Due on sale Clause/ LLC/Land Trusts

10 Replies

Hello everyone,

I am a new investor with one duplex under my belt and i have scrubbed the forums for information on how to avoid the due on sale clause, for those of you that don't know, this is when you roll the title of a property into an LLC effectively changing ownership. The bank then holds the right to require the loan balance due. I've heard that it "rarely happens" all over the internet but that doesn't sound like a risk I'm willing to take. Some suggest that when interest rate go back up that it could cause this to happen to more investors as the banks will want out of those low interest loans.

I am not a financial expert by any means but in my research I've found a few alternatives that were not easy for me to find:

This "due on sale" clause seems to mainly apply to government backed loans (fannie and freddie). If you get a commercial loan, they don't care if its under an LLC! (I'm in the process of getting a commercial real estate loan and verified this)

Another work around, i spoke with a lawyer for a paid hour consultation. How they recommend and offer to set up (for 5000k one time, then 550 per house added) is to get the property under, or roll it into a land trust. The land trust can then make your LLC the beneficiary. This LCC would then be part of a Series LLC which is sort of like a hub and spoke model with a master LLC (I'm in TX, Series LLC's Are not offered in every state). I was told by the attorney that you are protected under "garn-st. germain act" in which the bank would not be able to call the note due if the property was moved to a trust. The thing i did not like about a land trust is that you need to make someone else the trustee. I have a problem with this because i don't trust items like a cash flowing property with someone else. I was told that the attorney would be the trustee while setting it up than assign the trustee as myself. You also get anonymity with have this type of asset protection in place.

I am not an attorney or a financial expert and advisor so please consult professionals on these matters, i just hope that maybe this could save someone some time and point them in the right direction. 

Feel free to message me with any questions or comment on the thread

@Stephen McGrath If it is a Fannie Mae loan, originated after 2016/2017ish, they specifically now Allow you to transfer to a single member llc….No due on sale clause. 
$5k for a land trust is ridiculous…..here that would be about $500 and you certainly can be the trustee. And once someone files suit, the “anonymity” is gone 

@Stephen McGrath

There is amble case law allowing an individual property owner to transfer his property into a “living trust”, as long as he is the beneficiary.

However, this has nothing to do with due on sale clauses. In the property transfer above, the property title is being transferred, with no sale taking place. What people using a land trust attempt to do, using a variety of means, is combine a property transfer with a disguised property sale. So the seller transfers his property into the trust; the buyers LLC becomes a 99% beneficiary of the trust; or numerous other versions, some much more sophisticated.

Here’s the long and short of it; until 1978 almost all residential property could be sold and the mortgage could not be accelerated unless of payment default. In fact, in 1980 when interest rates spiked to 18%, about ninety percent of all real property purchases were made either with the buyer assuming the existing mortgage or buying the property subject to the existing mortgage, or utilizing a wrap around mortgage, all often combined with seller carry back second liens.

With the pool of existing assumable mortgages dwindling to where they are now non existent (without lender approval), various gurus began marketing techniques to work around the due on sale clauses.

My own opinion is that if there is currently a 98 percent chance that violation of the due on sale clause will not result in loan acceleration, then the use of the trust techniques might increase the odds to 99%.

When interest rates spike to double what they are now, lenders will move to enforce due on sale clauses, and while the trust technique MIGHT allow you a defense, chances are you’ll spend a ton in attorney fees and lose in court to the much more politically potent banking lobby.

@Stephen McGrath I just went to a meetup in DFW where this was the topic. It was pretty fascinating because I never knew much about land trusts. From what I learned in the presentation, they can be an effective way to create anonymity. They don't offer asset protection by themselves but make it harder for lawyers or banks to find out who the real owner is. Although if you get a loan you will be signing a full recourse, personal guarantee so it doesnt really change much. When paired with series llcs they can add to the layers of protection especially if you have different state LLCs as the beneficiaries(WY, NV, or DE). The presentation was given by Randy Hughes. He is what I would call a guru with several books and courses on the topic. I didnt buy any of the products but may do so in the future. His pitch is for $600 hell teach you how to do the land trusts yourself, no lawyers needed.

Thanks to everyone who responded, still a newbie with how all of this breaks down so your input is appreciated! with the little knowledge i know on the subject I thought i could be useful to get a discussion going on the topic.

