Transferr property into LLC

17 Replies

I am purchasing a 4 unit apartment building in my hometown in Wyoming. I am using Guild Mortgage, from which I heard of on one of the podcasts, and we have a branch in my town. I was going to purchase this property with my LLC that already has 1 investment property in it, and it was created and being used for this purpose since 2015. The mortgage company told me that I couldn't purchase with LLC, but was unclear as to why they wouldn't let me. The LLC has perfect track record the whole time it has been in existence, and is a single entity LLC.

Now to the point, I am ending up purchasing it under my own name, but have made it clear to everyone involved that I intend to put it into the LLC after closing. The mortgage company said that it wouldn't create a due on clause. How should I go about the transfer into the LLC, and can anyone give any incite as to why they wouldn't let me purchase with my LLC in the first place? The property is currently owned by an LLC.

Thank you,

Aaron Christen

AaLi Investments LLC

As to why they won't finance you as an LLC is an easy one. Banks normally sell their mortgages, and for some, all of them. And in the usual sale of mortgages, they certify that the mortgage notes are to homeowners, not to LLC's. In the last financial crises, some banks were caught fraudulently certifying their loans, resulting in losses to the insurers resulting in heavy fines, some in the range of hundreds of millions of dollars.

And yes, there are some banks that keep their mortgages, and not selling them, and these are called portfolio loans. You have to call around small country banks to see who offers them. Big city banks usually don't. They sell their loans so they could make more loans. I got some portfolio loans when I bought foreclosures, offered by the foreclosing bank itself. When I asked the banker whether it's an OO or an NOO loan, he said it's neither. Reason is OO loans and NOO loans are two different markets, and they're sold at different discount rates to note buyers which is why fees and interest rates are higher for NOO loans. For portfolio loans, it doesn't matter, whether you live there or not so long as payments are made.

So if they make a loan to your LLC, they're stuck with the loan on their books, for years, and can't make another loan with the tied up money. As to loans to LLC's, I've easily gotten them, SBA loans via a commercial bank, they're SBA insured, I guaranty it, but that's a totally different market, not real estate.

@Aaron Christen , make sure you read the paperwork and that there isn't a due on sale clause in there. Just because the lender says they won't put in there doesn't mean they won't, or that the person you are talking to doesn't know what they are talking about. And if it is in there, but they say don't worry because they won't enforce it, understand that won't be up to them if they sell the loan, which they likely will.

To answer your questions, you can just Deed it over to your LLC, no problem. I agree that the only reason they would insist on loaning to you is because you are getting a residential mortgage and not a commercial one so they intend (or at least want the option to) sell it. If they sell it, see above. A lender would have to chime in here, but I would think that a Due on Sale clause would be mandatory to make it Fannie or Freddie compliant. Honestly have no idea, so like I said make sure you read mortgage/DoT and note.

@Frankchin, @EdwardB I was told they will keep loan in house and not sell it, and the loan is being processed as commercial. Thank you for the info. This gives me things to ask them on Monday. 

You should look for a new bank if you have not already closed on this property. There are many banks locally owned and operated in Wyoming that would love to give you a loan using your LLC and some may not even ask you to personally guarantee the loan. Even if they do most of them will only have you on as a personal guarantor which will still keep this investment property off of your personal credit. I always keep mine in my LLC especially the loan and insurance to keep my personal income and finances safe in the event of a lawsuit. Plus keeping investment properties off of your personal credit is always beneficial to keep your DTI low in the even you need to purchase or get a loan for something in the event of an emergency. Nothing is worse than being short on cash or having a medical emergency you need a loan to help cover and being told no even with perfect credit due to having hundreds of thousands of dollars in investment properties tying up your credit availability.

A transfer to an LLC will trigger the clause and should therefore be avoided due to the above-mentioned sale of mortgages, even though banks are hesitant to ever foreclose as long as the note is being paid. Even with the note being paid, the banks will still send threatening letters. This issue can be avoided completely by transferring the property into a land trust.

