Due on Sale Clause...LLC in Texas

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Due on Sale Clause...LLC in Texas

Maceo D.
Rental Property Investor · TX · Member since 2014 · 51 posts · 13 votes

Hello Everyone. I want to first start off with saying I am brand new here and new to investing. I did do a search for "Due on Sale Clause" and yielded 86 pages, so to be upfront, I really didn't want to read through that many topics if I didn't have to, =).

I figured I would go ahead and post a topic. So my question is more specific to situations in Texas and is multi-faceted:

  1. Has anyone ever had or heard of the Due on Sale clause been executed other than back in the day for the reason it was brought to existence?
  2. I just formed an LLC and have a lead on a property and the seller is not willing to do seller financing and wants to sell it. With that said, I, of course, want to have it owned by the LLC instead of me directly and most likely the loan would be in my personal name since it has the strong credit rating. How do you all handle this?
  3. Is there a certain timeframe that I should allow to pass before I transfer from my personal name to the LLC?
  4. Any additional advice you could lend that would apply to Texas?

Thanks in advance, I have already learned a great deal from several here by reading many different articles, so thanks for that as well.

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Sharon Tzib
Real Estate Broker · Cypress, TX · Member since 2013 · 824 posts · 470 votes
12y

"That's the bad thing about the internet is that you will find just as many people saying do as you will saying don't do it"

Yes, Maceo, that's true for just about everything in real estate :) Bottom line, the decision will always come down to you and your personal risk tolerance. No one here is going to be able to tell you what to do or not to do.

You need to understand your goals and priorities, and then make the decision yourself based on the information you have gathered that's best for you.

If you do decide to "chance it," then do what other investors do and have a couple of exit strategies in place, like refi, selling, or paying it off all cash. Again, you're not going to go to jail, and you're not doing anything illegal, so if it ever did happen they called it due, just have a plan for how to handle it.

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  • Jordan Thibodeau
    Rental Property Investor · San Jose, CA · Member since 2013 · 486 posts · 170 votes
    12y

    HI Maceo. Welcome to the boards.


    It really depends on the bank that created the loan. I've heard of stories where the bank doesnt care so long as the payment comes in and I've heard stories of the bank calling the loan in. I would check with the bank and see how they handle your situation.

    As far as the LLC, why have you decided to create one with just one property? Do you have more than one?

    0Reply
  • Maceo D.
    OP
    Rental Property Investor · TX · Member since 2014 · 51 posts · 13 votes
    12y

    Thanks Jordan. In regards to the llc, this would be my first property but I have intentions to continue building my portfolio. Also, I am seeking asset protection for my personal assets should anything ever go wrong. May I ask why you ask?

    0Reply
  • Andy Collins
    SFR Investor · Dallas, TX · Member since 2011 · 604 posts · 243 votes
    12y

    you financed the property in your name,,,do you manage it? did you have anything to do with the rehab?

    Chances are putting it into an LLC will do VERY little for asset protection,,,get an umbrella policy with several million in liability coverage.

    Putting a property in an LLC is not the 'silver bullet' people tend to think it is

    0Reply
  • Cameron Sharp
    Salt Lake City, UT · Member since 2014 · 35 posts · 18 votes
    12y

    The due on sale clause will rarely be a concern. As long as your on the up and up and give the bank no reason to use it, you should be fine. Don't sweat it.

    Focus on getting your first deal. Good luck

    0Reply
  • Maceo D.
    OP
    Rental Property Investor · TX · Member since 2014 · 51 posts · 13 votes
    12y

    Thanks Cameron, have you done this with no issues?

    0Reply
  • Ronnie Sparrow
    Investor · Spring, TX · Member since 2012 · 121 posts · 26 votes
    12y

    Maceo, my wife and I live in Houston and own 6 single family homes. We have used hard money and private money to acquire our properties. After the rehab is complete and we have a renter we refinance to a 30yr Fannie Mae loan. Once we do that and make a couple of payments we then have our attorney transfer the property into our LLC. The note remains in our personal name but the title is in our LLC. We are familiar with the due on sale clause but our attorney has reassured us not to worry about the lender calling the note due.

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  • Cameron Sharp
    Salt Lake City, UT · Member since 2014 · 35 posts · 18 votes
    12y

    I have not had an issue or heard of anyone I know have an issue.

    Like what Ronnie said, keep the note in your name and clean, and the bank doesn't have reason to exercise the DOS clause.

    0Reply
  • Maceo D.
    OP
    Rental Property Investor · TX · Member since 2014 · 51 posts · 13 votes
    12y

    @Ronnie Sparrow - Thanks Ronnie. I was hoping to get a response from someone that actually had guidance by a lawyer in Texas. Its my first deal so I am sure I am over thinking/over complicating everything.

    @Cameron Sharp - Thanks

    0Reply
  • Casey Carroll
    Investor · Vancouver, WA · Member since 2012 · 194 posts · 125 votes
    12y

    I've never heard the DOSC being an issue for any sub2 investors. If you're truly worried, you can transfer the property into a trust, and assign the beneficial interest of the trust into an LLC that you control. Banks don't care about properties with loans on them in the name of a trust, and the assignment of beneficial interest into an LLC isn't even a piece of paper recorded, so they would never be the wiser. It's how sub2 investors structure deals when they are really paranoid about the DOSC.

