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Victor Andrade
  • Investor
  • Lincoln, NE
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Due on sale clause - Transferring property to LLC

Victor Andrade
  • Investor
  • Lincoln, NE
Posted Jun 30 2022, 10:50

Hi everyone,

I am in the middle of a dilemma, and cannot find anything online or anyone that has gone through the same situation.

I have three properties, all in the same state (not the same state I live), I have conventional loans in these properties, the loans are in my name. I want to group up these properties into a LLC, for asset protection. I was going to take the route of the lender doesn't need to know... but when I called my insurance to update the insurance to the new name of my business, the insurance said "no problem, we'll update, can you confirm your loan number and lender, we need to notify your lender that we are updating your insurance".

Well now the lender will be notified, and I have the risk of them pulling the "Due on Sale Clause" on me.  

I am curious, if people ran into this issue before, and how do you navigate through this? I would really like to put these properties in a LLC for peace of mind, but it seems to me I have no way to do without triggering this "due on sale clause".

Any insight would be greatly appreciated.

Thanks,

Victor

Lincoln, Nebraska

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Patricia Steiner
  • Real Estate Broker
  • Hyde Park Tampa, FL
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Patricia Steiner
  • Real Estate Broker
  • Hyde Park Tampa, FL
Replied Jun 30 2022, 11:08

The lender does not have to allow the transfer to the LLC and there is a process at each institution for doing so. Freddie and Fannie started allowing conventional loans to include LLCs in October of this past year but prior to that date, all were required to be in the name of an individual.

More than likely it will not trigger the ugly you're anticipating - and I do know some borrowers who "just did it" - and it went uncontested by the lender.  Unfortunately, I know even more lenders who declined the request.  My recommendation is to call the servicing group of your lender and make a request. There's a form (there's always a form) and a tad of a hassle - but it will be worth it.

Hope this helps...

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Ben Zimmerman
  • Rental Property Investor
  • Raleigh, NC
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Ben Zimmerman
  • Rental Property Investor
  • Raleigh, NC
Replied Jun 30 2022, 11:10

Do it the same way sub-2 deals handle it, put your LLC as the primary insured, and name yourself as an additional insured on the same policy. That way when your insurance company sends the updated notice to the bank your name is still on the policy and typically won't raise any red flags.

However for the vast majority of people an LLC isn't worth it and provides very little if any benefit.  A $1-2m umbrella insurance policy is almost always a better route than putting things into an LLC.

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Chris Seveney#2 House Hacking Contributor
  • Investor
  • Northern Virginia
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Chris Seveney#2 House Hacking Contributor
  • Investor
  • Northern Virginia
Replied Jun 30 2022, 15:31

@Victor Andrade´┐╝

As others mentioned get an umbrella insurance policy - that's what I would do (and have done) in lieu of placing properties in a LLC