I have five rental properties that I want to transfer to an LLC. While the transfer process seems to be easy enough, I am having problems with the insurance and mortgage companies.Both have told me that they would drop coverage/call the note if that happens.
I do have a personal umbrella policy, just as a side note.
How do I go about this? I am in NC if that matters.
Any pointers appreciated. Thanks in advance.
If you call the bank directly and ask them what you just asked them then you will surely get the answer you received. Many investors will just Quit Claim them to their LLC and the bank 99 out of 100 times wont ever notice or care. Same goes for the insurance.
I have done this many times and there has never been an issue. Banks dont want to take back the home so if they found out you just transfer back to your name. The home is still attached to your name and SS#.
Why do you want to transfer them to an LLC anyways?
Although you cannot obtain a conventional mortgage for a property owned by an LLC, most investors obtain the loans in their personal name, and then transfer title to the property to the LLC.
Technically, there is a due on sale clause under the deed of trust that prohibits such a transfer, but as long as the lender is not informed of the transfer, they ordinarily will not call the loan. Mortgage lenders only want your payments – they are not looking for a reason to get the property back. The decision to do this is one that you have to make.
I personally don't think you need an LLC if you have the umbrella policy, and it's certainly not worth losing your loan.
I currently have a situation where I cannot get insurance from all state for more than 4 rental properties and only 4 rental properties will be covered by my umbrella insurance. How can I get insurance on rental properties more than 5?
@Emili Webster I would find a new insurance agent/broker. There are LOTS of options out there that don't have these types of limitations.
As far as your primary insurance on the rental properties go, many companies will allow you to insure as many as you want (I know of policies of 2,000+ units). There are even companies that start to give serious price breaks at about 10 properties (for example American Modern does that). Foremost will allow you to add as many as you want to one policy, although I don't know of a major price break or discount that isn't simply just the multi-policy discount.
As far as the umbrella piece, there are some limitations on certain types of risks. For example, I know of one personal umbrella program that limits 4 units in any one location, BUT that that allows for up to 30 residential units in Texas under the umbrella policy. There are other umbrella programs out there as well. While that doesn't help you if you have an apartment for many investors investing in single family homes, duplexes and 4-plexes its perfect.
One issue that the buzzkill insurance agent does have to bring up. For liability on most policies, do be careful when quit claiming. I know our agency really does not care to report ANYTHING but what is required to mortgage companies, meaning we're not interested in getting you in trouble with them, but you do need to report to us when you quit claim to an LLC.
There is case law in many states that shows when you quit claim to an LLC you negated your insurance policy that was in your name. Why? Because the named insured (the name on the top) has no insurable interests in the property.
I have found that many agents will state, we'll keep it in your name and additionally insure the LLC. The issue with that is again there is no insurable interest of the named insured, meaning that the policy cannot legally stand. The best way to take care of this is to list your name and your llc's name as named insureds. If your insurance ageny/company will not do this, find a different one as we represent over 400 insurance markets and I know that many insurers will do that, many will not.
The reason this is important, when the lawsuit shows up at your door in your LLC's name and you turn it into your insurer that only has your personal name, they will state "Well Joe, we would cover this lawsuit, but it's not your lawsuit, it's Joe LLC's lawsuit, who is that?" "Well I quit claimed....", "That's great Joe, unfortunately we do not cover the LLC's liability, too bad the attorney didn't sue you personally, since you sold the property we'll have underwriting refund the premium since sale, good luck with the suit."
Not saying this happens EVERY time, but according to the policy it is a possibility, and the cost between your name, your LLC's name, or both? $0, if underwriting allows it, pretty affordable to have correct coverage.
@Derek Lacey and @Derek Kartchner, thank you very much for the information.
If you're relying on insurance, be sure that it covers intentional acts include Fraud, violations of the Deceptive Trade Practices Act (in Texas), etc. If they do not (which is very likely from policies I have reviewed), then insurance alone is insufficient.
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