Transferring Real Estate into an Entity - Due on Sale?
Realtor and Investor · Leawood, KS · Member since 2015 · 166 posts · 78 votes
Transferring Real Estate into an Entity - Due on Sale?
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Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
10yThe OP is in Kansas City, that's not in Utah, in Missouri, banks do and will call in loans transferred.
A loan in the name of a member or guaranteed by a member with funds used in an LLC or where assets used by an LLC are collateral for a loan made by a member do not constitute commingling of funds or assets as personal guarantees are generally required.
A revocable Trust where the borrower remains as the beneficiary which has an estate planning purpose is specifically excluded as an event subject to the due on sale clause.
An LLC can have a Trust or any other entity as a member of that LLC.
You can transfer property to a Trust which carries estate planning goals with you as the beneficiary. Your Trust can later become a member of an LLC. The activities of your Trust are irrelevant to the due on sale aspects.
A lender may request a copy of your Trust, they may also ask that the Trust name be identified with your name, this is for title search aspects. The law also states that lenders are to reasonably afford a borrower estate planning avenues. A letter from your attorney will generally do the trick. Common sense tells the lender that the larger the estate, the more complex the estate plan can be. A string of Trusts and LLCs for a low net worth person is just a red flag.
In MO. members of an LLC are not listed with the Secretary of State, only the organizer and the registered agent who may be the same person or entity. LLCs are either "member managed" or manager managed" any person or entity may manage a MO. LLC without being a member. Members are only named in the Operating Agreement which is not filed with the Secretary or any other public filing.
So, you can get as convoluted as you like, just remember you'll have management requirements for every entity, tax returns and filings that can't be paid with a smile. An LLC means you can't represent yourself in court, you'll need an attorney.
If you have larger multi-family units, I suggest a separate LLC, you can have 100 homes in one LLC. The difference is the concentration of risks. You take on more risk driving your car than you do owning a single family residence. If you truly understand business and real estate, good management keeps you from being negligent in the first place, then insurance kicks in.
Risks of being sued is NOT the same all over the country, Missouri is rather landlord friendly in that respect, so is Kansas. New Jersey or California is another matter, while we have our share of trip and falls, you really have to be negligent to be liable. Folks need to consult with their local attorney as to the risks assumed in their jurisdiction.
Understand too, that if you lose a law suit for some activity outside your business ventures. like a car accident or a hunting accident, your assets are at risk and any and all of your LLCs owned are your assets, this is coming in the back door to attach your assets held, just as if you owned stock in a corporation, that stock can be sold.
The only bullet proof way to protect "your" assets is not to own them or be able to touch them, that is an Irrevocable Trust, you better make sure the family loves you, LOL. :)
27 Replies
- Attorney / Investor · Salt Lake City, UT · Member since 2015 · 228 posts · 198 votes10y
We've been successfully titling real estate assets in LLCs for nearly 30 years. It is standard practice. Yes, technically, it does violate the due on sale clause. It always has and that hasn't stopped millions of investors from using them. I've never seen it actually called due from being held in an LLC, however, and despite hearing the rumor that banks are calling them due. It seems to be more fear in the rumor mill than an actual risk. The bank just wants to know that the borrower is still the owner of the property. If you are the owner of the LLC that owns the property, you've accomplished that and it's not worth worrying about the due on sale clause. If the bank still has a problem, you can just title it back in your own name.
Your analysis of using a living trust is incorrect. If you're referring to what is commonly known as a "land trust", then it's not the trustee that provides the liability protection, it's the beneficiary in these documents. So, you'd make the LLC the beneficiary, NOT the trustee. Further, this doesn't change the due on sale analysis. The only exception to the no transfer rule is to a "family living trust" where the borrower, the human, is one of the beneficiaries. And then, of course, you have no asset protection. The land trust is used if you want to have some anonymity in holding title, not to avoid the due on sale.
Put the property in the LLC (or in a land trust if you want where the beneficiary is the LLC) and don't worry about the due on sale clause.
