Rental property without LLC - Due on Sale Clause

16 Replies

Hi everyone. I am fairly new to the forum and have been doing a lot of reading to prepare myself for my first deal. I met with a mortgage originator at one of the large bank in Minnesota today who told me that a transfer of a property under a LLC would trigger the due at sale/transfer clause. From what I understand, it is recommended to have the investment property under the LLC for protection purpose. For my first deal, I am looking at a duplex or four plex for house hacking to get my feet wet. These are my questions:

1. Is there a bank or lender in MN that allows property transfer under LLC?

2. Is a LLC even necessary?

3. If transfer under the LLC of the property is not an option, how do you protect yourself against a litigation? Is an umbrella insurance enough?

4. At the end of the year, are you providing the rental m1pr form to the renters? How would you go by doing so without a structure such as a LLC?

Thanks

@Patrick I.   I am not a lawyer but my personal opinion is that LLCs are over-sold to beginning investors.

Put yourself in an ambulance-chaser's shoes.   Assume your tenant has a slip and fall or other accident.   Your property insurance probably has something like a half million dollar liability coverage.   That is worth his time.   What is your net worth?   Is it worth the lawyer's time to chase after your bank account and other assets.  Remember he gets only a fraction of what his client gets.

Personally, I bought a $2M umbrella insurance policy and stopped putting my properties in my LLCs. I have a good friend that puts everything in property-specific LLC.

Now, as I'm moving into apartments, I'm selling off the single family. Every apartment has a property-specific LLC.

Regarding mortgage providers, yes they will always tell you you can't put the property into an LLC without triggering the due on sale clause. In reality, as long as payments are being made they don't seem to care. I have 3 properties that have been in and LLC for 5 years and not a peep from the bank. I've never heard of anyone having the note called due.

On the other hand, it is theoretically possible that interest rates could rise significantly.  If that happens banks might start looking for ways to get out of low-interest notes and call due old notes, similar to how companies can call a bond due.   However, I would say that scenario is also unlikely.

Good luck

@Greg Scott Thank you for your input. I really appreciate. At the end of the year, have you given rental m1pr forms to your tenants? If yes, how do you do and how does it work? My current landlord has a LLC and he provides the m1pr form with his LLC information. If I don't have a LLC and needs to provide the form to the tenant, how will I go about it? Thanks

@Patrick I.

I had to look up M1PR.  It appears to be a State of Minnesota form, which is why I had not heard  of it.  

I would ask your CPA.

You can purchase properties in the name of your LLC however you generally can't use FHA financing to do it. I assume you are going FHA because you are going to live there, you can't put it in an LLC for an FHA loan.

Some smaller banks who hold loans will allow you to transfer to an LLC without exercising the due on sale clause. I have had this work for a couple clients but they talked to the bank beforehand. One attorney told me to get around this at times they will draft the quit claim deed but not file it. Not sure if that really protects you but it was interesting hearing from an attorney.

You have to fill out the CRP form for each tenant, you will give that form to your tenant for them to fill out the M1PR if they are eligible.

I’ve worked in insurance for 30 years and I can tell you if you get sued the attorney will just try to squeeze insurance company to limit and be happy with that. Cheaper/easier for you to buy an umbrella policy for that extra “sleep at night” cover.

I’m going to run a report at work maybe and come back with real stats on likelihood of a large loss.

For me, I am considering LLC for tax purposes depending on what happens with these new proposed changes.

@John Woodrich Thank you John. Do you know of small banks in Minnesota that would allow transfer under LLC? Thanks

Originally posted by @Patrick I. :

@John Woodrich Thank you John. Do you know of small banks in Minnesota that would allow transfer under LLC? Thanks

I don't know what banks they were, they have come up the last couple years. They were NOT FHA loans though, if you are getting an FHA loan I wouldn't put anymore time into it.

Having an LLC will also protect personal assets from financial liabilities (e.g., business losses and foreclosure), as well as, accidents?

