Quit Claim Deed after obtaining a mortgage

2 Replies

The Podcast always says to take action, so that's what I've been doing! However, I have run up against a problem that I need a bit of guidance as it relates to banking. 

The strategy I've heard discussed on the Podcast that I'm trying to implement: purchasing a duplex in your personal name and getting a residential loan in your personal name as well; then once financed, doing a quit claim deed to place the property in an LLC for asset protection and/or you have partners in the deal.

My question relates to the how the bank is going to handle this in 1 year from now when I'm trying to do this strategy again, but they'll notice the income isn't being presented on Schedule E page 1 on my tax return, and instead is coming through on my Schedule K-1 from the LLC. Will that cause any problems with the bankers? Or did I go wrong in the fact that if it is a true multi-member LLC/partnership, then this strategy may not work.

Thanks in advance for your help and discussion. 

The bank will also find out when you update your homeowner's insurance. And if you don't update your homeowner's insurance, your property will be uninsured, since you'd no longer have an insurable interest in the property (which kind of defeats the purpose of liability protection).

Residential mortgages are for individual consumers, not corporations. The bank doesn't allow you to transfer the collateral you pledged for their loan to another entity, for the very same reason you are stating that you want to do it: That entity is not you and it isn't responsible for your debts and liabilities

Thus, you run the risk of having your mortgage called due in full via the due on sale clause.  And it happens more often than the experts would lead you to believe:

https://www.biggerpockets.com/forums/50/topics/386...

https://www.biggerpockets.com/forums/311/topics/18...

https://www.biggerpockets.com/forums/49/topics/232...

Also, in general, you might consider talking to a real estate attorney in your state before executing a quit-claim deed for anything. Why use a quit claim deed, when you can use a warranty deed? The distinction between the two may impact your title insurance, etc.

As @Jeff Copeland mentioned, be careful when choosing to use a Quit Claim Deed:

A person receiving a purported real estate interest via a quitclaim deed may receive no legal right to the property whatsoever. If the person seeking to transfer real estate with a quitclaim deed has no legal interest, nothing legally is conveyed. In the absence of title insurance--which is not available for a quitclaim deed--the person receiving the quitclaim deed has no legal recourse because the deed itself states that only the interest of the grantor, if any interest exists, is conveyed.

Whether title insurance terminates by transferring real property depends on the type of policy, and how “insured” is defined in the policy. You take a risk which could result in cancellation of your title insurance and complete loss of your real property without compensation in the event that a title issue regarding your real property arises.

Contact your title insurance company to determine coverage and if your policy does cover transfers , and when or how.