Jeff
If the loan is in your name, good luck getting any protection from the LLC. How will you prove that you are not commingling assets when your LLC is on the deed, but you personally are on the note? You've already breached the veil.
As far as due on sale goes, be careful. Determine your worst case scenario because it may happen. Just because @Jeffrey S. Breglio hasn't seen a note called due and recommends not to worry about it does not lessen the reality that it happens. I spoke with an investor here in Denver a few months ago that had a note called due 2 years after he deeded the property over. He wasn't behind, he never missed a payment, etc. It does not happen often, but what would it mean to you if it did? And for protection that likely doesn't exist?
Grab an umbrella policy and buy the next property in the name of the LLC.
Talk to a bona fide asset protection attorney. @Jeffrey S. Breglio is correct, investors have been doing this successfully for years. And my understanding, I am not an attorney, is that having the loan in your name has not pierced the corporate veil. I can not name specific cases but would be surprised if that has not been tested in court considering the sheer number of times this strategy has been adopted. Again, consult with an attorney if you want to know the real deal, particularly in the state the property is located.
In terms of the trust, Jeffrey is spot on there too. I will add that it will be more difficult for the lender to spot the transfer since it will not be public record and/or they may assume you have done it for estate purposes. My understanding and opinion, though, is that it does indeed still violate the Due on Sale clause. So if they choose to ferret you out, you will have to pay the piper.
I agree with @Bryan O., you need to determine if the risk is worth it. Odds are they will not accelerate the loan. If they do, they may give you the opportunity to retitle it. You need to consider the worst case, though, which is they accelerate the loan and do not allow you to retitle it which is their option since you violated the clause. If you, cannot/do not want to, deal with that then you should look for a different strategy. If you are willing to deal with that unlikely event for the liability protection then maybe it is worth it. I will close with, once again, only a good attorney can recommend what you should do. Just because you are right does not mean that you cannot be sued or may not have to sue to enforce that.
- Attorney / Investor · Salt Lake City, UT · Member since 2015 · 228 posts · 198 votes10y
Unfortunately, @Bryan O. is incorrect. Nor is he an attorney. I have been an attorney for nearly 20 years. I have almost a 1000 clients, with 1000s of entities with 10,000s of properties. I've been a real estate investor for 15 years, owning both residential and commercial, a flipper and private lender, a real estate agent for 8 years, and owned a title company. In all that time I have never seen a bank call a note due because of a transfer to an LLC. I have, however, successfully defended numerous clients and protected their assets in entities--even when the mortgage was in their name. Having a mortgage in your name is NOT commingling funds and does NOT pierce the corporate veil. There are numerous way to blow your liability protection, but solely having your name on the mortgage is not one of them.
I have seen three notes called due in all that time. Usually from local banks that are more aggressive at checking title, and these were all seller financing situations. The bank didn't care about the entity structure, but rather that the property had change hands. I spoke with clients and the bank in those situations. The bank asked for corporate documents to determine the owner. In no case did they mention the LLC was the issue. They didn't care. They cared that the owner of the LLC was NOT the borrower on the note. That is, it actually was a sale.
The due on sale clause is always an issue, and one that all investors need to understand. I didn't say it wasn't. It's part of doing business in real estate, both in an asset protection measures and in seller financing deals. If you understand it, and are prepared if it's called due, then it's not something to worry about. @Edward is correct. If that's not something you're comfortable with, then find a different strategy in investing. Get educated is my suggestion.
I'm always intrigued by the "I know someone who" claim. I would ask: What was the end result? What documents did the bank ask for? Did the bank actually force the payoff? Did the borrower still own the LLC? Did the borrower explain to the bank it was for asset protection purposes and not a sale of asset? Did the borrower offer to re-title back into his own name to make the bank happy? When you get all the details, the conclusion is usually different from the one stated. And if it is an actual example of a bank forcing a pay off simply because of the LLC, then there ya go. There's one.
Happy Investing!
Jeff
- Investor · Lithonia, GA · Member since 2015 · 9 posts · 1 vote10y
I am pretty new to this ant this might seem stupid but can you put the property under the LLC, which has no credit, so it would be difficult to get financing, but can you then be a co-signer on the property to build LLC credit?
