Wells Fargo won't allow us to place property in LLC

28 Replies

As some of you may recall I made some inquiries on here a few months ago about the best way to protect our real estate holdings by placing them in an LLC. Well we consulted a lawyer and began the process through him only to run into a major hurdle - we have been instructed by Wells Fargo, the lender on three of our properties, that we are not allowed to place the properties in an LLC and if we try to do so they will trigger the due on sale clause. The lawyer said he is mystified by their stance and has never come across such a problem before - we ourselves have always found Wells Fargo very easy to deal with up to this point. Now we either have to try and refinance with someone else who'll allow the transfer to an LLC, or take up the lawyer's other recommendation of simply getting an umbrella insurance policy to cover the properties. Personally I don't get it - I thought placing investment properties in LLC's was a stock standard business practice in Real Estate, so why is Wells Fargo getting so obstructive about it - does it leave them exposed somehow? Also please note - the LLC's are purely for liability purposes, not for any kind of tax breaks.

I might ne completely wrong but it seems to me that they are afraid of the LLC defaulting, where as under your name it's backed by your SS#. If you have three mortgageseparate with them I would expect that you should he treated with some solid respect. I find that with the banks I gave mortgages with they are very good to me. Have you spoken with the branch manager ?

Wells Fargo will do Commercial Loans for LLC but it needs to be setup that way from the start. They dont like you changing a personal loan (mortgage) to an LLC because of course there is more risk for them.

I've seen this-- and Nick Britton is pretty much spot-on.  Kindly note-- I'm NOT an Attorney, and I'm certainly not speaking solely to info in your juris, but I've worked in national real estate for many years, and I can maybe give you a couple of ideas to think about.  

When you purchase property in an LLC, the Lender has had the opportunity to vet the LLC as a "credit-worthy entity" for its own sake. When you puchase property in your own name, and then TRANSFER to an LLC, you're then removing that ability from the lender. All they know is that some corporate shell with no history is now taking management control of "their" assets/collateral. Partial releases, long term land leases, even transfers into trust can all technically trigger the due on sale clause. In addition, some loans allow for internal/corporate merger transfers and some do not-- at least on their faces.

What are the EXACT REASONS that you're transferring to an LLC, and how were your articles drafted? For example, you may have wished to solely protect yourself from the tenant-side liability, and your attorney, acting in your best interest, drafted the articles to protect you from "everything." I'm not suggesting this will help. but I would work with your attorney to draft a partnership-oriented LLC. Show the Lender that the financial obligation to pay (Tax burden, etc.) still passes through to the Members/Managers, that those Members/Managers were the original Mortgagors, and then they may view the transfer as a housekeeping item, instead of a threat. Don't be surprised if they demand to review your corporate docs once a year to assure that you don't then transfer into the more-liberating structure.

Finally-- here's a possible other maneuver that may help: consider creating the LLC as your management shell. You can lease the properties to the LLC, who then is solely responsible for subleasing to your tenants. Again, this may not absolve "you" of liability, but it will put the shell in between yourself & the assets. Again, depending on how your docs are drafted and the laws/regs in your jurisdiction, this may still trigger the DOS clause, but at least there's not an actual assignment for them to approve.

Definitely do speak to an Atty. who's used to working with leasing matters, corporate transfers, other assignments of interest, Commercial Mortgages, Assignments of Leases and Rents, etc.  The traditional residential conveyancer may simply not have the experience, clout, or relationships to pull this off.  

Good luck.  

What Well's isn't liking is getting loans under one set of terms, then changing those terms on your side. One of the terms when they made the loan was that the property was owned by you, the borrower. Not some other entity. It is very possible to get loans for a property owned by an LLC. But they won't be 30 year fixed rate loans. They will be commercial loans. OTOH, if you want 30 year fixed loans, you have to play by the rules set by Fannie and Freddie for such loans. Those rules include ownership, and they only lend on properties owned by an individual. So, take your pick. 30 year fixed conventional loans and keep the properties in your name. Or commercial loans for properties owned by an LLC.

Your lawyer is absolutely right.

Not in being mystified that Wells Fargo is taking this line.  That's not mysterious at all, most banks do the same.

Rather, he is right that all you need is an umbrella insurance policy.

The vast majority of LLCs provide NO asset protection.  ZERO.  That is because almost none of them are actually managed in such a way as to prevent liability from attaching to their owners.

Just get the insurance.

Richard C. made a very good point-- you then need to ACT in accord to preserve any insulation from liability, and most people simply do not.  

