Investor · Chicago · Member since 2022 · 128 posts · 85 votes
Ok. I Recently closed my 1st deal on 2 SFH's with a conventional loan. I wanted to transfer the properties into an LLC but my attorney says that technically it's against the clauses in my loan to transfer the loan to a different entity and I could be in default of the loan and the bank can come and ask for the money back.
now I am under the impression that many people do this anyway and the lender won't bat an eye, but am I making a mistaken assumption?
has anyone had any bad/good experiences with this
thank you all in advance for your responses. I look forward to reading them.
Correct, mostly. The Due on Sale Clause allows the Note holder to call in the loan in the case of the transfer of the property. The Fannie Mae guidelines appeared to have changed recently in the case of transferring to a single member LLC. However, I really wouldn't do it since the mortage would be left behind in your name. Also, if you keep doing this it, in my layman's opinion it looks like you are using the lLC as your alter-ego, thus piercing your corporate veil
Also, correct... Legal entities such as LLC's are not eligible for conforming residential loans. If the LLC takes TItle, you need to obtain commercial, i.e. non-residential, financing.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
4y
@Mordy Chaimovitz Fannie Mae conventional loans, as of a few years ago, specifically Allow you to transfer to an llc that you own the majority of. Just ask your lender.
Investor · Odessa, FL · Member since 2021 · 52 posts · 29 votes
4y
I have recently worked through this (though waiting for the fallout, if any). I started here (video below). Though I haven't worked with Anderson Business Advisors, I do like and appreciated Clint's videos. They're really informative.
What did your lender say? What do the loan docs say and has your attorney reviewed those specific docs?
My attorney did the closing. He knows the documents. I asked him why we didn't set it up as an llc before closing. He said my lender told him the loan can't be made out to an llc.
Correct, mostly. The Due on Sale Clause allows the Note holder to call in the loan in the case of the transfer of the property. The Fannie Mae guidelines appeared to have changed recently in the case of transferring to a single member LLC. However, I really wouldn't do it since the mortage would be left behind in your name. Also, if you keep doing this it, in my layman's opinion it looks like you are using the lLC as your alter-ego, thus piercing your corporate veil
Also, correct... Legal entities such as LLC's are not eligible for conforming residential loans. If the LLC takes TItle, you need to obtain commercial, i.e. non-residential, financing.
Investor · Odessa, FL · Member since 2021 · 52 posts · 29 votes
4y
Another option to consider is using a Land Trust to hold title, and have an LLC as the beneficiary of the Land Trust (which you can do as a two-step process if desired). But it all depends on those loan docs.
Correct, mostly. The Due on Sale Clause allows the Note holder to call in the loan in the case of the transfer of the property. The Fannie Mae guidelines appeared to have changed recently in the case of transferring to a single member LLC. However, I really wouldn't do it since the mortage would be left behind in your name. Also, if you keep doing this it, in my layman's opinion it looks like you are using the lLC as your alter-ego, thus piercing your corporate veil
Also, correct... Legal entities such as LLC's are not eligible for conforming residential loans. If the LLC takes TItle, you need to obtain commercial, i.e. non-residential, financing.
Investor · Chicago · Member since 2022 · 128 posts · 85 votes
4y
Sorry about above qoute without my remarks.
the main goal in transferring to the llc would be for protecting my personal assets in case of a litigating tenant etc as well as supposed tax benefits of being an LLC.
My attorney said i have insurance in case of litigation. And the tax benefit, well im not even sure i will need them at this stage of the game.
See the thread above... Thats what we are trying to tell you. LLC's provide no taxation benefit unless you are investing with a nonspousal partner. Also, search/look around BP. Pretty much everyday somebody asks about using a LLC. For residential properties you normally don't need a LLC for asset protection. Keep your property in good repair, have landlord/homeowner insurance, and get an umbrella liability policy. Its much easier and actually more beneficial. As mentioned above, legal entities such as LLC's aren't eligible for conforming residential loans. So, you'll have to pay for generally more expensive commercial loans. Getting a residential loan then quit claim deeding the TItle over to the LLC leaves the mortgage in your name and potentially makes it look like you are using the LLC as an alter-ego. That potentially goes to piercing your corporate veil which defeats the purpose. Also, you really need to have everything under the LLC so that you operate it as its own entity.
