I'm looking to begin investing in the Boston area (Medford, Malden, East Boston, Dorchester, Quincy) and have a partner lined up. We're currently working on the partnership structure and trying to iron that out to best meet our needs.
We would like to buy in one of our names (reasons being better rates and more willingness to lend from banks, more overall flexibility for future buying) and eventually move the property into an LLC for protection. I was specifically wondering if there is anyway to add a clause in the original mortgage agreement that would void the due on sales clause if ownership is transferred to a named entity (the LLC we would establish) or if this is not at all possible. I haven't heard of it being done but given a flexible lender, I figure it was worth exploring.
If that is not possible, we will most likely form an LLC initially and buy under the LLC to avoid the risk exposure, no matter how small, of a due on sales clause being called.
Would love to hear from you on this!
No. The requirement is from Fannie/Freddie who buy the mortgages in the secondary market.
This question has come up an infinite number of times. Use the search function.
Short answer, you can't get the long term fixed rate loans sold to fannie/freddie without the due on sale clause in the loan docs.
Can only get them in your personal name: no LLC's.
Since you are just starting out, if you go commercial financing you can get a loan/take title in an LLC, but you will need to personally guarantee the loan im most cases. These type of loans will very more from bank to bank.
If you do buy/get loan in your name then transfer to LLC, generally banks have not taken thier option to call the note due.
That being said if interest rates skyrocket, they might have incentive to.
Learn about trusts.. That is a very simple way to accomplish what you are trying to do.
If your goal is mainly for asset protection, a single LLC that holds title is likely a bad idea particularly a single member LLC. Some states don't have charging order protection, liabilities can go straight to your personal assets.
Thanks @Carlo C. that's great to know
@Nadav Swarttz - first property we bought was in our personal names (3 of us). We *wanted* it to go under the LLC (in fact we do all operations, banking, etc through the LLC...and taxes as well) but the property is held under our names personally and still is to this day!
We worked with a lawyer who tried to pass title to the LLC and he said (as many on the forums have as well) that he's never seen the due on sale clause get called in 20yrs. WELL, guess what happened? We got called on it, pretty much immediately, and we had to switch back to our names.
We all carry good personal liability AND umbrella insurance in the event something happens we are hopefully well covered. I know some investors that swear by LLC for asset protection and I know some that have over 100 units that don't use an LLC or corporate structure to hold title and just carry MASSIVE insurance policies. There's pros/cons to both..definitely talk to a lawyer for your personal situation and comfort level.
As many have said here - your best bet might be to look into trusts (although there's some complications there as well) and taking possession as LLC will limit your lending options initially.
If you're just getting started, consider taking it in your personal names and look into good insurance. Then once you establish yourself and have equity and hopefully more $$$ you're options could open up using an LLC if that's the route you'd like to go.
Best of luck!
One common and recommended strategy is using a land trust to hold the title and the beneficiary is a LLC. E.g. Some pros use Virginia land trusts with Virginian trustees to hold titles and the beneficiaries are either Nevada or Wyoming LLCs or corporations. Your name will never show up in the public records. Creditors first need to "find" your trustee who is physically located in Virginia AND to find out who the beneficiary is THEN get to Nevada to sue the corporation. There're a lot clauses that you can use in the trust agreement to prevent your trustee to give you away. One technique is called "poison pill". There's a clause that can say if the trustee feels there's a chance of litigation against the beneficiary then the trustee needs to resign and pass the trust agreement to the successor trustee without saying a word.
Also, you can find a local friend to serve as a trustee at the closing table then fire him or her right after and use a different person to serve as a trustee to hold title. The whole world including your lender will not know anything about. It's only between you and your trustee.
Thank you both very much for the responses. They're super helpful and now I have some research to go take care of. Again, I appreciate it!
- "We worked with a lawyer who tried to pass title to the LLC and he said (as many on the forums have as well) that he's never seen the due on sale clause get called in 20yrs. WELL, guess what happened? We got called on it, pretty much immediately, and we had to switch back to our names."
Which bank did this to you?
@Nadav Swarttz Welcome.
"...and eventually move the property into an LLC for protection."
Protection from what?
@Mike Hurney Protection of personal assets mostly
@Nadav Swarttz what are the "personal assets mostly"?
@Mike Hurney Brokerage and retirement accounts. Where is this line of questioning going?
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