Originally posted by @Patrick I. :

@John Woodrich I am going with a conventional loan John

I am an advocate for putting properties in LLCs when possible, but personally I am buying a 4 plex this month on a conventional loan and am fine putting it in my personal name which the loan requires. My purchase agreement is under my LLC name and we are going to try and push it through but if that gets kicked back at underwriting I am fine with an addendum to change it to my personal name.

LLCs are a good idea but not an absolute need.  You are required to get insurance anyhow which will protect against 99% of any claims.

If you are really concerned I would search around on here to see if you can find an instance where insurance didn't have enough coverage to protect someone.  I haven't looked but haven't seen or heard of anything.

@Patrick I.

1. Is there a bank or lender in MN that allows property transfer under LLC?  

Yes, but not if you are house hacking/owner occupying the home.


2. Is a LLC even necessary? 

I don't think so.  Certainly not on your first few deals and especially if you have proper insurance and make a concerted effort to provide a safe rental environment.


3. If transfer under the LLC of the property is not an option, how do you protect yourself against a litigation? Is an umbrella insurance enough?

Nothing will protect you against fair housing claims and other legal mistakes you make.  The first and more important step is to learn MN law from a legal source (not BP).  homelineMN.org is the best source for this.  They have a class and publish a book for landlords.  You also need good insurance.  Third, you need to follow #1.

4. At the end of the year, are you providing the rental m1pr form to the renters? How would you go by doing so without a structure such as a LLC?

There is absolutely no difference with the M1PR form between LLC's and individual owners.  The owner's name must be stated but you simply list your name.  The reality is LLC's have positives for sure but they do have some negatives.  One such negative is that in Minneapolis, an owner cannot pull their own permits for repairs since only natural citizens have that right. This means if you have your property in an LLC you legally are supposed to use only Minneapolis Licensed contractors to do all permit required repairs.  This is not true if you own it personally. 

In addition, an LLC must be represented by an attorney in Hennipen & Ramsey county 
housing court.  The owner cannot represent its self for an LLC, but is allowed if individually owned.  By the way, this is a  state law that most people will not know and will challenge but this is why you must learn MN law on your own.  It's more important than you think.


Cheers,

~Tim

@Tim Swierczek Thank you for your clear explanation to each of the questions I had. Could you share the names of the banks/lenders that allow transfer under LLC? If house hacking is not an option with them, I can review and adapt my strategy. Thanks a bunch

@Patrick I. to clarify you cannot legally do it with any FHA, Conventional, VA, or USDA loan. As some had stated its very rare that a lender will call you out on it, but you run the risk if you do it. The issue is if you do it on an owner-occupied home within a year of closing you have also committed loan fraud which is a federal crime and a felony.

Most if not all portfolio lenders will allow you to close in the name of an LLC, and some require it because they classify the loan as a business loan and do not have to follow Dodd-Frank protocols. These same portfolio lenders should also all allow you to transfer it but that shouldn't be necessary if you start with an LLC upon purchase.

I work for a lender that offers a line of portfolio products along with the other loans mentioned above. Our portfolio loans are very "creative" but also higher priced than community banks. They do allow to close in the name of an LLC.

Community banks are all over.  Some examples of bigger ones are Bremer Bank, Sunrise Bank, Deerwood Bank, BMO Harris Bank, First National Bank Hastings, Community Resource Group & Citizens State Bank, but there are hundreds more.

I just want to be clear that I would not chase the LLC designation to get the property into an LLC. I know of no community bank that allows you to put down less than 20% even if you are owner occupying. They only offer balloon loans with variable rates. These products are good and necessary for seasoned investors but should have no place in your early plans.

I agree that LLCs are oversold. My parents have always owned in their names with no issue. I have always invested under an LLC but I don't really think that it has made anything easier or less risky. Use conventional up to 10 then find a community bank.

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