Investor · Odessa, FL · Member since 2021 · 52 posts · 29 votes
4y
I think a lot depends on what you're trying to accomplish. BP has a good high-level comparison here https://www.biggerpockets.com/...
We're using LLCs, though, in addition to the asset protection (and anonymity via a land trust), we also are building a family trust for our kids so we can keep the government out of our business ;) so the LLC brings a lot of benefits for that.
Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
4y
I had a client who attempted to force through a change from personal name to LLC with a lender - and the lender said no a couple of times before advising her that they would call the loan if she violated the covenant. A title company will not file the Quit Claim without contacting the lender when a conventional mortgage exists on the property. Here's what I recommend: live up to the terms of the contract and purchase an Umbrella Policy which is an inexpensive and must-have for Landlords. And, then next time you acquire a property, use your LLC since Freddie and Fannie now allow LLCs to be used in their transactions. The Trust recording that was referenced isn't a good asset protection vehicle for investors as it can be restrictive and costly to setup. Stay the course. Get an Umbrella Insurance Policy. You're doing great with two properties in your empire. Rock on...
use your LLC since Freddie and Fannie now allow LLCs to be used in their transactions.
they do? My understanding of the state of play was that with the recent clarification you can _transfer_ title to an LLC that's majority owned by the individual who purchassed it and took out the loan (it's still a recourse loan...you're on the hook) but they won't loan on a property already owned by an LLC. Is that not correct? Got a link?
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
4y
@Andrew C. I didn't think so either... I had heard them allowing the transfer w/o violating the Due on Sale clause. But, that would be huge if legal entities were eligible for conforming loans. Be a big shift from their primary intent of promoting home ownership vs. helping investors.
Here it is: "Good news for investors from Fannie Mae...In November (quietly and with no fanfare) Fannie Mae announced that they now allow the post-closing transfer of title to an LLC."
It's important to really KNOW the business - it changes in some way every day. But also remember that you hired an attorney who has told you no...your loan documents may prohibit it and if so, it's prohibited.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
4y
@Patricia Steiner oh then we are saying the same thing. Your prior post was interpreted to mean purchase with the LLC directly with a conforming loan. I see that isn't what you meant
I don't like the title transfer afterwords since that "Frankenstein" the title and mortgage and it looks like using the LLC as an alter-ego
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
4y
@Mordy Chaimovitz sigh. Another post asking " there is something I want to do that I have been clearly been told by qualified people is not allowed/illegal/unethical/inadvisable to do"....is there a way I can do it anyway?
So I'll get off my small horse and just say that "lots of people do it and it often works because they usually don't care" isn't much of a defense if the lender does care and also that you now have a situation where the LENDER HAS CONTACTED YOUR ATTORNEY TO SAY DON'T DO THIS.
@Mordy Chaimovitz sigh. Another post asking " there is something I want to do that I have been clearly been told by qualified people is not allowed/illegal/unethical/inadvisable to do"....is there a way I can do it anyway?
So I'll get off my small horse and just say that "lots of people do it and it often works because they usually don't care" isn't much of a defense if the lender does care and also that you now have a situation where the LENDER HAS CONTACTED YOUR ATTORNEY TO SAY DON'T DO THIS.
How do you expect to get away with this exactly?
Loved your post, and your horse
Im not looking to get away with anything, sometimes there are practices in an industry that become standered despite inherent technicalities. I was interested to hear what the general attitude in the real estate world/lending world is in my situation.
however I hear your point loud and clear and it is well taken and appreciated!
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
4y
@Mordy Chaimovitz thats a gracious reply and I hear you...the sigh wasn't just for your question and it is definitely an area where you get a lot of "its commonly done don't worry about it" advice.
I also thought the lender had directly told your attorney not to transfer to an LLC, as opposed to telling the attorney the original loan couldn't be in an LLC. My advice is the same in either case (don't do it please) but I see that adding a layer of confusion too.
