LLC required for receiving hard money?

Question

I am not very knowledgeable in the areas of LLC's nor hard money loans. I am speaking with a hard money lender for the purpose of funding a flip. He says I will need an LLC in order for them to lend to me. Is this common for hard money lenders/do all hard money lenders require this?

Stephanie P. · Answer

@Ross Bernard

@Ann Bellamy was very articulate and correct in her explanation, but I'll go a little further.  If the loan is considered to have a business purpose, then it is not a covered mortgage mortgage and not subject to the same rules as principle residences.  Reg Z, then doesn't apply; but it's extremely important for lenders and brokers of mortgages to have the borrowers state, unequivocally, the intention of the purpose and the use of the proceeds.  It must be for business purposes or it will be subject to a host of other regulations.  An LLC, is the first step in separating personal from business.

Stephanie

Tim Ivory · Answer

May I ask why it would be harder to refinance a property that is within an LLC?

Lee Ripma · Answer

Thanks @Jason Hirko, @Stephanie Potter, and @Ann Bellamy for taking the time to respond and for you insight on LLCs. I think I'm going to be able to close my current deal without one and won't put the property into my LLC until after I do a cash-out refi in 6 months. I think if the property I was buying was commercial instead of being small multi-family then it would be easier for me to just use the LLC the whole time. I'll keep everyone posted after I've been through it once!

Jason Hirko · Answer

Some require it, some don't. It is certainly not accurate to say that HMLs require an LLC, so if yours does and you don't want to, you could look for one that doesn't require one.

Ann Bellamy · Answer

Most HMLs require that you take title in an LLC or Inc.  The reason is the lending laws changed since the advent of Dodd Frank.  Dodd Frank required that states formulate individual laws at least as restrictive as the federal law.  So in most locations, the definition of what loans MUST be considered residential and comply with federal requirements is greatly expanded.  So since HMLs choose not to deal with the new normal of residential lending, then lending to businesses who flip houses as inventory keeps them in the commercial lending zone.  Hence the requirement for an LLC or Inc.

The personal guarantee is not removed.  If you buy a 6 unit with a bank commercial loan, the bank will still require personal guarantees.  As do HMLs.

Loans without personal guarantees are rare, and are called non-recourse.  When you first start out in flipping or even in buy and hold, your chances of getting a non-recourse loan are less than zero.

So get the LLC and be done with it.  Some states have online portals where you can do it in 10 minutes.  Then have your attorney draw up your operating agreement.  You will be required to get different insurance also, since it's a business policy, so be aware.

Lee Ripma · Answer

Does anyone have any recent experience with hard money requiring the use of LLC? I was going to close with Patch of Land but they required an LLC which is taking too long to come back from the state. It's much easier to refinance by holding the property in my personal name and I'm going to guarantee the loan anyway.

Ben Stoodley · Answer

Hi @Ross Bernard it is not uncommon for HML to require borrowing entities, rather than holding Title and the Loan in a personal name. However, it should be just as easy to find HMLs that do not require that, and will lend to you in your personal name. This doesn't mean it's a personal guarantee, the vast majority of all HML are asset based and non recourse. Best of luck!

Jeremy Pace · Answer

@Ross Bernard ask the lender if you will also need to sign a personal guarantee.  There's no real benefit to you to set up an LLC for the purpose of the loan if they're simply going to lean on your personal credit anyway (lean, ha! my puns).  If they need the LLC so that the LLC can be set up as the responsible, autonomous party ... then it makes sense.

LLC required for receiving hard money?

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