I have two condos that are currently rented and they're both in my name. I'd like to move them into LLCs, but am concerned about the due-on-sale clause. Many people I've spoken with say it's not a big deal and the bank won't call the note, but I still have concerns. Another option is to get an umbrella policy, but this wouldn't provide the same level of protection. Should I be concerned with the due on sale clause?
@Nicholas Nelson A transfer most likely will trigger the Due on Sale clause (DOS) - and while in the past, in an environment of falling interest rates and prices might been a rare occurrence, like they say, past performance might not apply to future results, and with rates increasing and "aged" loans (where the bulk of the interest was already collected, since you pay most at the beginning part of the amortization schedule) the banks might be more interested in collecting on the DOS clause and redeploying the money at higher interest (especially if the valuation of property makes for an easy sale in case of foreclosure).
A detailed resource on Due on Sale you might want to read is: the-truth-about-getting-around-due-on-sale-clauses.
Also, these threads might be worth reading: 386043-bank-called-my-due-on-sale-clause 183825-due-on-sale-clause-was-called-by-bank 232247-due-on-sale-clause
Also, FYI - The Fannie servicing guide, for about a year now, explicitly excludes a transfer into an LLC you own from the due on sale clause. You still have to close in your personal name, however. Link: oh-yeah-the-due-on-sale-clause-is-now-llc-friendly-sometimes
Then, if you choose to proceed, at least you'll know what you getting into.
But...it takes two to tango, and this can be a two-way game: if the bank hits you with the DOS letter, you can transfer the property back in your name to cure the problem and play that game, back and forth, if you want/can/afford. Or you can refinance, if your position is solid. So there are ways to deal with it.
Be careful when/if choosing to use a Quit Claim Deed for this operation:
A person receiving a purported real estate interest via a quitclaim deed may receive no legal right to the property whatsoever. If the person seeking to transfer real estate with a quitclaim deed has no legal interest, nothing legally is conveyed. In the absence of title insurance--which is not available for a quitclaim deed--the person receiving the quitclaim deed has no legal recourse because the deed itself states that only the interest of the grantor, if any interest exists, is conveyed.
Whether title insurance terminates by transferring real property depends on the type of policy, and how “insured” is defined in the policy. You take a risk which could result in cancellation of your title insurance and complete loss of your real property without compensation in the event that a title issue regarding your real property arises.
Contact your title insurance company to determine coverage and if your policy does cover transfers , and when or how.
BUT, do you need to complicate yourself with the LLC and DOS?
First, the umbrella policy is not an option, but a must, as is not a replacement or alternative to an LLC - you need it regardless, and before you need the LLC (I would say ASAP).
Second, once you get the umbrella, do you still have reasons to need an LLC? Do you have substantial personal assets and rentals equity (!) to protect? Here is a diagram to help you in your quest for these answers.