    0Reply
  • Maceo D.
    OP
    Rental Property Investor · TX · Member since 2014 · 51 posts · 13 votes
    12y

    @Ronnie Sparrow - Question for you, are the leases with your tenants under your name or the name of your LLC? Asking cause I am assuming when you get new loans you have to show the income you are making from your other rentals to account for your DTI or am I not thinking about that right? So I am curious how that works if the lease shows the income going to the LLC instead of you. Forgive me if I am asking an ignorant question.

    @Casey Carroll - Thanks that for that info, I will see what that is about as well.

    0Reply
  • Sharon Tzib
    Real Estate Broker · Cypress, TX · Member since 2013 · 824 posts · 470 votes
    12y

    @Casey Carroll "Banks don't care about properties with loans on them in the name of a trust,"

    Well, it's not that they don't care, it's because of a legal decision. @Maceo D. the reason people use the titling into a land trust strategy is as a direct result of Garn-St. Germain Federal Depositary Institutions Act (12 U.S.C. 1701-j), specifically Section d8 that provides an exemption for real property loans secured by a lien on residential real property containing less than five dwelling units :

    "a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property"

    Here is more on this subject as it relates to Texas http://www.lonestarlandlaw.com/Due-on-Sale.html. Notice the title of the page - "There is no Due on Sale Jail" Attorney Bill Bronchick :)

    Lastly, whenever you set up an LLC, if you want it to be perceived as legitimate by the IRS for tax purposes, as well as by the courts for lawsuit purposes (i.e. asset protection), then you must operate it as a viable business, which means yes, your rent checks and leases should be in the LLC's name, you should have a separate banking account that handles all of your rental property transactions, you should be holding annual shareholder meetings (this can be in your garage or Hawaii, the latter being much more fun and a tax write off), and filing special tax returns. I personally agree with @Andy Collins that having an LLC for just one property is a bit premature, however, it sounds like you intend to grow into it. An umbrella policy is still not a bad idea, even with an LLC.

    Hope this helps.

    0Reply
  • Mike M.
    Longview, TX · Member since 2012 · 368 posts · 131 votes
    12y
    If you have strong personal credit, personally guarantee the loan and purchase the property via your LLC. That's how I bought my first property. Commercial terms aren't as favorable, but your corporation will build a payment history and you can enjoy a level of asset protection with a properly run LLC. Mike
    0Reply
  • Maceo D.
    OP
    Rental Property Investor · TX · Member since 2014 · 51 posts · 13 votes
    12y

    @Sharon Tzib - Thanks, I have actually read that article but I have also read the flip side arguments. That's the bad thing about the internet is that you will find just as many people saying do as you will saying don't do it. Regarding the lease yes that was my thought as well and I intend to run the LLC as a true business. This is not my first LLC just my first dealing with RE. I appreciate the information.

    @Mike M. - Thanks as well, I do have excellent credit so I will look into that as well. I guess my next step should be to find a lender and start having discussions on what is possible then make my decision from there on whether to start with LLC or transfer to the LLC.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    12y

    read this thread:

    http://www.biggerpockets.com/forums/83/topics/113007-due-on-sale-or-dos-snap-poll

    0Reply
  • Sharon Tzib
    Real Estate Broker · Cypress, TX · Member since 2013 · 824 posts · 470 votes
    12y

    "That's the bad thing about the internet is that you will find just as many people saying do as you will saying don't do it"

    Yes, Maceo, that's true for just about everything in real estate :) Bottom line, the decision will always come down to you and your personal risk tolerance. No one here is going to be able to tell you what to do or not to do.

    You need to understand your goals and priorities, and then make the decision yourself based on the information you have gathered that's best for you.

    If you do decide to "chance it," then do what other investors do and have a couple of exit strategies in place, like refi, selling, or paying it off all cash. Again, you're not going to go to jail, and you're not doing anything illegal, so if it ever did happen they called it due, just have a plan for how to handle it.

    1Reply
  • Maurice Miller
    Investor · Orlando, FL · Member since 2014 · 76 posts · 26 votes
    12y

    I agree with @Sharon tzib You got some good advice here, now you just need to make the best decision for YOU.

    Of course with real estate every transaction is Unique and has it's own challenges connected to it.

    All you can do is conduct due diligence, minimize risk, set up exit strategy and Jump in.

    @Maceo D. Enjoy the ride!

    1Reply
  • Maceo D.
    OP
    Rental Property Investor · TX · Member since 2014 · 51 posts · 13 votes
    12y

    @Steve Babiak - Thanks for the link Steve.

    @Sharon Tzib and @Maurice Miller - I agree, thanks

    0Reply
  • Ronnie Sparrow
    Investor · Spring, TX · Member since 2012 · 121 posts · 26 votes
    12y

    Maceo, yes all our leases are in the name of the LLC. Treat it like a business with a separate bank account. When you sign checks sign your name , MGR or any position you give yourself in the company. And have a real estate attorney form the LLC for you.