While a transfer to an LLC will cause alarms at the bank and prompt them to send you a letter, a transfer to a trust will not. A transfer to a trust is exempt from due on sale violations since banks will view transfers to a trust as an estate planning tool. You should not even receive a letter from the bank.

This article can explain the general process of taking a property into your own name and transferring it into the Land Trust before assigning it to the LLC. The added benefit of this process is that you can also have your attorney sign the public records as "Nominee Trustee" before assigning yourself as the "Trustee" once the trust has been established. This means your name does not appear on public record for that property, your attorney and their address is the only thing that appears. You always have control and nobody else, not even your attorney, can manage or sell your property except for you. But the step introducing anonymity isn't require - that's up to the investor and requires extra steps.

If you need to prove ownership for financing or any other reason, you simply produce your company documents as well as your banking and accounting records. Since these disclosures are private, and not part of the public record, it does not violate the anonymity you’re seeking.

This not true, transfer to a land trust can cause the due on sale clause to be activated. A transfer to a testamentary trust is exempt from the due on sale clause. there is a federal statute that prohibits it. there is no such federal statute about land trusts that I have ever heard of. Transfer to a land trust can cause the due on sale clause to be triggered. Using deceit about the trust could get you sanctioned by the bar association about the nature of a trust, and could definitely get your loan called. You might even be liable on federal charges if you falsify the information about the nature of the trust. A transfer to a Land trust normally provides NO protection from liability like an LLC does. Saying the issue of due on sale clause can be completely avoided by using a Land trust is false in my experience.

No bank I am doing business with is going to loan you any money using the I am a hidden man stuff you are proposing here.  I realize you are trying to build a business peddling this stuff but this appears to be misleading to me.  you are overselling a product that probably 99% of the folks on here don't need.  Do you really think @Aaron Christen is ever going to be able to remain anonymous in Green River Wyoming while personally managing a 4 plex?  Do you really think the Sweetwater County Treasurer won't know he owns it?  Do you think the Bankers will lend to to him with 3 layers of corporate and trust ownership?  Who do you think is going to interview the tenants, or hire the repairmen?  How is he going to network with other landlords or people selling their property if he is anonymous?  Who is going to go look at properties?  who is going to sign purchase offers?  Who is going to sign the statement of consideration required in order to file a deed?  Who is going to send the letter saying you have 72 hours to quit the premises?  Who is going to testify about the renter not paying rent, and needing evicted to the judge?  An anonymous person.  That type of protection may have some application for some high worth individuals, who do everything through other people.  none and I mean absolutely none of the big investors on this site use this kind of program.  it does not work for hands on investors.

Maybe this should be read as well

https://www.l4sb.com/blog/just-anonymous-anonymous...

or perhaps an unanswered comment I made on the article you posted in your comment above. 

Scott, I have some disagreements that maybe you can clear up. First you can transfer your property into a TESTAMENTARY trust because it is legally still you, you are doing it for inheritance purposes so federal law recognizes you and your trust as the same person. If your LAND trust is not a testamentary trust then it violates the due on sale clause and the bank may call your loan. Next if your trust by whatever name you call it transfers the land to an LLC the due on sale clause can be called immediately. The bank will know you did the transfer because you MUST provide proof of insurance. The insurance must be in the name of the LLC or it is VOID. If the name of the insured is the trust or you but the deed is in the LLC your insurance is void, then if you get sued they come after you and you have no insurance. As to anonymity, how are you anonymous if your name is on the mortgage of the property? Don't you think that would make even the least suspicious sue happy lawyer think you may be involved somehow? Then you signed the deed putting it into the trust right? You signed the deed putting it into the LLC from your trust right? You write the checks to the insurance company out of the LLC right? If you hire other people to do those management things for you it will cost you a fortune and they can run the business not you. If they sue or depose one of those folks you think they will lie to protect your anonymity? No. Now if there is a lawsuit and your name is on the bank account don't you think they will depose you too? Will you lie about your involvement and risk going to prison for perjury? Especially if your name is on every legal document connected to the property?
If I am wrong here please let me know. I am a bit rusty on this as I have done a suit involving an LLC or corporation for several years. If I am right then all of these folks wanting to go spend money on an attorney to do this will have wasted their time and money. Please enlighten us. If there is some magical way to never be sued again by landlords I would imagine every landlord would have it. Please explain how I am wrong about any of these.

