with a lawyer).
Regarding future purchases, you will probably have to continue to be personally responsible for any loan (even if title is in an LLC's name) for some time. You won't be able to take a loan in the LLC's name until it's showing suitable profits to cover any loan it takes out.
Remember who owns a property (has title) and who's responsible for paying back the loan (the guarantor) are two different things.
@Amber Hooks I have 4 rentals that are conventional loans (fannie mae). I purchased the properties in my personal name with this financing on them. I then formed an LLC and did a quit claim into the LLC name (that was in 2008 &2009. I have been paying my mortgages ever since and haven't had a phone call yet.
If you want to be 100% legit, then form the LLC to operate the rental, but keep it titled in your personal name or have it in an LLC and get a commercial loan product on the buildings (yes this is possible on 1-4 families) If you go that route you will get 20-25 year amortization on a 5-10 year fixed rate with slightly higher interest. You will need to call smaller local banks and credit unions for this.
Thank you all! Good information.
@John Anderson, can you elaborate? I'm not sure I'm following you.
@Todd Dexheimer, "If you want to be 100% legit, then form the LLC to operate the rental, but keep it titled in your personal name..." ...I'll need to read about this. I thought if you deed it to the LLC then the LLC is on the title. I'm not clear on how the property sits in the LLC without the LLC being on the title. I have a lot to learn!
@Amber Hooks lots of good information here and I'll try to translate some of this as best I can.
There are some experts who say that you can get the same protection as an LLC provides with a good insurance policy. I'm not very good at telling you which strategy is best but "LLC" and "Insurance" are the two prevailing thoughts on asset protection in the investment world.
Now, changing to your LLC after closing is very common. That "Due on Sale" clause that is talked about so much isn't even legal in every state. It is true that the bank COULD call the note due if you change title. And just as someone mentioned before, just pay on time and you will be fine. You cannot close a "conventional" loan in an LLC name. But you can with a "portfolio" loan...but the loan will be very different. Use your first 10 mortgages as conventional loans, close in your name, and then switch title to an LLC after closing. That's what everyone does. No bank is calling your note due if they are making a ton of money in interest....which they are if you are paying on time. Just pay on time.
Feel free to ask additional questions if you need. Thanks!
@Account Closed
@Andrew Postell thank you for your response. I certainly need to further educate myself about the legal side of all of this.
@Amber Hooks the property would not be in the LLC, it would remain in your personal name, but be operated by an LLC as the manager. Provides much less protection. Getting a $1M or $2M umbrella policy personally and putting a high liability policy on your property can also mitigate risk. Also, running your real estate properly helps as well
@Amber Hooks I think @Account Closed over states his case. Yes there are Gurus who recommend LLCs and are setting you up for expensive courses or legal fees. Depending on your personal situation and LLC may not be the ideal choice. LLCs often do not provide as much protection as people expect them too. However that does not mean they offer no protection.
To simply say not to open an LLC without knowing more about you, your current and your projected future situation is irresponsible. Every lawyer I know that owns property, owns it in an LLC and not in their own name.
@Amber Hooks I agree with most of what has been said here. I am not sure of the purpose of the transfer. Currently who has title to the property? Are you and your partner both on the deed and are only you on the mortgage? If that is the case then I would leave it. Any indemnification you need is better gotten from insurance.
If you are trying to record that you and your partner have title to the property but only you are recorded on it then you might need to do something else. I would talk to a real estate attorney and a CPA or tax attorney.
@Ned Carey Many lawyers do that because they are afraid of malpractice claims. Doctors do the same thing. That is more an issue caused by their other jobs instead of the real estate itself.
Of course... I have mentioned in other posts, the top of the line is really a multi leveled approach with an LLC being owned by a Trust with the trustee being a lawyer and the beneficiary being a foreign trust with a foreign lawyer as the trustee. Which unless you a drug dealer, dictator, or pop star that is a huge amount of over kill.
@Ned Carey @Account Closed
Thank you for taking the time to reply to my post. My situation at it's most basic is this...
Home was purchased as part of a partnership, between myself, my spouse, and a friend...and should be part of the partnership LLC (I think???).
Mortgage is in my name.
Home title is in my and my spouse's name.
Any further thoughts?
@Ned Carey @Account Closed
I should have also mentioned that I am not YET on the LLC, but will be added soon. Currently, with having the home in my name for the mortgage but the income not in my name (since I am not on the LLC) it is impacting my ability to get another conventional loan.
