Transferring To LLC After Closing - Single Family Dwelling

33 Replies

Hey there everyone! This is my first BP post since my wife and I are new to real estate investing. We are located in East coast central Florida. We bought our first house last year after finishing college and are now house hacking but we saved up over the past year and are now 16 days out from closing on our first true rental property. 

Issues that have come up: 

1. Both our lender and accountant advised buying the property in our name and then, after closing transfer the deed to an LLC. The lender said this was fine, but that there wouldn't be any wording on the disclosures specifically stating that the transfer would be allowed. This makes me nervous that they will change the loan terms once we transfer to the LLC after closing. Is this a normal practice and I should stop worrying? I have an email from the loan officer saying it would be fine but nothing is stated on the actual documents.


2. Insurance in FL has gotten crazy and the only quote I can get is from the subsidized government program, but they cant quote if the property is in an LLC. In fact, none of the companies from 3 separate agents could help if the property was in an LLC. If we have to keep the property in our names for the time being until the insurance market changes, is that an okay option? The insurance quote we have only offers $100k liability limits but we are getting an umbrella policy for ourselves soon.

3. The property is in good shape but needs some TLC which we plan to do over the course of a few weekends before posting it for rent. The little items that we are planning on fixing have caused the insurance companies to decline quoting. Small things like the on/off valves under the sink look dated, even though the inspector said they were in good working order. The seller just wants to offload the property as is so they aren't willing to make any changes prior to the sale which has severely limited our insurance options. What do you all do in the situation? 

I appreciate any ideas or wisdom you may have! 

I transitioned from buying in the LLC to buying personally to get better financing. Although your lender can say they would not exercise the due-on-sale clause, without something in writing, that's meaningless. The reason I am choosing to hold title personally (with a large umbrella insurance policy) and not transfer over is because, looking through the bank's eyes, if interest rates go up significantly, I would want to force all those paying super low interest rates into higher interest loans.

If you are paying 3%, but in 5 years the going rate is 7%, they could call the note due and you'd be stuck having to refi into a 7% loan (or if you chose to keep holding in the LLC, you'd need to do a commercial loan, which means higher rates and/or shorter terms).

I know "everybody does it," but I just feel better keeping it personally. I have 7 loans with the same lender. Transferring them to the LLC and getting them called would reek havoc for me.

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Originally posted by @James Palassis :

I transitioned from buying in the LLC to buying personally to get better financing. Although your lender can say they would not exercise the due-on-sale clause, without something in writing, that's meaningless. The reason I am choosing to hold title personally (with a large umbrella insurance policy) and not transfer over is because, looking through the bank's eyes, if interest rates go up significantly, I would want to force all those paying super low interest rates into higher interest loans.

If you are paying 3%, but in 5 years the going rate is 7%, they could call the note due and you'd be stuck having to refi into a 7% loan (or if you chose to keep holding in the LLC, you'd need to do a commercial loan, which means higher rates and/or shorter terms).

I know "everybody does it," but I just feel better keeping it personally. I have 7 loans with the same lender. Transferring them to the LLC and getting them called would reek havoc for me.

I think you're a bit paranoid dude.

Originally posted by @Mike Adams :
Originally posted by @James Palassis:

I transitioned from buying in the LLC to buying personally to get better financing. Although your lender can say they would not exercise the due-on-sale clause, without something in writing, that's meaningless. The reason I am choosing to hold title personally (with a large umbrella insurance policy) and not transfer over is because, looking through the bank's eyes, if interest rates go up significantly, I would want to force all those paying super low interest rates into higher interest loans.

If you are paying 3%, but in 5 years the going rate is 7%, they could call the note due and you'd be stuck having to refi into a 7% loan (or if you chose to keep holding in the LLC, you'd need to do a commercial loan, which means higher rates and/or shorter terms).

I know "everybody does it," but I just feel better keeping it personally. I have 7 loans with the same lender. Transferring them to the LLC and getting them called would reek havoc for me.

I think you're a bit paranoid dude.

Thanks. Did you have anything of value or substance to add that might help the OP?

