Polling on "Due on Sale" being enforced after transfer to LLC

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Polling on "Due on Sale" being enforced after transfer to LLC

Ben Williams
Real Estate Investor/Agent and Web Developer · Flower Mound, TX · Member since 2015 · 53 posts · 14 votes

Taking an informal Poll here on the "due on sale clause" enforcement. 

Wondering what people's experiences have been when purchasing a property secured by a loan under the individual's name, then shortly after transferred to another entity controlled by the same individual (such as an LLC with individual as owner).

If no interruption of complete payments, has anyone had their loan called due? If yes, then were there any special or unusual circumstances? What advantage would a bank have in doing this since the same person is still responsible for the loan and all the bank would do would risk a foreclosure, costing the bank money? 

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Account Closed
Investor · NOVA, VA · Member since 2014 · 99 posts · 101 votes
10y

As you probably know from searching the site, there is very little actual experience with this and yet everyone (to include myself) has an opinion.

So I guess so far your informal poll is:

Actual experience - 0
Opinions based on nothing - 6


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  • Ben Williams
    OP
    Real Estate Investor/Agent and Web Developer · Flower Mound, TX · Member since 2015 · 53 posts · 14 votes
    10y

    Never heard of that angle.  Would you think it be considered "Concealment" if I don't tell the lender, but don't make any attempt to hide it?  

    @John Anderson , It looked like you were quoting something, but your source didn't make it to the post.

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    10y

    The due on sale clause is likely not called very often due to the fact that we have been in a perpetual falling interest rate environment. I think at the point when we enter a rising interest rate environment that it will be much more common.

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  • Ben Williams
    OP
    Real Estate Investor/Agent and Web Developer · Flower Mound, TX · Member since 2015 · 53 posts · 14 votes
    10y

    @Russell Brazil Could you explain why a rising interest rate would entice banks to enforce the due on sale clause? Would I be right in thinking that it would free up funds to lend at a higher interest rate? 

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    10y
    Originally posted by @Ben Williams:

    @Russell Brazil Could you explain why a rising interest rate would entice banks to enforce the due on sale clause? Would I be right in thinking that it would free up funds to lend at a higher interest rate? 

     Say a loan is at 4% and rates move up 300 basis points to 7%. Then there is incentive to force people into higher rate loans. Money can be made both on the interest rate spread, origination charges, selling the new loans etc.

    In a falling interest rate environment the incentive isn't there, plus as rates drop then the value of existing mortgage bonds goes up. As rates go up then the value of existing mortgage bonds drops.

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  • Ryan Cameron
    Investor · Philadelphia, PA · Member since 2014 · 351 posts · 80 votes
    10y

    @Ben Williams

    I have not had it done, though I asked my loan company about it. They said 'it' (the loan) would become due if I transferred ownership to my Single-member LLC. This is a mortgage that I have paid consistently over the past 11yrs

    I'm not sure what advantages the bank would have in doing this. I wouldn't even bother 'toeing the line' here, just purchase all properties thru the LLC going forward. And if funds are made available, cash the lender out, transfer to the LLC, and take the equity back out once in the LLCs name.

    Best of luck to you

    1Reply
  • Kimberly G.
    Property Manager · Northeast Florida · Member since 2015 · 135 posts · 76 votes
    10y
    My cpa told me to call my bank and ask for some sort of personal guarantee on the loan form to allow me to do this. Anyone heard of that or do this?
    0Reply
  • Account Closed
    Investor · NOVA, VA · Member since 2014 · 99 posts · 101 votes
    10y

    As you probably know from searching the site, there is very little actual experience with this and yet everyone (to include myself) has an opinion.

    So I guess so far your informal poll is:

    Actual experience - 0
    Opinions based on nothing - 6


    12Reply
  • Christian Bors
    Real Estate Agent · Mechanicsburg, PA · Member since 2014 · 529 posts · 217 votes
    10y
    Originally posted by @Kimberly G.:

    My cpa told me to call my bank and ask for some sort of personal guarantee on the loan form to allow me to do this. Anyone heard of that or do this?

    This is very common on the commercial side. All banks will require a personal guarantee while lending to an LLC unless extraordinary circumstances apply, I.E. you have 5 million in the bank etc...

    On the residential side of banking, all loans are made to individuals.  Hence, every loan is back by a personal guarantee.  I doubt a bank will allow someone to transfer a 30yr residential mortgage to the commercial side even if the borrower was willing to pledge a personal guarantee.  I suppose there could be a chance if its a small bank who services the loan in house.  However, smaller banks typically sell their residential mortgages on the secondary market.  These banks do not have enough assets manage this accounts in house.  

    Banks will extend terms to LLC's, however it will fall under the commercial side of the bank. In doing so, the terms are less attractive. For example, terms will most likely be 5yr fix amortized over 20years with a balloon at year 6. On the bright side, commerical banking can be much more creative. They do not have to wait for "seasoning" period for the BRRRR strategy. They can also write blanket mortgages.