Is your LLC a single member or multi-member LLC? In some states, a single member LLC is a disregarded entity as far as personal protection and liability. I have properties in both an LLC and an S Corp and were I to do it over again I would not put them into any entity. If in an S corp and the stock holder gets due, a creditor can attach the stock of the S corp...thereby taking control of the entity that holds the RE. If in an LLC, a creditor can possibly attach to the person's ownership rights in an LLC. The creditor may not be able to control the actions of the LLC, but they can own the membership interest. Consult a lawyer. Get liability insurance. Find an attorney that will give you the full picture on asset protection. Most attorneys I know will say the same thing: the only way to be totally protected is to be penniless and broke. I don't like that option!

Residential mortgage lender won't allow llc. You can change the llc after you do the loan though. but you have to accept that due on clause risk. also your insurance agent might give you a hard time with llc as well

Commercial mortgage lenders love llc.

As has been stated, it's not a Wells issue, it's a FANNIE/Freddie/loan investor requirement.....the loan you received, and title, have to be in your personal name....period. LLC's can cause additional hurdles if the lender needs to foreclose. Simply buy sufficient insurance and sleep well. And yes, borrowers do transfer title to an LLC all the time, in violation of their loan terms, but opposed tom ours attorn's opinion, I have Never had a lender say "no problem".

What is your goal with the LLC?

If it is asset protection, transfer property into a new trust.

If it is liability protection, insurance, and enough of it. 

Okay, I guess I need to clarify. When I first came on here a few months ago, it was to seek some insight on a proposal put to us by a well-known real estate guru my wife has written for to the effect that we should place our properties in land trusts to protect the assets. As I recall, I think the general consensus was that the trust thing could work via the appropriate states like Delaware, etc, but the feedback from some, plus our RE lawyer, was that it was too convoluted a situation for our relatively small holdings (four rental properties plus our own home) and that an umbrella LLC (versus single entities for each property) was the way to go. So it was on that basis that we proceeded with the lawyer's own suggestion to go with the umbrella LLC, only to have him come back at us and give us the bad news.

Our obvious concern is to minimize our liability and protect the assets, particularly as we feel fairly vulnerable in what is of course litigation land these days. Here's a few points  -

Reading elsewhere, I've come across a point where it may technically be illegal for a bank such as Wells to try and prevent placing the properties in an LLC as a matter of our estate planning? Or would that only apply with a trust?

Further, I've also read that we could possibly sign some sort of personal guarantee with the bank in order to get them to hop on board as far as the LLC's are concerned.


Lastly, while I appreciate the bank's concern, surely the fact we have considerable equity in each property should make a difference?

Thanks for all the responses to date - much appreciated. For someone who peruses forums on a number of different subjects it's refreshing to come on here and find how willing people are to share their expertise and knowledge to such an extent - and without all the typical animosity and flaming.

One way around this might be in the future is to take a business loan instead of a mortgage on the property.  I know that @Justin B. has utilized this method to purchase properties.

Frankly Im surprised there is any real discussion about this. Wells Fargo, BofA, Chase, and every major bank has the same due on sale clause. Its standard language in every mortgage. Secondly you took advice from as you put it, a "guru". Thirdly, your attorney charged you probably a lot of money to set up this LLC that you are now realizing may be useless. He then seems mystified that a due on sale clause was in your mortgage? Oh and now Im guessing he will be assisting you with the purchase of the umbrella policy? Walk away from the attorney. Buy an umbrella policy. Its like $300/year. Shut down the LLC. Lesson learned. Stop reading anything that comes from a "guru". Go make some money. Stop spending it.

@Rob Beland hit the nail on the head. If you are doing asset planning (not protection), you are looking for a land trust. There is 1 way to transfer your deed to a trust without triggering your due on sale clause. Look into the Garn–St. Germain Depository Institutions Act:

"... a lender may not exercise its option pursuant to a due-on-sale clause upon ... a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property[.]”

If your lawyer was surprised about the due on sale clause, get a new one immediately. I'm guessing he was recommended by your "guru", or is not RE focused. I've not heard of a standard residential mortgage without one.

If you want to avoid triggering due on sale and protect your assets, get yourself an umbrella policy. They're "cheap as chips." If you also manage the units you can look into an errors and omissions policy as well.

