Another LLC Discussion: Mortgage company won't allow move
Investor · Fishers, IN · Member since 2015 · 85 posts · 22 votes
Another LLC Discussion: Mortgage company won't allow move
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Investor · Boston, MA · Member since 2015 · 398 posts · 147 votes
9yFor your first few properties, the bank wouldn't lend to the LLC as it has no history. You have to get the loan in your name, and then quitclaim it after purchase into the LLC. You still owe the bank on the loan, but if a "lawyer situation" comes up you personally are protected as the LLC technically owns the building. If you have to refinance later you will need to quitclaim it back to your personal name first.
32 Replies
- Investor · Boston, MA · Member since 2015 · 398 posts · 147 votes9y
For your first few properties, the bank wouldn't lend to the LLC as it has no history. You have to get the loan in your name, and then quitclaim it after purchase into the LLC. You still owe the bank on the loan, but if a "lawyer situation" comes up you personally are protected as the LLC technically owns the building. If you have to refinance later you will need to quitclaim it back to your personal name first.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes9y
Originally posted by @John Blythe:
That being the case, what good is our LLC?,
The guy that set it up got to charge you a fee. So it was good for him.
- Investor · Fishers, IN · Member since 2015 · 85 posts · 22 votes9y
Originally posted by @Russ Draper:
For your first few properties, the bank wouldn't lend to the LLC as it has no history. You have to get the loan in your name, and then quitclaim it after purchase into the LLC. You still owe the bank on the loan, but if a "lawyer situation" comes up you personally are protected as the LLC technically owns the building. If you have to refinance later you will need to quitclaim it back to your personal name first.
thanks for the reply. i'm planning on doing an LLC per property in which case this will be the standard procedure (due to them never having a history before getting the property). so i can 'quitclaim' this thing w/o a mortgage needing to be transferred? mortgage stays in my name, LLC will 'technically own the building' and everyone is happy?
- Investor · Fishers, IN · Member since 2015 · 85 posts · 22 votes9y
Originally posted by @Chris Mason:
Originally posted by @John Blythe:
That being the case, what good is our LLC?,
The guy that set it up got to charge you a fee. So it was good for him.
ha, well thankfully i did it myself. if any money was pissed away it was only to the great state of indiana :)
- Member since 2016 · 13k+ posts · 12k+ votes9y
If you are intending to do each individually you would have the same amount of protection simply by having adequate insurance coverage on each. Since even under a LLC you need liability insurance you are not really getting any better protection having them in a LLC. A LLC is really only smoke and mirrors which can be pierced.
You will not likely hear from any members on this forum that have been saved from liability by having a LLC that would not of had the same protection simply through their insurance. Everyone advocates on the benefits of a LLC but you will rarely if ever hear from anyone saved by it.
- Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes9yYou can't quit claim the house into the LLC, it will trigger the due on sale clause, especially if they told you already not to do it. This is a common issue with LLCs. If you didn't pay cash and you only have one property it's not worth the headache of an LLC. The bank wants to sell it on the open market. If you move it to an LLC it then belongs to a commercial entity and Fannie Mae doesn't allow that. So they'll force a due on sale clause and you'll have to scramble to get a commercial loan.
- Investor · Fishers, IN · Member since 2015 · 85 posts · 22 votes9y
Originally posted by @Christopher Phillips:
You can't quit claim the house into the LLC, it will trigger the due on sale clause, especially if they told you already not to do it.
This is a common issue with LLCs. If you didn't pay cash and you only have one property it's not worth the headache of an LLC.
The bank wants to sell it on the open market. If you move it to an LLC it then belongs to a commercial entity and Fannie Mae doesn't allow that. So they'll force a due on sale clause and you'll have to scramble to get a commercial loan.
thanks for the clarification here, christopher. with all that said, does it help us in any way to create a bank account for the LLC and have our property manager interact with that rather than our personal accounts? or will that only create more headache than help come tax season?
best-
- 9yGeorge DespotopoulosBusiness MemberLender · New York, NY · Member since 2016 · 936 posts · 287 votes
Hey @John Blythe were you able to review the closing documents before hand or have an attorney do so or at the least be present at closing?