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes10y
The OP is in Kansas City, that's not in Utah, in Missouri, banks do and will call in loans transferred.
A loan in the name of a member or guaranteed by a member with funds used in an LLC or where assets used by an LLC are collateral for a loan made by a member do not constitute commingling of funds or assets as personal guarantees are generally required.
A revocable Trust where the borrower remains as the beneficiary which has an estate planning purpose is specifically excluded as an event subject to the due on sale clause.
An LLC can have a Trust or any other entity as a member of that LLC.
You can transfer property to a Trust which carries estate planning goals with you as the beneficiary. Your Trust can later become a member of an LLC. The activities of your Trust are irrelevant to the due on sale aspects.
A lender may request a copy of your Trust, they may also ask that the Trust name be identified with your name, this is for title search aspects. The law also states that lenders are to reasonably afford a borrower estate planning avenues. A letter from your attorney will generally do the trick. Common sense tells the lender that the larger the estate, the more complex the estate plan can be. A string of Trusts and LLCs for a low net worth person is just a red flag.
In MO. members of an LLC are not listed with the Secretary of State, only the organizer and the registered agent who may be the same person or entity. LLCs are either "member managed" or manager managed" any person or entity may manage a MO. LLC without being a member. Members are only named in the Operating Agreement which is not filed with the Secretary or any other public filing.
So, you can get as convoluted as you like, just remember you'll have management requirements for every entity, tax returns and filings that can't be paid with a smile. An LLC means you can't represent yourself in court, you'll need an attorney.
If you have larger multi-family units, I suggest a separate LLC, you can have 100 homes in one LLC. The difference is the concentration of risks. You take on more risk driving your car than you do owning a single family residence. If you truly understand business and real estate, good management keeps you from being negligent in the first place, then insurance kicks in.
Risks of being sued is NOT the same all over the country, Missouri is rather landlord friendly in that respect, so is Kansas. New Jersey or California is another matter, while we have our share of trip and falls, you really have to be negligent to be liable. Folks need to consult with their local attorney as to the risks assumed in their jurisdiction.
Understand too, that if you lose a law suit for some activity outside your business ventures. like a car accident or a hunting accident, your assets are at risk and any and all of your LLCs owned are your assets, this is coming in the back door to attach your assets held, just as if you owned stock in a corporation, that stock can be sold.
The only bullet proof way to protect "your" assets is not to own them or be able to touch them, that is an Irrevocable Trust, you better make sure the family loves you, LOL. :)
You can get an asset based loan, where the loan is based on the underlying asset (equity and NOI) vice your credit. That would be more difficult and the rate and terms will not be nearly as good. You can also personally guarantee the loan, which will also help secure the loan and earn you more favorable rates and terms. You will be on the hook for the loan if the LLC defaults, though.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes10y
Please enlighten us as to what property type your 'piece of real estate' is @Edward Stephens. Sounds like vacant land the way it's worded. Depending on the type of asset, proper advice will vary greatly.
This is a GIGO scenario regarding assets and asset protection. Garbage in, garbage out.
So many ask these complicated and involved questions and receive tons of advice, yet we don't know if we are advising on a strip mall, farm land, MHP, apt bld, or just a house. Thank you.
The investor I know was given 2 options: Deed it back to the same name on the note, or pay. He had 30 days to complete. He did not have the money to pay the note, so he had to put it back in his name. When I asked my lender if they use the same policy, they said no. When they accelerate it is due and there is not window to revert it.
- Realtor and Investor · Leawood, KS · Member since 2015 · 166 posts · 78 votes10y
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes10y
Thanks @Edward Stephens. I wasn't trying to call your question garbage. Garbage is the majority of the advice when no one knows what property type one is trying to protect.
- Realtor and Investor · Leawood, KS · Member since 2015 · 166 posts · 78 votes10y
@Bill Gulley Although I currently live in Missouri, the property in question is in Kansas.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes10y
Originally posted by @Edward Stephens:
@Bill Gulley Although I currently live in Missouri, the property in question is in Kansas.
