Transfer LLC... be careful...

16 Replies

When times were good many newbie investors would buy property from banks promising that the property would be "owner-occupied" meaning the bank would give the new owner a better interest rate since it assumed that person was going to personally live (and take care of) the property.

The big problem here is the bank would have also required that the new owner purchase the property personally rather than through a LLC.

This means the property owner would now be personally liable for the property.

For new investors who find themselves in this position you must be careful about using a Quit Claim Deed to transfer ownership from yourself to an LLC you own. Often banks have due on sale clauses in their paperwork that would be triggered by a transfer of ownership. Doing this might make your entire note due immediately.

First off, let me say that I agree with Mike on his statement. Getting an OO loan with intent to have tenants is fraud.

Second, are you (Henner) aware of or have personal knowledge of ANY investor who did a quit claim from their personal name into their own entity name and the lender excersized the due on sales clause? (and they got a NOO loan, no fraud).
The reason I ask is because I am not aware of any.
First off, the last thing a bank will do is foreclose on a property (due on sales clause would cause that usually) that they are receiving timely payments on, specifically in this day in age. Secondly, if the loan was not received under any fradulent circumstances, then transfering title from your personal name to an entity that you also own is not going to cause the due on sales clause to be triggered. The banks don't lend to the entity off the bat because they want YOU personally on the hook. Once you are, transfering title to your entity in which you own does not limit your financial responsibility to your lender and so long as you keep up the payments, you will be fine.

Note: If you or anyone else does transfer title from yoru name to your entity (I have done this many times and NEVER had the clause excersized), make sure you change your insurance policy to read the insured party is your entity and not you personally.

I agree that if a bank is receiving payments on time that the due on sale clause will rarely be invoked. However there is still a risk since it could happen...

I have had newbie investors ask me about protecting themselves by moving property into LLCs. Sometimes many of them are in OO loans (first rental property or duplexes, 4plex) and they want to rent out the property.

I simply explain to them that the lender could "possibly" invoke the DOSC.

More importantly, you should be advising them to not get OO loans for investment properties, it is fraud as Mike pointed out, DOSC or not.

Secondly, while there was a "title transfer" the transfer was to the same owner basically, just in his/her entity and if the investor asks the lender to do so and it is approved, they avoid ANY possibility of the DOSC.

Originally posted by nationwidepi:

Secondly, while there was a "title transfer" the transfer was to the same owner basically, just in his/her entity and if the investor asks the lender to do so and it is approved, they avoid ANY possibility of the DOSC.

I have done this numerous times. It was ALWAYS disclosed and I NEVER had a problem. In some cases I had to supply LLC documents showing I was the owner and in others I had to sign a staement. It has never been an issue. I've been investing in real estate for 18+ years and I have NEVER heard of a situation where it was exercised.

:cool:

Hi, there is a GREAT MISCONCEPTION of what the due on sale clause is all about. It is for the purpose of interest rate risk of the lender and absolutely not to keep a borrower from transferring his/her interest to themselves where no beneficial interest is transferred to a third disinterest party to the loan.

The thing to woory about is the intent to defraud the lender, forget the due on sale. Good luck, Bill

Originally posted by Richard Warren:
I have done this numerous times. It was ALWAYS disclosed and I NEVER had a problem. In some cases I had to supply LLC documents showing I was the owner and in others I had to sign a staement. It has never been an issue. I've been investing in real estate for 18+ years and I have NEVER heard of a situation where it was exercised.
I have numerous times as well and NEVER had a problem. I too was also required to show the corporate docsshowing I was the owner of the entity. Never had a problem to this day.
Originally posted by Financeexaminer:
Hi, there is a GREAT MISCONCEPTION of what the due on sale clause is all about. It is for the purpose of interest rate risk of the lender and absolutely not to keep a borrower from transferring his/her interest to themselves where no beneficial interest is transferred to a third disinterest party to the loan.

The thing to woory about is the intent to defraud the lender, forget the due on sale.

Exactly! As stated above, fraud is the biggest issue and not the DOSC. Transfering title from your persoanl name into your own entity is not a violation of the DOSC.

i wouldn't think it's fraud if you bought an OO home, lived there for a while...and then moved on, but rented out the home...what do yall think?

Originally posted by Bryan Alenky:
i wouldn't think it's fraud if you bought an OO home, lived there for a while...and then moved on, but rented out the home...what do yall think?

What you describe wouldn’t be fraud, simply changing circumstances. It comes down to intent, the original intent was to live there. That shouldn’t be loan fraud unless the loan was obtained by deception.

:cool:

what if my long term intent is to repeat this?? short term, i wouldn't mind bouncing around every year or so...long term, more lower interest loans for rentals...then do we have a problem???

Originally posted by Bryan Alenky:
what if my long term intent is to repeat this?? short term, i wouldn't mind bouncing around every year or so...long term, more lower interest loans for rentals...then do we have a problem???

I’m not an attorney and that’s really a legal question. I would imagine that the lenders would see a number of mortgages on your credit report and question your motives.

:cool:

The banks haven't been forcing the issue with the DOSC because interest rates are very low. However, if hyperinflation picks up and 30 year mortgages become 18%, you can bet that banks might just be interested in getting rid of their 6% loans and replacing them with 18% loans.

Is there a big difference in rates? The last time I got a mortgage, the NOO was only about a 1/4% higher than the OO mortgage. Hardly worth commiting fraud over.

Originally posted by P NW:
Is there a big difference in rates? The last time I got a mortgage, the NOO was only about a 1/4% higher than the OO mortgage. Hardly worth commiting fraud over.
NOTHING is worth committing fraud over, however, NOO loans have historically been at least 1/2 point higher, so 1/4 point more would be a great deal.
what if my long term intent is to repeat this?? short term, i wouldn't mind bouncing around every year or so...long term, more lower interest loans for rentals...then do we have a problem???
In this scenario (although I am also not an attorney), I would suspect that the banks could prove "intent" through your patern of history as well as the fact that you would already have at least one OO loan on the books.