    To get back to your original question, it wouldn't hurt to ask your banker.  However its very unlikely you will get the answer you are hoping for. 

    1Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    The "official" answer from my firm's compliance department? Is basically what you already know - it could trigger due on sale, lender or loan servicer has every right to immediately call the note due (generally forcing a refinance, as @Russell Brazil notes), etc.

    Have any of my past clients who always shove everything into an LLC ever called me to yell at me? Nope... so far.

    1Reply
  • Ben Williams
    OP
    Real Estate Investor/Agent and Web Developer · Flower Mound, TX · Member since 2015 · 53 posts · 14 votes
    10y

    to clarify general  question so far...

    I'm wondering on actual experience primarily. I'm not saying I will notify the lender I'm not talking about being devious or concealing anything. I'm talking about a transfer of a property to an LLC. I'm aware the bank does indeed have the right to call the loan due. The question is, will the bank do so, and if yes, why? Because on the surface, so long as the loan is still paid on schedule, the bank is still getting the return they forecasted. Also the loan payment is still ultimately the responsibility of the same individual and secured by the same property. The ONLY thing that changed for anyone is extra liability protection for the owner.

    @Russell Brazil gave the most technical logical for a bank to call the loan due. 

    @Chris M. Have some additional real world insight. 

    What are others' actual experiences?

    0Reply
  • Ben Williams
    OP
    Real Estate Investor/Agent and Web Developer · Flower Mound, TX · Member since 2015 · 53 posts · 14 votes
    10y
    Originally posted by @Ben Williams:

    to clarify general  question so far...

    I'm wondering on actual experience primarily. I'm not saying The owner will notify the lender and I'm not talking about being devious or concealing anything. I'm talking about a transfer of a property to an LLC which is legal and in public record. I'm aware the bank does indeed have the right to call the loan due. The question is, will the bank do so, and if yes, why? Because on the surface, so long as the loan is still paid on schedule, the bank is still getting the return they forecasted. Also the loan payment is still ultimately the responsibility of the same individual and secured by the same property. The ONLY thing that changed for anyone is extra liability protection for the owner.

    @Russell Brazil gave the most technical logical for a bank to call the loan due. 

    @Chris M. Have some additional real world insight. 

    What are others' actual experiences? What are others' insights the the reasoning of the lenders for calling or not calling loan due?

    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y

    Hey guys Its not the Banks Rules that don't allow lending to entity's but its federl rules governing Fannie and Freddy loans.  Those loans are basically designed for individuals, and not for commercial purposes.  @Ryan Cameron you cannot get a conventional loan underwritten to an entity. It has to be written to an individual. That's why you cannot get those loans for an LLC or any other commercial entity. It's Federal law not the lenders. If you want the loan in your LLC's name its got to be a commercial loan. The interest is a bit higher, The down payment is a bit higher, and the term is usually shorter. 5 to 10 years being common, but with a 25 to 30 year amortization. This makes payments a little higher.

    Most investors that are serious finance and refinance properties more often than a home owner would.  I don't have a loan that's seven years old.  The average property sells every 7 Years.  1 or 2 % isn't a huge amount of money in the scope of a $100,000 rental investment, over a 3-5 year term.  If you are keeping your equity to a minimum you sell or refi to get it back out more often.  The difference in interest is of little consequence between the 2 loans over 3-5 years.  The Down Payment is usually 25%  and that's what most Fannie Freddy loans want after the first few properties.  Same same here.  The 25 year amortization just speeds up the rate that you are buying down the equity.  Depending on what you are doing I don't see as this hurts the investor much either, although the idea is to keep equity at a minimum. 

    One big difference I see is usually after a set number of conventional loans they require a big reserve to finance additional properties.  Here there is a disadvantage to the investor.  Just recently they disallowed the use of certain retirements to meet the reserve requirement.  If you must quit your job or cannot easily access your retirement funds they no longer qualify as reserves.  That means you must have cash.  The reserve percentage is based on the unpaid balance of your existing loans.  As everybody on here knows money sitting in the bank as reserves is costing you in missed opportunity.  Most Investors do not want large sums of money sitting in the bank as reserves.

    The commercial loans provide another built in feature. A part of what qualifies the loan is the properties ability to make the payments. The lender looks over all your numbers as well as many of the same things a conventional loan. If the property isn't going to be able to make the payments the lender will back out. Its at least comforting to know they looked at my numbers and agreed it wasn't a looser. That plus I don't have to hide the fact that I want my properties in an LLC make commercial loans a better option for me.

    At some point as an investor you need to Pony up and play by the rules.  Its a business and should follow ethical and moral practices.  If it doesn't it can't be expected to perform well.  Lying to conventional lenders about the tittles of up to 10 properties doesn't really fit the bill now does it. 

    RR       

    8Reply
  • Ryan Cameron
    Investor · Philadelphia, PA · Member since 2014 · 351 posts · 80 votes
    10y

    @Ralph R.