This was usually something I explained to my clients at closing, if I repped the purchaser.
Now as in my new role as a co-founder of a non-bank lender, we are not held to the same restrictions or requirements that traditional lenders/banks are, and we do not sell to Fannie. So this clause does not come into play. This would be something we most likely would allow one of our borrower's to do.
MoFin Lending4.9152 Reviews - Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes9y
You should consult with your CPA. You do want to build up the credit history for the LLC, so it would make sense to operate everything out of there as far as receiving rents and dealing with contractors, etc., but as sole owners of the LLC, you have to avoid mixing personal funds and business funds so you don't lose the protection...
- Investor · Fishers, IN · Member since 2015 · 85 posts · 22 votes9y
Originally posted by @George Despotopoulos:
Hey @John Blythe were you able to review the closing documents before hand or have an attorney do so or at the least be present at closing?
This was usually something I explained to my clients at closing, if I repped the purchaser.
Now as in my new role as a co-founder of a non-bank lender, we are not held to the same restrictions or requirements that traditional lenders/banks are, and we do not sell to Fannie. So this clause does not come into play. This would be something we most likely would allow one of our borrower's to do.
hi, george. thanks for the info. nope, no attorney present. i was able to review the docs, yes, but combining my haste and general ignorance it didn't get caught. lesson learned!
- Investor · Fishers, IN · Member since 2015 · 85 posts · 22 votes9y
Originally posted by @Christopher Phillips:
You should consult with your CPA. You do want to build up the credit history for the LLC, so it would make sense to operate everything out of there as far as receiving rents and dealing with contractors, etc., but as sole owners of the LLC, you have to avoid mixing personal funds and business funds so you don't lose the protection...
gotcha, good call. i'll make sure to get in touch with him and figure out what's what.
- 9yGeorge DespotopoulosBusiness MemberLender · New York, NY · Member since 2016 · 936 posts · 287 votes
Originally posted by @John Blythe:
Originally posted by @George Despotopoulos:
Hey @John Blythe were you able to review the closing documents before hand or have an attorney do so or at the least be present at closing?
This was usually something I explained to my clients at closing, if I repped the purchaser.
Now as in my new role as a co-founder of a non-bank lender, we are not held to the same restrictions or requirements that traditional lenders/banks are, and we do not sell to Fannie. So this clause does not come into play. This would be something we most likely would allow one of our borrower's to do.
hi, george. thanks for the info. nope, no attorney present. i was able to review the docs, yes, but combining my haste and general ignorance it didn't get caught. lesson learned!
Yea, it's usually boiler plate but when you're dealing with legally binding documents it's never an assumption to make.
Those documents are very boring reads and in legalese, definitely not the easiest to comprehend and impossible to account of every little clause. That's why I always recommend to have experienced counsel either present at closing or review the documents with you beforehand at least on your first few deals. You can get a breakdown of the major provisions and at the very least advisement on what you can or cannot do.
MoFin Lending4.9152 Reviews - Professional · Highlands Ranch, CO · Member since 2016 · 18 posts · 3 votes9yTry non recourse lenders can be found on the net. Depends what state the LLC is filed. Some states have better protection Delaware, Nevada are asset protection states but you will need a registered agent in that state
- Syndicator · Austin, TX · Member since 2014 · 85 posts · 47 votes9y
The quit claim process is standard procedure. I'd say having an LLC for each property is not. It's probably overkill and unnecessary for most, but of course follow your own counsel's advice. As stated by another, a good insurance policy can provide similar liability protection.
