Land trusts, LLCs, and Refinancing

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Hi Everyone – I've recently entered into a land trust with two partners to purchase and flip an SFR. Since the closing, two of us have decided to keep the property and buy out the third partner. Now that we plan to hold, I'm inclined to dissolve the land trust and create an LLC. My attorney agrees (via a brief email conversation).However, I'm wondering if there are any implications. Specifically, we purchased the property with private money with a term of one year. We'll need to refinance in order to keep the property. I've read that banks won't provide a loan if a property is in an LLC.

Would you recommend my partner and I retain the land trust or create an LLC?

Thanks.

@Jim Brozny

I buy properties in trust as well. And from my experience it is much harder to find a bank that would do a loan to a trust. I haven't had any problems with LLC. However, for LLC or a Trust you personally will be signing the note.

@Jim Brozny I won't comment on which one is right for you...my liability insurance probably won't cover that...but I can explain about lending with these types of entities. A "commercial" loan or a "portfolio" loan will not have a problem with a Land Trust or LLC on the title of a property. You can close and refinance with those loan types with both. A "conventional" loan will not allow a closing with a LLC on title. Conventional loans are governed by Fannie Mae and Freddie Mac (if you recognize those names). It's not up to the bank on a conventional loan - the LLC thing is a Fannie/Freddie loan. Portfolio loans are governed by the bank...the money comes from their own portfolio of money (thus, the name). So the bank makes the call on those loans. Most investors do a title change after closing in order to place the LLC on title with a conventional loan. Same thing with the land trust, just change it after closing with conventional. Hope that helps. Thanks!

@David Jackson you'll have to forgive me here, my comment was to solely address the feasibility of financing.  I probably can't comment on the legal verbiage of the trust. But you can find loans that will lend on a property in a trust.  The lenders normally want to see the trust paperwork to review but it is completely possible to find loan options in the scenario listed above. 

You can create an LLC and just reassign the beneficial ownership of the Land Trust to the LLC with a simple signed unrecorded written assignment. There is no need to dissolve the Land Trust. If you do, you will have to retitle the property, creating a lot of additional registration cost and insurance headache for no reason.

In fact in my case, all my properties are titled into Land Trusts, each of them having an LLC as beneficiary. The Land Trust add an anonymity layer. In Florida it also add some additional liability protection.

I apologize for my naivete, but if you transfer a property that has a mortgage to any other entity, can't that trigger the acceleration clause?

This is something that I'm having a hard time with - figuring out how to structure an LLC for my rental properties in a way that I can get a conventional loan, while still retaining the protection of an llc.

Originally posted by @Mordechai Birnbaum :

I apologize for my naivete, but if you transfer a property that has a mortgage to any other entity, can't that trigger the acceleration clause?


If you transfer title to an LLC, yes it can trigger the due on sale clause (except some lender that will allow transfer to an LLC were you are the sole member/beneficiary).

By transferring title to a land trust where you are still the beneficiary, the Garn St Germain Act will void any due on sale clause (for residential properties). You can in a second time assign quietly the beneficiary to the LLC.

 

The acceleration clause can be triggered if a property is transferred to any entity (LLC, land trust, corporation, etc.) if the loan allows for acceleration. Some loans permit assignments, e.g., portfolio loans, Fannie Mae, etc. Even if your lender has an acceleration clause, this should not drive your decision making. Lenders are in the business of loaning money, not owning property. In 20 years of practice, the handful of instances where I have seen a lender accelerate a loan always dealt with the owner not performing, I.e., falling behind on mortgage payments or not insuring the property. Ask a broker how many times they have seen loans accelerated, and the answer, in my experience, is little to none. The real issue as I see it based on your post is the financing angle. If you plan to refi the property, complete all your financing before moving the property into an entity. After the funding is complete, then explore your land trust versus LLC options. The land trust has some benefits, but this is not to say, placing the property directly in an LLC is the wrong way to go. I use land trusts strategically to obtain specific goals with my investing. My portfolio is well north of 100 properties, and I have used land trusts less than ten times, and each time the decision was driven by the investment and not a concern over what a lender may or may not do.