Transferred Rental to an LLC and now the bank is giving me issues

18 Replies

I recently transferred a college rental property into an LLC. I also transferred the insurance policy to the LLC instead of my name. So the insurance company forwarded that information to the bank which my mortgage is thru and now the bank is telling me that the insurance policy needs to be under my name, not the LLC.

I talked to the insurance agent and he told me that they could potentially just put it back into my name, but then the LLC would not be insured, basically defeating the purpose of transferring it to an LLC in the first place!

Now I've gotta imagine people are transferring rentals to LLCs all the time and this is a completely normal thing?? Unfortunately it's a "big" bank, Old National to be specific, so I can't seem to get a hold of the right person on the phone to resolve the issue and I don't think anyone at my local branch can specifically help me. 

Hoping for some insight or suggestions! 

Thanks

Will a professional insurance agent or broker pop in and tell us about the pros/cons/gotchas of having the LLC as an additional named insured, and if it can be done at all, and if that is a state specific answer?

I know it's done all the time with spouses and trusts in CA, but no one would have cause to call me when it's an LLC since I'm not a commercial LO.

Kenny, I'm no attorney but I worry that having your name anywhere on the insurance policy may pierce the LLC. If this is your only investment property, you might consider a $1M umbrella policy instead of an LLC for asset protection. Best, Terrell

I am a lawyer, and obviously this answer would change somewhat if i were barred in your jurisdiction, but I'm just over the state line in Illinois.

Why wouldn't you just be an additional insured under the policy? The LLC needs to be insured against the operating losses that might be caused through damage or casualty or premises liability. You would be insured for your personal guarantees that surround the financing. The two scopes of risk are different, so I think this is something you could just be an additional insured on (like a property manager being additionally insured with the owner of the property).

There was some concern here that this might pierce the corporate veil and remove your limited liability. You can nearly always keep that limited liability if you 1) properly fund the organization against its reasonably anticipated liabilities, and 2) don't comingle your own finances with that business organization. You need the LLC to be insured to maintain your limited liability because otherwise you run afoul of #1.

I hope this gives you some vocabulary to talk to folks about what you want.

A big chartered bank will hate you for making that transfer. Why? They offer different programs to individuals and to LLC's, largely because FM and FM won't buy the loan for an LLC. You will likely learn it goes beyond the insurance. So check it out.

If you have a copy of your loan documents you may want to read them (yes all of it), lots of lenders have a clause within their loan docs that they can "call the loan" meaning if the property is transferred to an LLC or someone else they can require you to pay the loan in full.

@Kenny Isberner , so if you don't have it paid for then by changing the name on your insurance policy if something would happen then the check would come in the name of the Llc, not your name or the name that is listed. Which then the Llc could walk away with the money and the bank not getting paid. Did you change the name on deed also? That will also present you some problems.

There’s a reason the banks don’t like this . They charge extra for business and commercial loans ! The insurance is what triggers due on sale clauses . You probably should have put the property in a land trust if you wanted protection because an llc is not much protection from a frivolous tenant lawsuit standpoint

So quick question if the property was brought by my LLC out right in the first place would banks give me an issue insuring that property. It seems like that should be a simple issue. As I've had other non-real estate businesses where insurance was required.

@Kenny Isberner It’s because the bank “doesn’t like” or that they “don’t understand”, they understand very well.....you have a conventional loan which is not available to llc’s and your loan has a due on sale, a Fannie/Freddie requirement, that allows/requires the bank to call your loan. 

The whole "must have an LLC" is overblown.....just get a $1-2M insurance/umbrella policy....and sleep well.

@Amar Woods If the property was bought by the LLC outright, it's a whole different loan (commercial), while the OP is using a conventional loan, which is why they're giving him issues.

As Wayne points out above, I simply use a $2M umbrella policy and run the rentals as a good business, addressing any safety issues immediately (and keep all the paperwork).  I've been in the business over 15 years now and never even had a threat of a lawsuit.

Thanks for the clarification, I'm a stock trader so I versed in a lot of different investment vehicles but to hard assets like real estate I'm a newcomer. Other than buying my home in Orange County almost two years ago. Cheers.

Most of the people transferring the properties into LLCs, are not following up with the insurance policy....so the majority of them are uninsured altogether and have zero clue of that fact.  They think they are limiting their liability, and in fact are creating far more liability for themselves.

I have done this. Successfully, but in another state and with another bank. Xfer of a deed to an LLC creates a path of warts and hair that only you can fix with a lot of heavy lifting. The named insured must match the named mortgagee in order for the invoice to be 'seen' by the bank. (Your insurer will use exactly what is on the deed as recorded after you flip to the LLC.) Nothing else works unless your bank will give you a waiver! When that doesn't happen, they throw the invoice from your insurer into the trash, contact you after you are delinquent, and while you're on the phone with an intern customer rep...they start the clock ticking. After so many days without coverage, they will notify you in writing that (one of these two things will happen)...1. they will insure their exposure using their choice of insurer and bill you directly or 2. invoke the due on sale clause. Their insurance will not protect you...it protects them. Not the option you want to pay for.

I'm sorry to say this, but your attorney failed you.  An attorney in your jurisdiction with experience doing this, would have given you a heads up and how to navigate.  Now is not the best time to find one, but it's most likely your only option at this point since you don't say how many days you're delinquent.

Have you heard about "Force Placed Insurance?"  The mortgage holder can purchase a policy to protect them and assess that cost to you (it won't be a "cheap date") and/or they can call the mortgage.  Don't try reasoning, don't give your argument - it's their ball, their court.  Go back to your insurance guru and let the guru communicate with the bank on what will be acceptable in resolving this.  

It just is and your insurance broker can provide acceptable documentation.

The dark side of cramming residential RE into a commercial entity begins to show... Glad insurance is being discussed for a change vs the low probability DOS only.

Speaking of being uninsured, your title insurance may be toast, too, if all and only original vested parties are members of your LLC. Bonus. Anyone added or removed?

Double bonus if your transfer to the LLC was conveyed with a quitclaim deed, the weakest and shadiest deed of all. Why people don't step up and outta the ghetto in deed type is beyond me. Good times.

Whenever an owner wants to transfer property that is subject to a mortgage to their LLC (this comes up several times per month), we have a form letter which explains the risks, the various ways the transfer will be discovered by the lender, and the likely repercussions. That letter includes a release and hold harmless the owner must execute if, despite the warnings, they still want to move forward. Let's just say we do all we can to talk people out of this... but if they insist on being moronic, at least they can't hold us responsible when things go bad.

The other day a LENDER requested deed prep for transfer to an LLC immediately after settlement by their buyer. I don't see a bright future for that loan officer.

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