'Frankly Im surprised there is any real discussion about this. Wells Fargo, BofA, Chase, and every major bank has the same due on sale clause. Its standard language in every mortgage. Secondly you took advice from as you put it, a "guru". Thirdly, your attorney charged you probably a lot of money to set up this LLC that you are now realizing may be useless. He then seems mystified that a due on sale clause was in your mortgage? Oh and now Im guessing he will be assisting you with the purchase of the umbrella policy? Walk away from the attorney. Buy an umbrella policy. Its like $300/year. Shut down the LLC. Lesson learned. Stop reading anything that comes from a "guru". Go make some money. Stop spending it. '

Congrats. Having extolled the virtues of the community, the first cynical blowhard rears his ugly head.

As a point of fact the lawyer had the integrity to return ALL of his fee, thanks very much. Screwed that one up, didn’t you?

As for the 'guru', what does that have to do with the point about the LLC other than the fact we arrived at that situation via an earlier proposal (mentioned as an aside) from the individual on the matter of trusts? The LLC advice came from here - and the lawyer - so you might as well question why people are on this forum seeking advice in the first place from fellow investors and self-styled gurus. Of course, the irony of your questioning the advice of the 'expert', while ladling out your own deftly delivered diatribe probably eludes you - having someone ghost write a book for you soon, are you?

Further, I suggest you learn to read - I quite clearly stated that my wife has been professionally engaged as a writer (on numerous occasions as a matter of fact) by this very well known individual and personally sought out his advice on the matter of protecting the RE assets, so by all means enthrall us with your acumen vis-a-vis your brilliant extrapolation to the effect we're reading his books?

As for the umbrella policy - really? Who would have thought that such a thing existed? The point, oh greatest of real estate sages, is that we still wanted to find a way to isolate the properties within a legal structure that would further insulate the growing portfolio of RE assets, a not unreasonable aim in a situation where a three to five million dollar blanket policy could prove small change in the right circumstances, especially here in the USA with its bevy of piranha lawyers waiting for any given opportunity to stake their financial claim.

Oh, and as for that pearl of wisdom on making money instead of spending it! What breathtaking insight! You mean real estate investment isn’t about taking from the rich and giving to the poor? Damn, I’ll have to lay down my bow and arrows and break the bad news to Little John and Will Scarlett! I guess in your neck of the woods they simply give real estate away, agents waive their fees, surveyors, contractors etc donate their time out of goodwill, and lawyers perform their duties pro bono on the odd occasion people (obviously not a genius like you) need their services? The point, Sherlock, is that any business requires the expenditure of money at times on ancillary services, even consultation fees, and anyone who doesn’t do their utmost to protect themselves from the potential legal minefield that property ownership represents in the USA is courting disaster. Any more profound philosophical insights?

Finally, I would suggest you peruse the responses from those who preceded you on this post and note the professionalism and basic courtesy so utterly bereft from your own arrogant, chest-thumping ‘look at me’ post that essentially added nothing to the discussion other than the sad fact that, like all forums, there’s always some egotistical jerk lurking about who thinks they own the site and look for any opportunity to jump up on a soapbox and pontificate. Try learning that most un-American of traits – humility – before posting again. Or better still try restraining that impulse to post completely.

Jon Holdman made the great point earlier that this most likely would change the terms of the loans they would have offered in the first place to a LLC. The interest rate probably a little higher...different length of time, etc.

If you personally work/talk with someone at the branch, go in and chat with them. See if the loan(s) could be transferred to the LLC and change the terms so that they are also happy. Perhaps they might also want you to personally guarantee the loans so that if your LLC does default, they can still come after you. This is what I did with my bank.

It's not wrong to have a LLC as someone suggested above. It's also not wrong to not have a LLC! It's your own business choice that only you can make.

Perhaps it's time to start a relationship with other banks. Small, local banks.

@Bryan Otteson

The trust option was the one we went down in the first place, but were dissuaded from doing so via an earlier post here, as well as the lawyer we consulted. The basic premise we were given is that making such a move could have been viewed suspiciously from a legal standpoint and might not necessarily stand up under scrutiny in a Florida court.

As for the 'guru', that's getting a little overblown in the context of this post. My wife has never even met the individual concerned, but has edited a number of his books. He doesn't even live in our neck of the woods - closer to you in fact - so the only contact has been through email or over the phone. With that in mind, it could hardly be said that he was the one who recommended the lawyer we consulted. I agree with you that now, in hindsight, I'd question the lawyer's level of expertise (his specialty is real estate) given the fact we're now discovering that the due on sale clause is common, but I'll give him his due, he did return his fee to us when all this came up - I nearly fell over in shock when my wife told me!