Originally posted by @James Palassis :
Originally posted by @Mike Adams:
Originally posted by @James Palassis:

I transitioned from buying in the LLC to buying personally to get better financing. Although your lender can say they would not exercise the due-on-sale clause, without something in writing, that's meaningless. The reason I am choosing to hold title personally (with a large umbrella insurance policy) and not transfer over is because, looking through the bank's eyes, if interest rates go up significantly, I would want to force all those paying super low interest rates into higher interest loans.

If you are paying 3%, but in 5 years the going rate is 7%, they could call the note due and you'd be stuck having to refi into a 7% loan (or if you chose to keep holding in the LLC, you'd need to do a commercial loan, which means higher rates and/or shorter terms).

I know "everybody does it," but I just feel better keeping it personally. I have 7 loans with the same lender. Transferring them to the LLC and getting them called would reek havoc for me.

I think you're a bit paranoid dude.

Thanks. Did you have anything of value or substance to add that might help the OP?

1) Not to act paranoid. 

2) Protect himself and his family by placing the property in the LLC

3) Get proper insurance.

4) Keep calm and relax. No need to place the what if scenario's in one's head.
 

Should he be a worry-wort, then leave it in his own name, get proper insurance AND get a large umbrella policy to protect his personal assets. Reason being, for you and him, they are at risk should something happen and insurance either doesn't cover it or it's not enough. With an LLC, the liability is limited to the LLC. In your personal name, there is really no limit.

Common sense here should be used, and neither one of you are using it. Not judging, just giving the direct info so both of you can reconsider your options and protect yourselves.  

@Will Jayne

While trying to be neutral, the LLC is somewhat oversold...

That being said, be careful about having the mortgage in your name and the Title int he LLC. It might be a co-mingling issue since you should be drafting the payments for the mortage, not the LLC. Also, the LLC can only provide limited liabiilty for what is under its purvue. So, you really shouldn't "frankenstein" it by doing it this way. Lenders seem to advise this all the time since protecting / maintaining your corporate veil is a legal matter, not a lender matter. they just want to sell you a mortgage. Since they are probably a residential lender, that's all they can do.

The Due on Sale clause in my mind is the least of your worries. If they call it in, just refinance. Realize that legal entities such as LLC's are not eligible for conforming residential loans. So, you will have to use commercial lending. This is part of the cost of having a LLC.

check out this discussion thread about issues of moving Title back and forth for a loan:  https://www.biggerpockets.com/...

Here is a prior discussion on insurance including umbrella:  https://www.biggerpockets.com/... You said you were getting an "umbrella policy for ourselves." Is this under your names? If so, it won't cover the assets owned by the LLC. The LLC is its own separate legal entity. This would be similar to expecting my umbrella policy to cover your asset...

I wouldn't expect a gov't subsidized program to help when Title is held with a legal entity.  The Gov't is trying to help people, not legal entities.  You probablly need to find an insurance agent to help you find the right insurance companies.  The usual companies that you hear about are generally residential (similar to lenders), as in when a person owns it.

You can't have the insurance policy in your name but Title held by the LLC's. The policy, not sure how they'd sell it to you, is worthless. Again, that would be analogous to you taking out a policy on something I own. You don't have an "insurable interest."

You've got a bunch of issues here.  You should consult some qualified professionals.  Good luck.

Thank you everyone for your input. Mike, this is my true "first deal" so I while I may be coming off as paranoid, I am only trying to learn while making as few mistakes as possible. 

David, thanks for the input. I have 3 independent insurance agents and a CPA working with me to put this together the right way. The issue here in Florida is the insurance market. The property needs some tlc which is why it's a good deal but the small things that need to be fixed have made it "undesirable" to the 2-3 carriers that are left in this area willing to write rental properties. Here is my plan now since the cash flow on this is worth sticking it out and making the deal work. 

Since the ONLY insurance carrier currently willing to write this property is the government backed carrier who will only write it if it is in our personal names, we keep it in our names for now so that we can get through closing. Then, make the necessary renovations and get a secondary inspection so that we are eligible for coverage by another carrier that will add the LLC as an additional insured. At that point we would quit claim to the LLC, cancel the government insurance, and write a new policy with a new carrier that lists the LLC as a Named Insured. That would leave the property in the LLC and the insurance would lists the LLC as an insured.