Hey @Eric James

That's actually the plan, i will likely put the next one under an LLC and leave this one in my name. This would be for "protection" not that the LLC is un penetrable, but also so i don't carry all the debt under my personal name which i would imagine could affect lending opportunities.

@Wayne Brooks

I thought the fee was overpriced myself, but that's just the first asset protection attorney i spoke with. They wanted 5000 to set it up, included in that they would roll i believe 3 properties into land trusts, and create the series LLC. I was not actually aware that that a Fannie Mae loan would now allow that, so thank you for the information!

@Don Konipol

Thank you for the information, that makes a lot of sense. So essentially, i am not protected against that clause if they really wanted to get out of the loan even with a sophisticated landtrust/LLC in place. Would you recommend to go for commercial lenders or now Fannie Mae loans as Wayne mentioned for all future investments?

@Peter M.

Hey Peter, thanks for the info. That sounds along the lines of what I've heard, quite frankly it seems scary to set it up myself but in due time i will have to explore the option that makes most sense. Currently i only have my one duplex, so as far as shielding outside assets there are none to protect. But as i gear up to gain my next property, asset protect is coming to mind so i wanted to be prepared. As a side note Peter, I've actually been looking at Dallas/Ft Worth as my main target area for my next purchase, i would love to get any advice you have, if willing on the area.

I am NOT charging enough if lawyers are charging $5K for a trust. :) 

OK, my first question would be: What is your goal in transferring title, that you have to address a due on sale clause?  Asset protection...anonymity...something else?

For asset protection, insurance is going to be your first line of defense.  Make sure properties are covered with an appropriate level and type of insurance.

After that, an LLC is probably the next-best step for most. Maintain the formalities.

A trust is probably too much of a pain to deal with for most people.  ZERO asset protection and you have to REALLY trust your trustee.  If you are the trustee, you get zero anonymity.  Don't get sucked into a non-legal trust factory.  Those range on a scale from ineffective to problematic, especially for investors.

For your first handful of investment properties, your focus is probably better off focusing on getting good at flipping or landlording first, but everyone's situation is different.

Originally posted by @Wayne Brooks :

@Stephen McGrath In case you misunderstood my post….Fannie Mae now specifically Allows you to buy/borrow in your personal and then transfer into a single member LLC….no need for the land trust hoops and games.

Wayne is correct and actually both Fannie Mae and Freddie Mac backed loans can be transferred to an LLC provided the loan originator remains the majority owner. The other stipulation is that you need to transfer back into your personal name before selling or refinancing.

Commercial loans may not allow you to transfer ownership to an LLC if the commercial loan is in your personal name. Inquire about this with whomever is originating the loan. Getting the commercial loan in the LLC name is ideal, but new LLC can have trouble getting credit. One option may be a commercial loan with personal guarantee.

Setting up complex legal entities may be overkill but it generate revenue for attorneys, which could motivation to advise you to do something that isn't necessary. It is like asking your insurance agent if you need life insurance, "yes you need lots of it" will be the answer. It doesn't mean you don't need insurance, just consider the source of any advice and their motives for profit.

Originally posted by @Stephen McGrath :
The thing i did not like about a land trust is that you need to make someone else the trustee. I have a problem with this because i don't trust items like a cash flowing property with someone else. I was told that the attorney would be the trustee while setting it up than assign the trustee as myself.

You can set up a land trust with you as trustee, but you lose the anonymity in that setup.

You can also set up an anonymous LLC as trustee. And you are the manager of the LLC.

Or you can use a trusted third party as trustee, like your attorney. The trustee will only have to intervene if you want to sell or refinance the property. You can also use him for signing public documents like building permit application. The beneficiary of the land trust can collect the rent and manage the property directly. Or you can also set up a management property corporation that will do that too.

Land trust are very powerful tools that have many uses. They are cheap: a few hundred dollars to set up, or even free if you do it yourself (but please check with a local attorney for the first one as there are many traps you want to avoid). They are very versatile: you can assign the beneficiary privately, a lender can avoid the foreclosure process if the loan was on the trust beneficial interest as it is personal and not real property, you can assign portion of the beneficial interest to your heirs piece by piece to stay within the annual gift tax exclusion for estate tax avoidance, ...

However they are a pain in the *** to deal with when dealing with a lender as most of them don't know about them. One trick is to restate the land trust as a living trust for the transaction and restate it as a land trust after the transfer.

If you want to learn more about them, I would suggest the fantastic Clint Coons Youtube channel.