Lender · PA · Member since 2019 · 535 posts · 461 votes
4y
Finally to add one last bit of confusion. If you are not getting a government insured loan to begin with than many HMLs require a LLC. Once you close the loan, I see no value in transferring it to an LLC. In some states you have to pay transfer taxes between yourself and your own LLC. If the loan docs have a due on transfer provision than you should not do it. You can always buy your next acquisition in an LLC and just keep this in your name. Remember for tax purposes a single member LLC is treated the same way as an individual tax payor.
Rental Property Investor · Member since 2021 · 76 posts · 36 votes
4y
@Mordechai Chaimovitz it sounds like what your attorney meant is that you cannot close the loan in the LLC name with the initial loan closing documents which is correct for most conventional loans. But it can be done post closing. In order to actually close in an LLC name, you have to use a special lender which usually means higher rates.
I just went through this personally and this is what is my experience. Like the previous person said, if it's a Fannie Mae or Freddie Mac loan, it can be transferred to in an LLC as long as the LLC is owned by the exact same person(s) who are named on the loan. So if the loan is in the name of a husband and wife, both must own the LLC. I believe it's even on Fannie Mae's website. I also contacted my loan officer and got the ok from them just to be safe. I then contacted the same title company and had a deed recorded in the name of my LLC.
All of my financial transactions pertaining to the property including paying my mortgage is now done with my LLC bank account. Keeping and managing funds separately from your personal account is very important. Hope this helps.
So, how do you handle your corporate veil with drafting payments from your LLC's bank account to pay your mortgage? The mortgage is still in your name. Title held by the LLC. Aren't you co-mingling funds by having another entity pay for YOUR mortgage? did you generate any paper?
the main goal in transferring to the llc would be for protecting my personal assets in case of a litigating tenant etc as well as supposed tax benefits of being an LLC.
My attorney said i have insurance in case of litigation. And the tax benefit, well im not even sure i will need them at this stage of the game.
what do you all say?
I say ask your attorney what happens to all your "private" information (assets, holdings, etc.) during the discovery phase of litigation and after the case is closed.
Bottom line: If it goes to litigation and your insurance pays out, it means you lost and all your information is now available for anyone who wants to come after you. Your entire estate is now exposed and at risk.
"Control everything, own nothing" is all about insulation from liability.
Ideally, BEFORE you begin your acquisitions, you'll set up a trust with someone you trust as the trustee (whose identity will be a matter of public record with respect to the trust) and you as the beneficiary (whose identity is protected). The trust then forms and owns an S-Corp. The S-Corp and the trust form multi-member LLCs. No entity holding an income-producing asset is owned by a human person.
"But, David, that's SO much expense!" Let me ask one of my favorite questions: How much money can you AFFORD to "save" (not spend)?
@Mordy Chaimovitz sigh. Another post asking " there is something I want to do that I have been clearly been told by qualified people is not allowed/illegal/unethical/inadvisable to do"....is there a way I can do it anyway?
So I'll get off my small horse and just say that "lots of people do it and it often works because they usually don't care" isn't much of a defense if the lender does care and also that you now have a situation where the LENDER HAS CONTACTED YOUR ATTORNEY TO SAY DON'T DO THIS.
How do you expect to get away with this exactly?
I think you've missed that the rules have changed. @Patricia Steiner provided the link to the relevant change, which is specifically that: 1) NO, you still cannot close the purchase in the name of an LLC and get a freddie/fanny mortgage 2) YES, it is fully allowed to transfer the title into an LLC if you have a confirming mortgage and they guidance they provide to lenders is that they are not allowed to exercise the due on sale for this, provided the LLC is majority owned by the same person/people that were on the title when the mortgage was originated.
so this is no longer a game of 'can I get away with this, since most people seem to be able to'. It's now actually a fully above-board move that's allowed. At least in the general case.
FWIW, I still don't like it and prefer to close the purchase in the name of the LLC and with a loan made to the LLC, but I'm able to find 'commercial' loans that I'm as happy with (or happier) than what's available via a conforming loan so .