Financing an LLC Question

7 Replies

I've been buying properties in my name and financing them in my name (to get more favorable interest rates). I want to switch them all to LLCs, but my current loan documents prevent that. How does everyone deal with this? And what type of financing do you get for a property in a partnership? I've got one deal financed through my LLC, but it's a 5 year loan that amortizes over 25 years. The rest of my loans are 30 year fixed.

@Erin Onsager are you saying you want to just change the ownership of the property to the LLC? Is that what I am reading? And what loan document in your loan prevents you from doing this? Most of us change the title to the LLC pretty easily even if we had to guarantee the loan personally. Ownership of the home is different than who is responsible for the loan. So if you didn't want to be personally obligate on the loan...well, then you would have to refinance all of those loans. But just switching the deed...any title company can do that for you. Some states will charge a tax to do it so make sure to ask about that with your title company.

@Andrew Postell

Right; that is what I'm asking. But, the loans all have clauses that state that the legal owner of the property needs to be the same as who is on the loan. I have one property that is a bit unique. It's an investment property with my cousin and I. I own 80%; her share is 20%. She is the tenant (so we got owner-occupancy FHA financing). I can't change the ownership of that because Freddie Mac requires that the owner of the property be on the loan. Take my cousin out of the picture and that's my issue for all my other loans as well.

@Erin Onsager ok, so I wonder who told you that your loan documents prevent this?  I hope you don't mind but I'm going to pull back the curtain a little.  If they were referring to the "due on sale clause" (which nothing legally actually references it by that name) then they are mistaken by what it reads.  This portion of the note reads that the lender "MAY" call the note due if the ownership changes.  Super important legal word - MAY.  And if the lender actually is dumb enough to do this....they must provide AT MINIMUM 30 days to you in order to change it back. Now, if you are paying your loan on time...no lender is going to call a note due. They make TONS of money on your loan. To call it due means they have to transfer it from a performing asset on their balance sheet to a non-performing asset...and that's a BIG no-no for lenders. That can affect their own credit rating. They aren't going to jeopardize that for your loan. A few years back, during the housing crises, banks were calling notes due and foreclosing on people that weren't paying their loans on time because they were in these screwy loans and there were protests and senate hearings and all sorts of things. Could you imagine the public backlash if a bank called a note due IF YOU WERE PAYING IT. Yeah, nightmare if that actually made the press. Lenders know all of this. Many of us change out title's all the time to our LLC's and we are all completely fine. Even if it did happen...they have to provide you 30 days to change it back. And it usually takes 1 day to change it if your really needed to do it.

Oh, and your FHA situation. That sounds weird to me. We can just add you to the title. Why are you trying to refinance out of a FHA loan anyway?

Awesome; thanks. That's helpful. I'm not trying to refinance my FHA loan, just explaining why we can't change ownership (due to it being an FHA loan - which we were able to obtain because it is owner-occupied). It's a unique situation, but all of that makes sense and gives me more comfort in just changing ownership.

Thanks!

Totally agree with @Andrew Postell on this. I have seen many "threat" letters from banks, even, but have yet to see a single bank execute the Due on Sale Clause against a performing note even once...

The most common strategy to avoid the situation entirely would be to use a Land Trust. You could transfer the property into the Land Trust (excluded transfer thanks to the St Germain Act, since the trust is considered an Inter Vivos Trust [estate planning tool]) and assign the LLC as a beneficiary. This article goes into more detail. Some people don't like even the chance to arguing with their lenders, so this has been a fall-back strategy for some time. Added benefits of the Land Trust is that you can tie it into estate planning easily in the future and can even introduce anonymity on public record for your own name if you have an attorney give you a hand.

Just some options. Best of luck to you moving forward!

Hey @Erin Onsager ,

That sometimes can be an issue or a tough road. If you need any help at all with switching your insurance out of your name into your LLC name exclusively please let me know. I want to make your investing as easily as possible.

GOOD LUCK ON YOUR JOURNEY!