I purchased a rental property in Wilmington, DE in the name of my LLC on a interest-only loan from a family friend. I am now looking to do a cash-out refinance on the property and I am looking to do so in my personal name to get the best terms possible. My question is what are some of the pitfalls or concerns I should have with this process. In an perfect world 6 months I will then transfer the title back into the name of my LLC.
1. How often does this trigger the due on sale clause?
2. What type of risk does this cause (if any) going from my LLC to my personal name, back to my LLC?
3. What else am I missing?
Anyone who has gone through this process before or with knowledge on the subject that can offer some insight would be greatly appreciated!
There isn't a problem with taking the property out of the LLC.
Technically, transferring the property from your name to the LLC triggers the due on sale clause. I would be up front with the bank about it though, and ask if transferring to a single-member LLC triggers it.
Normally just because the clause is triggered doesn't mean that it is enforced. If you are making all of the payments, that is typically all the bank cares about. However, that is not a guarantee that if interest rates go way up the banks won't change this policy and enforce it so that they can try to force you to refinance to a higher interest rate loan. Seems unlikely, but it is a possibility.
You are also at risk every time title changes to the property that your property value will be reassessed. However, most states have an exemption for when the beneficial ownership has not changed.
Be aware of the title chain and insurances. Picture your future buyer getting the title history report. Name changes and what, quit claim deeds, all over the place. Title may not be insurable in the future. All these willy nilly vesting changes would scare me as a buyer. How will Jack and Jill first time buyer feel?
Title and hazard insurance may have an out if the named-insured is different. In the name of, what, asset protection you have incurred a bunch of needless risk not even counting the DOS clause.
Don't put little houses with debt into LLCs is my opinion. I have LLCs for my commercial properties only. No problems with debt or insurance that way.
@Shawn Kostoff - I'm a staunch advocate for not doing this, but I wont get into that now. The one thing I would look into is whether or not Delaware considers a transfer from LLC to individual to be a transfer of ownership to trigger the transfer tax in some states it does...in others it does not. I honestly don't know what the case is in Delaware. Basically this just adds additional cost in the form of transfer tax. As Brian already mentioned...you're always at risk for the due on sale clause if it's written into your mortgage. Since you're getting a personal mortgage, there's a near 100% chance it will be in your mortgage as I don't think there's too many portfolio lenders working with residential mortgages in the Wilmington area...but if you did find one PM me their name.
@Brian Schmelzlen - New Castle County, Delaware hasn't assessed properties since 1983...so unless you're doing new construction you don't have any concerns about re-assessment of the value. :-)
I'm also in the "no LLC for residential mortgages" camp.
is the risk of due on sale high? not really
but the risk of being sued is even less likely. Making the strategy moot
get umbrella insurance, run a tight ship. When you have a commercial property in a commercial loan then your LLC will serve you well.