I'd challenge those saying this will trigger the due on sale clause to find more than a single random real estate attorney who's ever seen that happen when transferring title out of your name to an LLC in which you have a controlling interest. The LLC is an alter ego of you. The lender has no motivation to engage in the hassle. And if you found one that wanted to, they have to provide a 30 day notice for you to resolve the issue, so you'd just deed it back out. It's not complicated. - 9yLevi T.Pro MemberRental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
Originally posted by @John Blythe:
Originally posted by @Russ Draper:
For your first few properties, the bank wouldn't lend to the LLC as it has no history. You have to get the loan in your name, and then quitclaim it after purchase into the LLC. You still owe the bank on the loan, but if a "lawyer situation" comes up you personally are protected as the LLC technically owns the building. If you have to refinance later you will need to quitclaim it back to your personal name first.
thanks for the reply. i'm planning on doing an LLC per property in which case this will be the standard procedure (due to them never having a history before getting the property). so i can 'quitclaim' this thing w/o a mortgage needing to be transferred? mortgage stays in my name, LLC will 'technically own the building' and everyone is happy?
Correct, you can quick claim at closing or whenever you want. Just tell your attorney or closing agent you need to quick claim and they will write the document and file it for you, its SOP. That said, you run a small risk that the bank could call the note in, but I've never seen it happen. Your gong to have to go commercial lending if you want to avoid the LLC issue or grow beyond a few rentals.
*I'm not an attorney, and I'm not giving legal advice, entertainment only*
- Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes9y
Originally posted by @Christopher Phillips:
You can't quit claim the house into the LLC, it will trigger the due on sale clause, especially if they told you already not to do it.
This is a common issue with LLCs. If you didn't pay cash and you only have one property it's not worth the headache of an LLC.
The bank wants to sell it on the open market. If you move it to an LLC it then belongs to a commercial entity and Fannie Mae doesn't allow that. So they'll force a due on sale clause and you'll have to scramble to get a commercial loan.
Technically all of this is correct; however, as long as payments are being made, most banks will not bother to call the due on sale clause. They have every right to do so, but they just don't. I've heard of a lot of people doing quit claims, and never heard of a bank actually calling the loan due. That said, I am not a lawyer, and you have to be comfortable with the risk that it will be called due, and you will have to scramble to get a commercial loan.
- Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes9y
@John Blythe. I agree with @Brad Shepherd.
The following is my understanding, as an investor, not a lawyer. I would be curious to hear what a lawyer has to say.
It's important to note that a quit claim only transfers the property, not the loan, to the LLC. So in the worst case scenario, when a tenant sues you for more than your insurance will cover, they can't take more than the assets in the LLC. However, you still own the debt. Using one LLC for your whole portfolio creates a better situation in many ways, because when your LLC is making money, you can take commercial loans in the name of the LLC. When properties and loans are owned by the LLC, your personal assets are truly protected. A lawyer can only get his hands on the net value (assets-debts) of the whole portfolio, so in that nightmare scenario, you aren't left with any loans in your name.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes9y
Not much of a challenge Brad, any transfer of interest sets off the due on sale.
The alter ego goes deeper than that and the motivation begins with a written loan policy, regulations and prudent lending requirements require that policy to be followed. You also have loan servicing agreements, instructions to a servicer, that will require the action to be taken for any transfer discovered that is not consistent with the law and terms stated.
If the issue was cured by deeding back the property that will be at the lender's option to accept that as a cure, it is not a given because, bottom line the terms were violated and lenders don't like dealing with sneaky borrowers......like what keeps you from doing that again in 3 months when you think the dust has settled? Nothing.
Before we get a bunch of folklore opinions here, read this:
https://www.law.cornell.edu/uscode/text/12/1701j-3
It's an easy read.
The only way to "fix" this legally and ethically is to do some simple estate planning. Transfer the property to your Trust, an LLC may be a beneficiary or administrator, see your attorney and accountant. The due on sale clause may not be used when a borrower transfers collateral as part of an estate plan. Issue solved!
The due on sale is used everyday I'm sure, in the big picture this may be a tiny sliver of the total loans out there. The public seldom hears of these matters, what borrower is willing to go public saying they messed up and got caught, like hello, I'm an idiot, I pulled a fast one and got caught!
