My partner and I are about to purchase a 4plex in Austin. We thought we would get the loan in our names then convey it to our newly created LLC. However, I was casually told that this is in violation of the DOS clause and the loan can be recalled immediately. We need to correct this mistake so we are trying to figure out the best option:

1. Keep the property in our names.  If we do this, do we add more insurance?  What can we do to protect ourselves?

2. Get a commercial loan through the entity - I realize we would be paying double loan transaction fees as well as a higher rate, but at least we would be in compliance

3. Call the mortgage company and see whether we can transfer the note - I assume this will not happen.

4. Any other suggestions?  We are due to close in a week, so any advice would be much appreciated. 

We would potentially like to buy a few of these things, so any suggestions on how not to make the same mistakes twice would be much appreciated and helpful.

Changing to a commercial loan at this late stage would likely put you in violation of your contract.

Now that the loan has closed in my personal name, what are my options?

Every residential loan has the due on sale clause. You’d likely have to refinance into a commercial loan which would have terms that aren’t as favorable and you’d have closing costs again.

Beyond my skill level. Good luck.

Caleb - is that what you would do?  I’ve got $2 million in liability insurance in an umbrella policy and my partner has $3 million. My attorney thinks we are idiots having it in our name. Again, any advice would be helpful as this is our first investment. 

@Ariel K. no id leave it as is. Would the same attorney be the one to set up the llc for you for likely 1-2k? If so that’s a conflict to giving unbiased advice.

If you want more coverage get an umbrella policy. Most LLCs don’t provide protection besides a bit of anonymity

we already have the LLC made. He made it seem like we are protected except in cases of gross negligence. The $5 mil I mentioned is through an umbrella policy.

If I understand correctly, you are saying to keep the property in our names, get umbrella insurance and that should be good enough?

You can’t stop the loan now but after the loan closes, technically you own the property with a mortgage. It is cheaper to have the loan in a long term residential loan and leave in your name with an umbrella policy. But if you want to use a LLC you will need to get a commercial loan and it will cost you more and additional legal fees.

what are the pros/cons of the LLC vs keeping the loan in personal names?

@Ariel K. there are a million threads on this on BP. I recommend using the search function to find and read those.

Unless you have a good reason to go commercial, I’d just stick with a conventional loan.

You’ll get a better rate, longer payment term, and if this is your first deal, not all portfolio lenders will lend to someone with no experience.

You can offset the risk by keeping the home in good order, having a landlord insurance policy, and having umbrella insurance.

Additionally, some people feel that having a single owner LLC with a couple properties doesn’t really provide much lawsuit protection.