I was sure I mentioned Kansas. A duplex is not a multi-family either, there isn't much difference in the risk than with a single family detached dwelling. :)
A duplex IS a multifamily, but it is NOT commercial real estate. Commercial real estate is a whole different situation than residential properties like single families and small multi families. Living in St Louis, MO I have a lot of duplexes available to me, so that's what I personally invest in. I also recommend investor clients (I'm also a real estate agent) who are interested in buy-and hold because they tend to have better ROI than single families but are still in the world of residential real estate.
I will say, I've heard agents and title reps say the title transfer to an LLC is becoming an issue despite it being common practice in recent years. But, I would agree with @Jeffrey S. Breglio about the lack of useful information in the vague generalities and "I know someone claims" and would echo the advice to talk to a local real estate attorney.
- Attorney · Winchester, VA · Member since 2015 · 726 posts · 387 votes10y
Originally posted by @Jeffrey S. Breglio:
Unfortunately, @Bryan O. is incorrect. Nor is he an attorney. I have been an attorney for nearly 20 years. I have almost a 1000 clients, with 1000s of entities with 10,000s of properties. I've been a real estate investor for 15 years, owning both residential and commercial, a flipper and private lender, a real estate agent for 8 years, and owned a title company. In all that time I have never seen a bank call a note due because of a transfer to an LLC. I have, however, successfully defended numerous clients and protected their assets in entities--even when the mortgage was in their name. Having a mortgage in your name is NOT commingling funds and does NOT pierce the corporate veil. There are numerous way to blow your liability protection, but solely having your name on the mortgage is not one of them.
I have seen three notes called due in all that time. Usually from local banks that are more aggressive at checking title, and these were all seller financing situations. The bank didn't care about the entity structure, but rather that the property had change hands. I spoke with clients and the bank in those situations. The bank asked for corporate documents to determine the owner. In no case did they mention the LLC was the issue. They didn't care. They cared that the owner of the LLC was NOT the borrower on the note. That is, it actually was a sale.
The due on sale clause is always an issue, and one that all investors need to understand. I didn't say it wasn't. It's part of doing business in real estate, both in an asset protection measures and in seller financing deals. If you understand it, and are prepared if it's called due, then it's not something to worry about. @Edward is correct. If that's not something you're comfortable with, then find a different strategy in investing. Get educated is my suggestion.
I'm always intrigued by the "I know someone who" claim. I would ask: What was the end result? What documents did the bank ask for? Did the bank actually force the payoff? Did the borrower still own the LLC? Did the borrower explain to the bank it was for asset protection purposes and not a sale of asset? Did the borrower offer to re-title back into his own name to make the bank happy? When you get all the details, the conclusion is usually different from the one stated. And if it is an actual example of a bank forcing a pay off simply because of the LLC, then there ya go. There's one.
Happy Investing!
Jeff
You forgot the disclaimer: Any advice given by this attorney only applies to his particular jurisdiction. Each state is different, and you should only accept advise regarding how land transfers work from an attorney licensed to practice in the state in which the transaction occurs. Piercing the corporate veil is a creature of the common law and statute, and as such, is heavily modified by the rules of whatever state you operate in. The rule in Utah may not, and in all likelihood will not, apply in Missouri or Kansas. - Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes10y
Originally posted by @Maggie L.:
A duplex IS a multifamily, but it is NOT commercial real estate. Commercial real estate is a whole different situation than residential properties like single families and small multi families. Living in St Louis, MO I have a lot of duplexes available to me, so that's what I personally invest in. I also recommend investor clients (I'm also a real estate agent) who are interested in buy-and hold because they tend to have better ROI than single families but are still in the world of residential real estate.
Well, I guess you're a rather new agent who missed the property definition on the agent's exam.
HUD defines property types, from the HUD definitions here you go:
"SINGLE FAMILY PROPERTY: A single-unit family residence, detached or attached to other housing structures."