    Thanks for the break down. This is what I like the most about BP. All the information/Education

    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y

    Here's a post about this.  For those who have been on here a while the OP is a well respected BPer and a very successful investor.  He actually had this happen to him.   

    https://www.biggerpockets.com/forums/311/topics/18...

    The information concerning the due on sale clause I posted about being a Fannie Freddy rule was what 2 of my lenders told me when I sent written requests to put my properties into an LLC. They would allow a deed for a Primary residence to be placed in a trust for estate planning though. I have been able to get permission to do this.

    RR

    RR

    1Reply
  • Ryan Cameron
    Investor · Philadelphia, PA · Member since 2014 · 351 posts · 80 votes
    10y

    @Christian Bors Could you explain what  "Write Blanket mortgages" mean?

    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    @Ralph R., link doesn't work. 

    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y

    @Ben Williams @Account Closed

    See my post above

    RR

    0Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    10y
    Originally posted by @Account Closed:

    @Kimberly G. Are you saying to ask your bank if you can get away with transfer the property to an LLC, and I think the bank would be watching you and hoping you do, so they can take the property form you? Do the right thing and leave it in your personal name and get a good insurance policy so you can sleep well at night? Good luck.

    I wouldn't say it's a matter of "getting away with" anything. 

    I think it's more a matter of convincing the lender, "I'm deeding the property into an entity I control. I was making the payments until now, I am still making the payments now, and I will continue to make the payments as agreed in the loan documents and the mortgage / deed of trust."

    Lenders don't want to foreclose if they don't have to. It costs them big bucks they won't get back if they do foreclose.

    The change of ownership has no impact on the lien other than to enable the lender to call the loan per the "due on sale" provisions. The lien itself remains in full force and effect.

    As I see it, the question here is what are the legal requirements on the lender's side regarding the nature of the loan? Is the lender required to force the refinance into a commercial loan?

    Any mortgage bankers or other finance people here who are qualified to provide those insights?

    As for the transfer, yes - you should have the entity "buy" it from you with you conveying a warranty deed (or it's equivalent in a non-judicial state). Quit-Claim deed is a very weak instrument, and some title insurers may balk at them. If a lender is involved in the entity purchase, the process should follow all the necessary guidelines and qualifications.

    My $0.02...

    3Reply
  • Ray Slack
    Investor · White Haven PA · Member since 2014 · 363 posts · 221 votes
    10y

    30 years in the business .. Have bought and sold homes with loans in other's name and sold them with loans in my name. Violating the due on sale clause. Never had a problem.  The only time I have ever heard of them being called due is if the payments fall past due. 

    + 1 for No problems in real world experience.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Account Closed LOL John your over the top here... when someone deeds to their LLC or trust.. and its the same individuals the chance of a call is as remote getting a foot of snow in Orlando :)

    can it happen yes.. does it NO

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Account Closed  in my very limited experience this simply does not happen

    as long as its the same ownership.. people change properties into trusts all the time for tax and estate reasons. as long as LLC's.. none event.. simply does not happen..

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  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y

    @Account Closed  well Damn it I cant figure out how to make that link work.  its a thread here on BP by Serge S.  he actualy had it happen to him  theres 126 posts.  if you search "Due on sale clause was called by bank!" or copy the link in a google search it will come up.  its a pretty good read.

    RR  

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Ralph R.  I have seen it happen only once where I was directly involved. I bought a pre foreclosure sub too and the seller walked over to the credit union and said they had sold it.. got a demand letter within 5 days LOL.. other wise never happened in all the years.. 

    but if its a transfer with the same overship and only for vesting purposes.. I have never seen it or heard of it.

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  • Ben Williams
    OP
    Real Estate Investor/Agent and Web Developer · Flower Mound, TX · Member since 2015 · 53 posts · 14 votes
    10y

    @Account Closed the reason for the poll is that so many very educated and experienced investors and lawyers tell me this is done a lot and the loan never (or in some peoples cases rarely) gets called due. Remember, this is same person owning the original property as well as the LLC which would be becoming the new owner.

    I can understand Fannie and Freddie qualified loans required to be made to individuals because LLCs can file bankruptcy and shut down with less consequences than an individual. When the loan is tied to a person, a real person can be held accountable. But if a property is transferred to an LLC AFTER the loan is finalized, the loan itself is still tied to the individual and still secured by the property. No risk has changed or rules broken between any relationship between the bank, the Fannie/Freddie, or the owner/borrower. Furthermore, the use of the property is unchanged as a rental/investment. Far as I can tell, the only thing that has changed is that the individual is more protected from liability.

    So all that being said (and if accurate) only @Russell Brazil's answer makes any logical sense to me for a bank deciding to call a loan due for a title transfer to an LLC owned by the same individual.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Account Closed   dude.. your not getting the point..

    transfers to unrelated entities run the risk of the alienation clause being invoked.

    Transfers to simply change vesting and the principals are the same.. is not something that will cause a lender to call the loan.. based on my very limited 42 years in the industry. 

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