Just the one thought that "that's what everyone does" isn't a very effective defense if/when things go bad.
@Amber Hooks, I saw some discussion about transferring title it into a "Land Trust". The beneficiary will be an LLC in which all partners will be members. This doesn't trigger the due on sale clause There are also other benefits to this as well. However, I personally don't have any experience in this. I would say, speak to an experienced RI attorney about this. (Also note, that this may not work with federally back loans)
Another option might be to have the LLC buy the property from you so its own name goes on everything instead of yours.
Can you find someone locally who is well versed in these matters?
You have to decide your risk tolerance. I used to put all of my houses in my name, refi, and then switch them to an LLC. 99% of the time, you will never have an issue so long as your taxes are paid, and your mortgage is paid on time. If they are getting paid, the bank will generally not mess with the loan. After some time though, I didn't like rolling the dice. I have found that it is much easier and more secure in the long run to go to commercial mortgages and just doing everything straight through an LLC. The first loan is typically a bit more of a pain in the ***, but once you have established a relationship with the bank, they move quickly in subsequent deals. There are a few more hoops to jump through and ongoing loan servicing paperwork, but it takes the "What if" out of the situation, and everything is on the up and up.
Amber, excuse my belated reply. You seem to need to have it in an LLC for ownership and distribution reasons. I do know of a Texas attorney that has written an article on this subject. Another attorney recommended his site to me. Not sure how to link here but search for lonestarlandlaw dot com and "due on sale" - one of his quotes in that article is "Historically, mortgage lenders are not usually interested in foreclosing upon a performing loan on merely technical grounds such as transfer of title by the borrower. " Also I had an attorney tell me once if they do have a problem with the transfer, I could always transfer it back. Hope that helps.
In Texas this is really a non-issue. To exercise the Due on Sale clause and begin the foreclosure process requires a 20 day "Notice of Intent to Accelerate". The process offer an opportunity to cure, so you can just deed in back during that time
I would really, REALLY, REALLY!!!! recommend you do a Google search with these words:
due on sale bigger pockets
You will get the following in your search results:
posted over 2 years ago
I wanted to share a recent experience. I recently received a letter from one of my lenders (Flagstar bank) calling out a deed transfer I made around 2-3 years ago. I transferred a deed via quitclaim from my name into an LLC. The loan was secured in my name as it was one of my first 4 Fannie loans. They noticed that I had a named insured of my LLC added to my insurance. They first demanded that my insurance carrier change the named insured back into my name. Then I received a letter invoking the due on sale clause with a copy of the deed. They are giving me 30 days to transfer it back into my name and change the insurance accordingly. They will not accept mortgage payments in the mean time.
Wow - this is the first I've heard of a bank invoking the due on sale and it happened to me. I've made every payment on time with no issues. This gets me thinking of all the people that buy homes subject to the original mortgage. This situation would be an absolute nightmare if I had to unwind a transaction years later. I don't see how this could be a sustainable model with the due on sale threat constantly out there. All you hear is that the bank will never call the due on sale clause. Well it does happen.
Due on sale clause was called by bank!
============================
I’ve seen it happen, guys. My attorney has seen it happen. Yes, as long as the payments are made, perhaps the bank has no reason to look — but perhaps they do look. Are you willing to play that game with $50,000? How about a $500,000 mortgage? How about $5,000,000?
Can I (and Should I) Move My Property Into an LLC and Out of My Name?
=============================
I would list more, but I think you get the point.
I also had a friend that had his loan called on TWO different properties recently. He had to quickly put it back in his name.
Also, I don't know how folks who put their properties in the LLC overcome the problem of getting Insurance because you have to now name the LLC as the Insured, not you since after you put the property into the LLC, you no longer own it.
The Insurance Company needs to then give the Dec Page to the Lender.
Won't the Lender eventually find out? I think that people are just gambling that the Lender just won't bother.
Now, let's say you locked in a 30 year fix rate mortgage at 4%.
Why would you take a chance of having to refi that beautiful Mortgage if the Lender calls the Loan? Is it really worth doing that? If this was one of my properties, I might have closing costs associated with the Refi in the 10s of thousands and I would lose such a great loan!
If you really want Liability Protection, get the right Insurance.
If you want more protection, get an Umbrella Policy.
If you want even more protection.... get a Psychologist! haha just kidding here.