There is no definition I've ever found for "small multi-family" maybe a Realtor put one up on Wiki, but we generally go by HUD and federal code, mortgage program definitions as they are uniform. A local zoning board might call a duplex a multi-family, but that is not the acceptable definition in federal law, lending or appraising properties.
Please note: Single family "attached" and "detached".
Attached is 2 to 4 family units under a common roof line and having common walls situated on a common legal description.
Detached is a single family dwelling which stands alone, not attached to other dwelling units situated on one legal description. That's a house!
Commercial property is any property used for a commercial or business purpose. A single family detached dwelling can be a commercial property.
Loan programs define types of loans by property type, you can certainly have a commercial loan on a house.
Under affordable home guidelines, beginning with FHA and later VA, USDA and conventional loans, 1-4 four family residential units are considered single family residences. 5 or more does not qualify due to the greater commercial aspects out weighing home ownership aspects originally defined by HUD and FHA. Fair Housing statutes address a 4 unit as a multi-family when there are two floors and an elevator, so there is an exception.
Definitions need to be understood as they relate to guidelines, mortgage financing, and appraisals, don't get caught up in office lingo or what a zoning board might use in zoning.
Why? Because not long ago we had a new investor looking for financing. He was saying he wanted a conventional loan, 90% LTV for a multi-family he wanted to buy. I believe he called all the banks in his area, same answer, no multi-family loans at 90% LTV!
Now, had the newbie gotten his definitions straight saying a single family duplex, all conventional loans can make that request! He wasted days, looked like an uniformed newbie to all the lenders in town, almost walk away from the contract just because he didn't communicate clearly with the proper definitions.
1-4 units = single family residential dwellings
5 units + = multi-family residential dwellings (with the noted exception above). :)
@Bill Gulley there is no need to be rude or attack someone personally when they are trying to be helpful. I do apologize if you felt I was being disrespectful to you in my previous post.
Yes, there are many different definitions out there and the same word can have different meanings in different contexts. I will absolutely concede that by the definitions you used above a duplex would be a single family. At the same time, that is not the typical way I have heard the terms used on BP. Here is BP defining commercial as 12+ unit apartment complexes (amongst other things)https://www.biggerpockets.com/renewsblog/2012/02/0...
as well as a BP guide "How to Buy a Small Multifamily Property"
https://www.biggerpockets.com/renewsblog/2013/04/0...
and the FHA saying 25% or less of floorspace can be commercial for a property to still be considered residential
http://www.fhanewsblog.com/2011/06/can-i-get-an-fh...
While I am not a lawyer I have spent a great deal of time looking through statues while working for various governmental agencies, for school, as well as for personal edification. I also remember the reminders from lawyers that local definitions e.g. at the beginning of a statute are important to when reading code, which is one of many reasons various local, regional, state, and national law can appear contradictory.
Since I am on Bigger Pockets on this forum, I find I tend to use the terminology I see from Bigger Pockets, such as Small Multifamily. When I am with other residential real estate agents, I would assume multifamily referred to 2-4 family unit properties until given evidence that implied otherwise. I would not assume that on BP, which is why I said small multifamily.
In my experience, the working definition for commercial vs residential when considering properties that are exclusively for habitation is at 5 units (which is how my broker defines it), but that doesn't mean it might not be defined differently elsewhere. When I speak to people on BP, my local REI groups, other agents, or the general public, when they say single family they aren't using the HUD definition you gave above.
- 10yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
I would not quit claim the homes out of your personal name into an LLC because unless you are 100% owner of your LLC and only member you will void your title insurance policy and if you did that and wanted to quit claim it back into your name, your title insurance is still void.
Just get an umbrella insurance policy for added protection. I am dealing with 2 title issues not with dropped coverage for the reasons I stated above. Its not fun and very stressing.
Good luck
Curt Davis - KAIZEN Realty538 Reviews - Attorney / Investor · Salt Lake City, UT · Member since 2015 · 228 posts · 198 votes10y
@Curt Davis, when you transfer, just make sure your homeowners and title insurance polices cover the LLC and you. This is easily corrected by notifying the title co and your insurance agent of what you're doing and tell them what you need. There are policies that will cover your LLC. If they aren't able to, find another agent and title co who can.