Wow, I would say calm down but that was so eloquently put and entertaining to read that I am a little embarrassed that I cannot deal with hecklers so well. Are you sure you are not professional writer in the family? I particularly enjoyed the Robin Hood references. Well played Wilderbeeste, well played.

I, like you, do not subscribe to the "just buy more insurance" philosophy of asset protection. I do, however completely agree with the banks position. They underwrite these policies based on specific guidelines and so even though it makes perfect sense for us to put the properties into an LLC, and even arguably protects their position as well, they are slaves to the bureaucracy. Point in fact Well's specifically turned down my request to do the same thing 10 years ago.

So, what do you do? Well definitely get the umbrella policy which I am sure you have. And then hope you don’t get sued, or that you don’t get sued for more than your policy. And then turn your fortunes over to the insurance company because they can always be trusted. Surely they would never fight you on whether you are actually covered or not. And surely they will fight the suit for you even if they prefer to settle or, vice versa, settle because you want to even though they would prefer to fight. No, to me insurance is only one piece of the puzzle, but it leaves too much to chance. I would rather know that my assets were locked up and discourage lawsuits vice encouraging them because not only to I have a ton of assets but a great big insurance policy to target as well.

The best course of action is to buy the assets in the LLC. That means commercial loans which are much less favorable and much more difficult to make the numbers work. If you can make them work, though, that is what I would do. Barring that you can transfer the properties anyway. Despite what many people say, triggering the due on transfer clause is not a violation of your mortgage agreement. It merely gives the bank the option to call the loan IF THEY CHOOSE. Which they may or may not. The problem is that it is out of your hands. You could use a land contract. It is true that legally the bank cannot call the loan if you transfer it into a trust for estate purposes. The problem is that offers no asset protection. You can then change the beneficiary of the trust to your LLC which should shift the liability to the LLC, you may have to fight that one in court though, but it will also trigger the due on sale clause if the bank finds out. The argument is that it is much more difficult for them to find out.

You really need an attorney familiar with all this stuff, i.e. asset protection, nut just real estate or business entities. I am not one and do not offer legal advice. Just my opinion for you to research on your own.

Ed

Originally posted by @Tim Wilderbeeste :

'Frankly Im surprised there is any real discussion about this. Wells Fargo, BofA, Chase, and every major bank has the same due on sale clause. Its standard language in every mortgage. Secondly you took advice from as you put it, a "guru". Thirdly, your attorney charged you probably a lot of money to set up this LLC that you are now realizing may be useless. He then seems mystified that a due on sale clause was in your mortgage? Oh and now Im guessing he will be assisting you with the purchase of the umbrella policy? Walk away from the attorney. Buy an umbrella policy. Its like $300/year. Shut down the LLC. Lesson learned. Stop reading anything that comes from a "guru". Go make some money. Stop spending it. '

Congrats. Having extolled the virtues of the community, the first cynical blowhard rears his ugly head.

As a point of fact the lawyer had the integrity to return ALL of his fee, thanks very much. Screwed that one up, didn’t you?

As for the 'guru', what does that have to do with the point about the LLC other than the fact we arrived at that situation via an earlier proposal (mentioned as an aside) from the individual on the matter of trusts? The LLC advice came from here - and the lawyer - so you might as well question why people are on this forum seeking advice in the first place from fellow investors and self-styled gurus. Of course, the irony of your questioning the advice of the 'expert', while ladling out your own deftly delivered diatribe probably eludes you - having someone ghost write a book for you soon, are you?

Further, I suggest you learn to read - I quite clearly stated that my wife has been professionally engaged as a writer (on numerous occasions as a matter of fact) by this very well known individual and personally sought out his advice on the matter of protecting the RE assets, so by all means enthrall us with your acumen vis-a-vis your brilliant extrapolation to the effect we're reading his books?

As for the umbrella policy - really? Who would have thought that such a thing existed? The point, oh greatest of real estate sages, is that we still wanted to find a way to isolate the properties within a legal structure that would further insulate the growing portfolio of RE assets, a not unreasonable aim in a situation where a three to five million dollar blanket policy could prove small change in the right circumstances, especially here in the USA with its bevy of piranha lawyers waiting for any given opportunity to stake their financial claim.