What I meant by "umbrella policy for ourselves" was that if we have to keep the property in our names and couldn't transfer it into the LLC, we would have extra liability coverage since the property and the policy would both be in our names.

For the lending piece, it seems like I shouldn't be worried about transferring to the LLC because if they do at some point enforce the due on sale clause, I can just refinance with commercial lending and pay the higher interest rate. Is that what you are saying too?

I plan on building a real estate portfolio so I fully anticipate this first deal to be a learning experience with many mistakes made along the way. I am just trying to mitigate any serious losses as best I can while doing it. My biggest fear is that we micro analyze every potential risk to the point that we scare ourselves out of ever jumping in. Id rather suffer through mistakes than play life so safe that we never end up living. 

An LLC for a house hack is completely pointless. It would never hold up in court, because you are occupying the property and self managing. Trying to claim that you are personally separate from the business in this situation is a losing battle.

Also remember that an LLC is to protect your personal assets. No offense but as recent college graduates, I doubt you have substantial net worth. You may even have substantial debt. Attorneys look for deep pockets.

The best approach here is having really good insurance with high liability limits. If you are sued, the insurance company will fight the battle to protect you. Insurance has deeper pockets than you, so insurance becomes the bigger target.

Also be aware that umbrella policies generally ride on top of your personal policy. If you have car insurance and home owners insurance through State Farm, the umbrella adds on top of both policies. If you have the house in an LLC and insurance through XYZ company, your personal umbrella will not protect you in the LLC.

@Joe Splitrock Correct on our current net worth part, but fortunately we have no debt other than our primary mortgage. The LLC isn't for the house hack, but for our second house we have under contract that is going to be 100% rental. We also have a pretty high income which is why I am focusing on the liability side so much. I do work in commercial insurance so I admit I do tend to overthink the liability side of things. If it turns out we can't get an insurance carrier willing to write the policy if the property is held in an LLC, we will just make sure we get an umbrella policy with high limits to cover us. I will discuss with our insurance agent to make sure it would sit over our homeowners, landlord, auto policies, etc.

@Jonathan Pavkov I have made my lender aware that we plan to transfer to an LLC after closing and they said it wouldn't be an issue, they just don't have anything in the actual wording that says its okay. I was thinking the best move is to just get through closing being as clear with our intentions as possible and then worst case we have to refinance later if any issues come up. We anticipate being long term holders so if immediate cash flow gets cut down we are okay with that since we are in it for the long game.

Thank you both for your advice. 

Originally posted by @Will Jayne:

@Joe Splitrock Correct on our current net worth part, but fortunately we have no debt other than our primary mortgage. The LLC isn't for the house hack, but for our second house we have under contract that is going to be 100% rental. We also have a pretty high income which is why I am focusing on the liability side so much. I do work in commercial insurance so I admit I do tend to overthink the liability side of things. If it turns out we can't get an insurance carrier willing to write the policy if the property is held in an LLC, we will just make sure we get an umbrella policy with high limits to cover us. I will discuss with our insurance agent to make sure it would sit over our homeowners, landlord, auto policies, etc.

@Jonathan Pavkov I have made my lender aware that we plan to transfer to an LLC after closing and they said it wouldn't be an issue, they just don't have anything in the actual wording that says its okay. I was thinking the best move is to just get through closing being as clear with our intentions as possible and then worst case we have to refinance later if any issues come up. We anticipate being long term holders so if immediate cash flow gets cut down we are okay with that since we are in it for the long game.

Thank you both for your advice. 

Sorry I misunderstood the house hack part. Then yes, you can transfer to an LLC and maintain separation. I am still not sure it is worth the effort. My guess is the loan is conforming to Fannie Mae and Freddie Mac underwriting standards. These type of loans allow transfer to an LLC provided the mortgage holders remain majority owners of the LLC. This is written into their underwriting standards, so the mortgage company will comply. The mortgage stays in your personal name of course. They also require you to transfer back out of the LLC, when refinancing or selling the property.

My understanding is an umbrella policy only covers policies with the same policy holder. If your LLC owns the property or you insure the property with a different carrier, the umbrella doesn't cover it. Maybe that is carrier specific, but it makes sense. Why would a carrier want to cover properties that are not owned by the policy holder or insured by them?