Jeff
- Residential Real Estate Agent · Broomfield, CO · Member since 2013 · 390 posts · 125 votes10y
Originally posted by @Bryan O.:
If the loan is in your name, good luck getting any protection from the LLC. How will you prove that you are not commingling assets when your LLC is on the deed, but you personally are on the note? You've already breached the veil.
Grab an umbrella policy and buy the next property in the name of the LLC.
Sorry, but this is completely incorrect. You are misusing the terms, and providing a legal analysis that is nonsense. I understand everyone's need to give their prospective/advice/etc, but please refrain from taking on a legal analysis of someone's situation (which I wouldn't even do as a licensed attorney without having them come into the office). Comingling has nothing to do with who is on the mortgage, or frankly even who owns the property.
Hi @Adrian Tilley. Feel free to read my update that has been in my comment since yesterday. I understand your need to give your prospective/advice/etc, but please refrain from commenting until you have actually read the post in its entirety.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes10y
Originally posted by @Jeffrey S. Breglio:
We've been successfully titling real estate assets in LLCs for nearly 30 years. It is standard practice. Yes, technically, it does violate the due on sale clause. It always has and that hasn't stopped millions of investors from using them. I've never seen it actually called due from being held in an LLC, however, and despite hearing the rumor that banks are calling them due. It seems to be more fear in the rumor mill than an actual risk.
We've had a couple of threads in the last year here on BP where lenders were calling the loan due because of transfers to LLCs after the loans were made. The borrowers received letters that basically said "put it back" or we'll consider it a transfer and call it due. Which is what I would do if I were the note holder and I discovered such a transfer.
There are many threads on BP about due on sale calls, from the both the lender and borrower side. It's a mistake to assume that the calls aren't getting made. Best to be prepared for them IMO.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes10y
Originally posted by @Bryan O.:
The investor I know was given 2 options: Deed it back to the same name on the note, or pay. He had 30 days to complete. He did not have the money to pay the note, so he had to put it back in his name. When I asked my lender if they use the same policy, they said no. When they accelerate it is due and there is not window to revert it.
I wish the search function here was easier to use. We had one thread this year where an investor received the same letter and he posted a copy of it.
I'm not entirely sure about your lender's comment about their acceleration process. Breach of due on sale is a breach of loan terms. I'd be surprised if there is not a cure period.
@Dion DePaoli Can you please comment?
Originally posted by @Account Closed:
Originally posted by @Bryan O.:
The investor I know was given 2 options: Deed it back to the same name on the note, or pay. He had 30 days to complete. He did not have the money to pay the note, so he had to put it back in his name. When I asked my lender if they use the same policy, they said no. When they accelerate it is due and there is not window to revert it.
I wish the search function here was easier to use. We had one thread this year where an investor received the same letter and he posted a copy of it.
I'm not entirely sure about your lender's comment about their acceleration process. Breach of due on sale is a breach of loan terms. I'd be surprised if there is not a cure period.
They may have said that to try and head off the entire discussion. Perhaps their is a cure period but they just told me that. I plan to look into it further, but for the moment a good umbrella policy on everything does the trick.
- Financial Advisor · Elmira, NY · Member since 2015 · 132 posts · 67 votes10y
Bill, you are so right that definitions matter. Even though within HUD "single family" and "1-4" are often used interchangeably, I would respectfully suggest that generally
1-4 units = residential
5 units + = commercial
and that "single family" would fall into the 1-4 unit bucket (colloquially few folks would call a 3 unit a "single family"). At HUD, 1-4 is called single family as a program name, but even at HUD there are times where single family is clearly a subset of 1-4...
Don't even start on the definition of "duplex". Depending on your location, could be a side-by-side 2-unit building where the units are legally separate (2 tax lots), or a 2-unit building of any layout where the units are a single tax lot, or a 2-story unit within a 3 or more story apartment building or...I wouldn't be surprised if there were a few other versions of duplex!!
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