Oh, and as for that pearl of wisdom on making money instead of spending it! What breathtaking insight! You mean real estate investment isn’t about taking from the rich and giving to the poor? Damn, I’ll have to lay down my bow and arrows and break the bad news to Little John and Will Scarlett! I guess in your neck of the woods they simply give real estate away, agents waive their fees, surveyors, contractors etc donate their time out of goodwill, and lawyers perform their duties pro bono on the odd occasion people (obviously not a genius like you) need their services? The point, Sherlock, is that any business requires the expenditure of money at times on ancillary services, even consultation fees, and anyone who doesn’t do their utmost to protect themselves from the potential legal minefield that property ownership represents in the USA is courting disaster. Any more profound philosophical insights?

Finally, I would suggest you peruse the responses from those who preceded you on this post and note the professionalism and basic courtesy so utterly bereft from your own arrogant, chest-thumping ‘look at me’ post that essentially added nothing to the discussion other than the sad fact that, like all forums, there’s always some egotistical jerk lurking about who thinks they own the site and look for any opportunity to jump up on a soapbox and pontificate. Try learning that most un-American of traits – humility – before posting again. Or better still try restraining that impulse to post completely.

 Do you imagine this to be helpful?  Because honestly, it is less professional than the post it is replying to, and also is a wildly disproportionate response.

I'm glad your lawyer returned his fee. He should have. The fact remains that he (and you) screwed up in a couple of really significant ways. First in blindly going with an LLC, when chances are that it will do NOTHING to "further insulate the growing portfolio of RE assets." As I said above, and as you can find discussed in detail on this site, the vast majority of LLCs don't provide any meaningful protection. And second in not reading your mortgage and finding the due-on-sale clause, which really completely standard. Or even reading on here about transfering property into an LLC (there are dozens if not hundreds of posts warning that banks won't allow it, and that it may trigger a DOS clause.)

Rob and myself are from the same place, gritty mill towns in central Massachusetts.  It's a stright-talking kind of area that has produced few diplomats.  But many successful businessmen.

Based on my research. You may want to present the following idea to your real estate attorney:

1) Place the property into a trust. According to the Garn St. Germain Act of 1982, no bank can force the due on sale clause if you place it in a trust.

2) Have your multi-member LLC be one of the members.

Let us know what your real estate attorney suggests. 

Originally posted by @Tim Wilderbeeste :

As some of you may recall I made some inquiries on here a few months ago about the best way to protect our real estate holdings by placing them in an LLC. Well we consulted a lawyer and began the process through him only to run into a major hurdle - we have been instructed by Wells Fargo, the lender on three of our properties, that we are not allowed to place the properties in an LLC and if we try to do so they will trigger the due on sale clause. The lawyer said he is mystified by their stance and has never come across such a problem before - we ourselves have always found Wells Fargo very easy to deal with up to this point. Now we either have to try and refinance with someone else who'll allow the transfer to an LLC, or take up the lawyer's other recommendation of simply getting an umbrella insurance policy to cover the properties. Personally I don't get it - I thought placing investment properties in LLC's was a stock standard business practice in Real Estate, so why is Wells Fargo getting so obstructive about it - does it leave them exposed somehow? Also please note - the LLC's are purely for liability purposes, not for any kind of tax breaks.

Best advice is do it first and ask for forgiveness later (be smart prepare your ability to do take out financing in the event they get quirky).

Most lenders will be fine, I assume you've paid atleast 6 months payments so far prior to this transfer to your LLC.

Who wants to call a performing note? likelihood is highly unlikey from all counsel's I've loosely discussed this with.

Originally posted by @Alan Russell :

Wells Fargo will do Commercial Loans for LLC but it needs to be setup that way from the start. They dont like you changing a personal loan (mortgage) to an LLC because of course there is more risk for them.

They also dont want to take this loan in a LLC because it was meant for the secondary markets - mortgage backed securities - Fannie Freddie only accept living trusts and personal names (no LLC's/LP's/Scorps/C-corps/land trusts/etc).

Why would they want to take this loan in an entity unless if they are going to sell the note they spent all their time on (human labor/hours) underwriting it to FNMA/FHLMC standards and now because of one silly mistake (funding in a LLC) they have to sell it on the scratch and dent market at a greatly reduced market value or break even and or loose money on it instead of making the average 150-300 basis points on this paper.

So it makes perfect sense not to allow LLC/entities on agency paper.

This string is hilarious.    @Jon Holdman  gave the correct answer right off the bat, and he was followed up with absolutely correct advice from @Rob Beland  and @Richard C. that was based on sound experience.   All this nonsense about trusts, LLCs, and double back flips to protect a whopping 4 rental policies that are mortgaged. It's surprising that this thread has gone as long as it has.  I say this as both a plaintiff's lawyer and a landlord:  just buy the insurance and move on with your life.

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