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Originally posted by @Will Jayne :

@Joe Splitrock Correct on our current net worth part, but fortunately we have no debt other than our primary mortgage. The LLC isn't for the house hack, but for our second house we have under contract that is going to be 100% rental. We also have a pretty high income which is why I am focusing on the liability side so much. I do work in commercial insurance so I admit I do tend to overthink the liability side of things. If it turns out we can't get an insurance carrier willing to write the policy if the property is held in an LLC, we will just make sure we get an umbrella policy with high limits to cover us. I will discuss with our insurance agent to make sure it would sit over our homeowners, landlord, auto policies, etc.

@Jonathan Pavkov I have made my lender aware that we plan to transfer to an LLC after closing and they said it wouldn't be an issue, they just don't have anything in the actual wording that says its okay. I was thinking the best move is to just get through closing being as clear with our intentions as possible and then worst case we have to refinance later if any issues come up. We anticipate being long term holders so if immediate cash flow gets cut down we are okay with that since we are in it for the long game.

Thank you both for your advice. 

If they are saying it won't be an issue - then transfer it after you buy it, and get their response in writing as an email. They probably wouldn't put it in the loan documents, because why would they? This is a common practice btw...

@Will Jayne

Yes, if the Due on Sale Clause is executed, you can satisfy the clause by refinancing.  The current Note holder wants its money/principal back since the owner has changed.  So, give it to him --- refinance.  If you can't afford to refinance perhaps you shouldn't be doing the deal --- is my mindset.  Like i said, the main issue is protecting/maintaining your corporate veil.

Oh you work in insurance? Interesting.. I guess there is the other point of view in that I've met insurance people who look at it the other way and see how insurance is enough and you don't need the LLC. As mentioned, an umbrella policy in your name will cover all your other underlying coverages, so there is a huge "plus" there in terms of piece of mind.

Sorry to hear that the FL insurance market is so screwy.

Good luck.

@Joe Splitrock @Jonathan Pavkov @David M. thank you for those last remarks, that hit the nail on the head for what I was concerned about. Transferring to LLC after closing as a common practice is what my lender told me but I wanted to hear it from investors rather than the person trying to sell me the mortgage.

Since the insurance market is the main issue I am having now, I think what I am going to do is just bind the one policy I can get so that we can close. Then, make the necessary repairs afterward closing and see if I can get an insurance company willing to write a policy insuring the property with the LLC as the named insured. If I can get that done, we will then transfer the property into the LLC and do a cancel rewrite to get rid of the first insurance policy since that would only have us personally listed as the insureds and then bind the new policy that has us and the LLC listed. That will keep the lender happy since we are still named and then we would have the LLC on the property with an insurance policy listing the LLC as an insured.

Thanks to everyone who chimed in! I think we have a good course of action now with a plan A & B. 

Consider an umbrella policy. I know LLC is the thing people always do though if you are covered, you are covered, doesn't matter how you get there. If something really comes up they can probably pierce the veil of your LLC and get to you. You need coverage. Yep Florida is expensive though also cheaper in numerous other ways- so use the benefits avail, and good luck!

*You can easily change to LLC after closing with a quit claim deed, very easy -ask your agent. They can ask their broker if they don't know off hand.

Z

@Will Jayne

I think I follow...  I'm not sure about "...keep the lender happy since..."

We didn't say it, but you should also check with Title Insurance... That's another snafu potential when swapping Title to your LLC.

@Will Jayne

Oh, one more thing. It may be "common," but I don't think it always done right/well. If we didn't already say, make sure you address your mortgage payments so you don't co-mingle your funds. The mortgage is under your name so the payments should be drafted from your bank account, not the LLC's... Goood luck.

You don't need a LLC unless you have properties with a partner. I don't know why everybody recommends it. In fact, my attorney client once held a vacation rental property in his wife's name--he wasn't scared of getting sued. It does make it harder to finance and insure in a LLC. Just get a good umbrella policy and you're covered.

Lot of great info in this thread. I did want to jump in and clarify that I believe Freddie Mac only allows transfer to LLC if it's a primary residence, but Fannie Mae will allow transfer of investment properties to LLC. Something you want your Lender to get ironed out before they sell to one or the other.