    1Reply
  • Tyler H.
    Real Estate Agent · Fort Worth, TX · Member since 2010 · 208 posts · 70 votes
    12y
    Would not hurt to consult legal advice on any Sub 2 deal, as there are some Texas Property code requirements that most investors have no clue about. Due on sale is one of many concerns that you want to address including title policy, insurance renewal, escrow accounts (property tax impounds can increase with homestead property tax changes). Some things to think through.
    0Reply
  • Lynn Dee Murrow
    Investor · Las Vegas, NV · Member since 2012 · 119 posts · 104 votes
    12y

    I agree with Andy Collins. The LLC creates a false sense of security. I meet few investors who run their business in a way that the LLC would actually protect them. Buy that umbrella policy. It is more important than the LLC.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Maceo D.

    Due on sale is not often caught, and I only had it happen to me once. And that is because it was a local credit union and the seller went and told them what they did... I got a demand letter forthwith and paid if off.

    If your buying this to just flip then its a matter of timing.. However if the Seller is not aware of what can happen... you could take a seller with good credit and put them in a bad position if the lender called the loan they would then have a NOD on their personal credit... And your going to have a upset seller on your hands.

    Its rare but can and does happen.

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  • Sharon Tzib
    Real Estate Broker · Cypress, TX · Member since 2013 · 824 posts · 470 votes
    12y

    @Maceo D. it seem some people are giving you advice as if you are purchasing the home from the seller via a Subject 2 transaction. My impression was that is not the case, and that you were asking about the Due on Sale clause because after you close on the property via a mortgage, you want to transfer from your personal name to your LLC, an event which can also technically trigger the Due on Sale clause.

    Can you please confirm this is an accurate assessment of what you are doing so people can give appropriate advice.

    0Reply
  • Maceo D.
    OP
    Rental Property Investor · TX · Member since 2014 · 51 posts · 13 votes
    12y

    @Sharon Tzib - Yes Sharon you are correct. I will be purchasing the home in my name and holding as a long-term rental.

    0Reply
  • Darrell Shepherd
    Rehabber · Smyrna, GA · Member since 2013 · 864 posts · 510 votes
    12y

    I can assure you, there is no bank on this planet that is doing regular title searches on houses with up to date payments just in case someone transferred the title. The only way they'll know is if you tell them in some way. There are some issues with insurance and such when you transfer title and need to insure it.

    Plus it would shock me if the bank got in a hizzie if you transferred it from your name into a single member LLC that you were the single member of. Possible, but HIGHLY unlikely. Essentially the same person they qualified is still responsible for making sure the payments get made. That's a lot different than a Sub2. I've personally done over a hundred sub2's and never had a loan called. Had some trouble with my POA's getting stale and some insurance issues, but never had one called due.

    As mentioned you can transfer it into a trust and have the LLC be the beneficial interest of the trust and no one would ever know and they couldn't call the loan due if it was for "estate planning purposes"

    The umbrella policy is a good move, they are cheap. The LLC protection is good, the corporate veil can be pierced when you dont do things right, sure, but it's not easy, even if you dont have your act together. The lawyer would need to see a big payday to want to go through that. That's one of the reason's you want this stuff out of your name. Looking broke is your first line of defense, lawyers wont take a contingency case if they dont see a payday.

    Anyway, you shouldn't let all this keep you from buying. Read up on LLC's, Land Trusts, S corps, etc. The more you build the more you should know and the more important it will all be. I personally dont like owning anything in my own name, but if I had one house I wouldn't lose sleep over it at night if I had insurance on it.

    If I were in your shoes, I'd buy it, stick it in a land trust and have my LLC be the beneficial interest of the trust, then run the house like a business. LLC has its own checking account, gets the income, pays the bills, etc. The land trust is a flow through entity, it does not file a tax return. They are pretty simple, I do my own, but you do need to have the right wording on them. The LLC will be on your tax return, but single member LLC's are pretty easy to do and it'll flow through to your personal return.

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    The issue with public forums is that anyone can post, exaggerate their experience, give really inaccurate information and argue to save face in public.

    Jay hit it, the DOS is used, it may be more common in one area than in others.

    You can avoid the issue by buying in the name of the LLC and obtaining the proper loan. For a buy and hold, why not just do things right from the beginning? You didn't mention your financing plans, doing the old switheroo right after buying could get you in other trouble.

    Under the St. Germaine Act, there are events of transfer where the DOS may not be applied by a lender, if you can justify the transfer as an estate planning matter you're home free. See your attorney.

    All mortgages are reviewed after the are made and loans are pulled at random for examinations after a year as well. A transfer of title is picked up by your Assessor, they send the tax bill to the owner of record. 6 months after a transfer all it takes is a computer search or phone call to an Assessor to see who is in title, it's part of a loan review. Searching a borrower's name shows entities and titles held. Properties in trust are a red flag in review. You do realize that with any loan you signed an authorization to release tax information, right?

    Once investors realize you can't hide in a hole in China to get away from authorities the better off they will be. Just because your loan hasn't been called doesn't mean they don't know.

    And yes, get insurance and forget the guru stuff. :)

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