You might get a hall pass and skip a class, not get caught, I suggest you not do business that way, if you are the one who gets caught you really won't care about the other kids who got away with it.
You never know!
Happy Thanksgiving everyone :)
- Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes9y
@Brad Shepherd is correct. The average lender will not notice when you do the initial transfer. They will not notice as long as you're sending in your payments every month because those are still coming in under the borrower's own name.
Where they catch it is when they receive a notice of hazard insurance name change or notice of taxes paid under an LLC instead of the loan borrower's name.
Fannie Mae guidelines prevent originating with an LLC, but their due on sale guideline is only a recommendation and doesn't "prevent" the transfer. As long as payments keep coming in they won't force calling in the note. However, it's up to the individual lender. Most won't do it, but be aware of the risk.
- Real Estate Broker · Las Vegas, NV · Member since 2014 · 46 posts · 26 votes9yJohn Blythe there is some good advice in here and some really bad advice in this thread. I'm not going to point out either one but will say the bank "can" execute the "due on sales clause". I've personally never seen or heard of it executed and I network with over 8,000 investors. My suggest is meet with a "real estate attorney" in your state that has experience. Ask them about asset protection. I think you mentioned you set the LLC up yourself? If that's the case I'm sure you are leaving the LLC open to exposure of being pierced.
- Investor · Fishers, IN · Member since 2015 · 85 posts · 22 votes9y
good and bad, this is all great to see discussed and debated. thanks everyone. have a great thanksgiving!
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes9y
Hey guys, this stuff about they don't care, they want the interest, they won't call it because...... is a bunch of horsefeatehers! Not only are there regulatory reasons there are contractual reasons, it is not "if" it is "when".
Not really any debate about it, the way past it is through estate planning, otherwise you're going on folklore in these public forums.
Besides, you're probably better off holding a SFD personally. And, multiple LLCs for each property is just nuts, an attorney's and accountant's and an insurance agent's best dream and your nightmare!
Well, I'm off to the feast, enjoy the day, take a break, gobble gobble! :)
- Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes9y
Originally posted by @Jeff Vranek:
Try non recourse lenders can be found on the net. Depends what state the LLC is filed. Some states have better protection Delaware, Nevada are asset protection states but you will need a registered agent in that state
AND, NV, DE must be where the LLC was first created. Once created, you then Foreign File anywhere you need that entity.
- 9yRonald PerichPro MemberInvestor · Granite City, IL · Member since 2014 · 658 posts · 301 votes
An example of why banks may decide to call a Due on Sale clause...
Right now, the Prime Rate is 3.50%. It's gone up 25 basis points in a year. No big deal. In November of 2006, the prime rate was 8.25%, 475 basis points higher.
Most banks lend at some factor of Prime, so let's just look at the difference a 475 basis points makes.
On a $100,000 loan, the higher interest 30 year loan will earn the bank over $100,000 more in interest payments.
If you think banks aren't going to spend a few minutes reviewing their lowest-interest loans when (not if, but when) rates rise, think again. This will be easy pickings for them. They can call the loan due and either have you refinance (which gives them cash they can deploy at higher rates) or foreclose (which gives them a high-equity property, easy sold, to then have cash to lend at higher rates).
And I agree that an LLC per property, especially SFH, is overkill unless you have some really expensive houses. Bundle a bunch together into one LLC. Try to mix high and low equity homes together if possible so the entity is a less juicy target. And just do what's right by your residents. That's the best protection you can buy.
- Residential Real Estate Broker · Indianapolis, IN · Member since 2009 · 477 posts · 304 votes9y
@John Blythe Throw the property into a Trust.. The bank will allow this, especially when you explain that you are looking for some asset protection, etc... Totally legal. Then once the paperwork is filed and completed with the property in the trust, you can change the beneficiary of the trust to your LLC.... You don't have to file the change of beneficiary paperwork with anyone..
A lot of people use this strategy, and it works.
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