UNABLE TO LLC

11 Replies

The reason is because its a Fannie Mae property I have to have the contract in my name. I spoke with an attorney that told me that the only way to transfer it into my LLC is to default the loan. This doesn't sound like a good option for someone planning to get additional loans. It has mild lead issues which I am addressing. The lawyer also told me that a lead free certificate won't necessarily offer me protection against liability and that having the property in my name is not a good idea. After some thought, I've come to the conclusion of paying the property off within ten years, then transferring it into LLC. What are my chances of facing liability within ten years? And is this a good plan of action? If not...any other suggestions?? Btw, the property is in MD

Default the loan? Sounds like a bad idea to me. Many people quit claim deed into the LLC name and then hope the bank doesn't accelerate the note. I don't necessarily recommend that, but it is an option. That aside, I would look into getting an umbrella policy. That should cover your risk until you have shifted the property into the LLC. They are not expensive and can be set up in minutes. I think I pay $15/month for mine.

Bryan O.

You need an umbrella insurance policy. Putting your property in an LLC does little to protect you. Piercing the veil on a typical single-owner LLC is something that takes a plaintiff's attorney 3 months out of law school about an extra hour of effort.

I hope that defaulting the loan was not the strategy being recommended by your attorney. If it was I would suggest finding other counsel. I agree with the suggestion of getting a good umbrella policy. It should give you the additional protection you need. Best of luck.

Michael

Kimar,

I'm seeing two separate things here, first off the insurance protection, NO insurance protection will provide you with all the protections that you need, so an appropriate legal entity is in fact needed, and an LLC is a great for that purpose. Now in terms of getting the property into the LLC, there is a legal statute that allows you to be able to move any entity into a trust without the banks having an issue, so you might want to to that and then into LLC maybe, not sure if that is needed at that point, but a good lawyer will be able to help you out on that.

@Kimar Abdul-Samad A little confusion here. What your attorney is saying is that if you get property and loan in your name(which you have to do for an FHA or conventional loan) and then you transfer it to an LLC, that action has put you in technical default on your loan, violating the due on sale clause, and the lender could call the loan due. There is a fairly small chance they would, and if they did you'd be allowed to simply transfer it back. But do I think it's worth it,....no. Most of the risks from lead paint isn't the liability from it being unsafe after it's finished, but from improper methods of doing the actual remediation.

Be careful following @Marc Dupuis advice. If you move the property into a trust that your LLC is the beneficiary of it will still trigger due on sale. Look into the Garn-St. Germain Act. This doesn't mean the bank will call the note due, it just means that they have the option whenever they want if they choose to exercise it. If you are not worried about paying the note if they call it due, then all of this is irrelevant and you can just move it.

Again, I would steer you towards getting umbrella coverage.

Bryan O.

Originally posted by @Marc Dupuis :

Kimar,

I'm seeing two separate things here, first off the insurance protection, NO insurance protection will provide you with all the protections that you need, so an appropriate legal entity is in fact needed, and an LLC is a great for that purpose. Now in terms of getting the property into the LLC, there is a legal statute that allows you to be able to move any entity into a trust without the banks having an issue, so you might want to to that and then into LLC maybe, not sure if that is needed at that point, but a good lawyer will be able to help you out on that.

Do you have an LLC? Do you have minutes of the annual meetings? Do you have audited financial statements? Can you prove that you have never, not even once, co-mingled the funds of the LLC with your personal funds? Was your LLC capitalized at formation, or were the initial business operations conducted with your funds and then transferred to the LLC? Do you exert day-to-day managerial control over assets belonging to the LLC? Do you have publiched corporate by-laws? Do you have a personal guarantee on any debt owed (yes, that alone will cause courts to pierce the veil!!)

@Kimar Abdul-Samad If you want to have the pluses of a Fannie loan, that being a lower interest rate and the longer amortization, then you have to hold the property in your name. If you want the protection of an LLC, then you need a commercial loan or a business loan. Keep in mind even with the latter, you usually need to personally guarantee the loan.

There is always going to be liability when you are a landlord or operate any kind of business.  So the question is how to limit your liability if you want the pros of a Fannie Mae loan.  Always seek the advice of a lawyer (even though in your case it sounds like bad advice), but I want simply get an umbrella policy.

I own rentals in Maryland. One of the ways I limit my liability to actions involving lead are that I buy properties 1979 or newer....and when I do buy properties that are 1978 and older, I buy properties that typically someone with children would not want to rent, such as 1 bedroom condos.

Russell Brazil, Real Estate Agent in Maryland (#648402), Virginia (#0225219736), District of Columbia (#SP98375353) and Massachusetts (#9​0​5​2​3​4​6)

The LLC is brand new...it hasn't had any funds yet. I actually inquired about a trust, because a financial adviser recommended that I get a revocable trust. However, the lawyer I spoke to didn't speak fondly of that idea. On second thought, he didn't seem to know a whole lot at all. Ill be talking to a new attorney. I was wondering...is it possible to set up and collect rent in the LLC without the property being listed in the LLC? Or does that constitute "co-mingling funds"?

@Kimar Abdul-Samad

Welcome to BP. 

I see that you have got a quite a few suggestions.

Here's I have done and are in the middle performing it.

1. I hired a licensed real estate attorney to form a SERIES LLC. Kindly keep in mind SERIES LLC offers more protection by keeping each property in it's own box, therefore, separating it from other assets.

2. I am acquiring an umbrella policy now to further protect my assets. I am noticing it to be a little difficult to acquire umbrella policy as all of my properties in my SERIES LLC and a lot of insurance companies don't want to insure properties own under LLC.

I think if you own everything on your name, it will be very easy for someone to get as much as they could from you. Having an LLC will make it difficult for them to collect money from you.

Try to find a competitive real estate attorney.

Hope it helps.

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