This was posted over a year ago and has never been answered.  Not to mention how fast in a real lawsuit a single deposition or interrogatories would slice through this scheme and tell who the real owner is.  I simply don't see how it is a workable system for the self managing investor.

Here is another comment on your article you did not answer:

Scott, i am no lawyer, but it appears that § 591.5 Limitation on exercise of due-on-sale clauses, and 12 U.S. Code § 1701j–3 – Preemption of due-on-sale prohibitions contradict what you are saying.

It clearly states: “a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property”

Could you please expand on this?
Thank you so much!

What statute prevents the due on sale clause from being called when transferred to a Land Trust?

Next thing on my plate is finding a local Property management company that is not a Real Estate agency. I have talked with the local realtors, and got their rates and fees, and now would like to see non agency and compare. Closing is tomorrow at noon lol it is crunch time haha.

@Aaron Christen , FYI there is a lot of debate on BP about the two options:

1) take conforming mortgages in your personal name, to obtain lowest APR and best terms, and try and limit your landlord liability with an umbrella policy, or

2) try and transfer the deed into an LLC (risk the bank invoking the due on sale clause), and use the LLC to limit your landlord liability

Thank you @Steve K. I am presently at the 1 option now as I have an umbrella policy and landlord policy but trying to move to the #2 option, and the mortgage company "said" they won't call due on clause, but I'll get that In writing.

There might be a 3rd option.  Our lawyer (based in Cody) had us set up a separate company that leases the property from the holding company/individual.  The leasing company assumes all maintenance and responsibility and liability.  We still might get sued but in theory, the liability is held by the leasing company so you would be dismissed from the suite.

Just make sure you put extra emphasis on maintaining the corporate veil by separating the two companies and hiring a registered agent for the leasing company wouldn't hurt either.

I am not sure everyone is reading the details here. She said this is a commercial loan being held by the bank. That means it is NOT a conventional mortgage. Due on sale clauses are standard boiler plate in Freddie / Fannie backed mortgages, which can only be issued to individuals, but since this is commercial it is not governed by those rules

The most likely reason they are making her purchase in her own name is to avoid "no recourse" if sold to the LLC. In other words, they want her personally on the hook for the money. They don't care about the deed transfer, because the property secures the loan either way.

@Jerry W.

Would be glad to provide some answers, and I’m happy to answer any unanswered post from the past if you want to alert me to them. I work very hard at and exclusively deal in this area, so I’m not asking you or anyone to agree with me as I’m seeking to share what I’ve learned and seek to learn from others. I would ask that the tone of these discussions remains civil and points/arguments organized. I make a point of not getting into arguments in internet forums, so if it starts to go in that direction I will not participate since it won’t be beneficial for us or anyone else.

Introduction

Please always assume the best intention and hospitality in what I post as I spend my energy in this area not focused on being “right” for the sake of being “right”, but for the benefit of everyone. Sophistry benefits none.

In response to your post, I have prepared the following. I can also speak to my experience on never having a due on sale letter sent to any of my clients using the land trusts we create, and the “back of house” bank letters I’ve seen state that the major lending institutions do not pursue trusts nor consider them a violation of the due on sale clause. Smaller lenders who are less sophisticated believe any transfer of a due on sale clause is an issue and that has necessitated additional discussion, but I am as certain as any lawyer can be about my work product and its effects over the years.

I have also prepared resources that are on the web including webinars where I walk through the structure in detail with graphics. The terminology and the various uses of the same word, ‘Trust’, to mean different functions of a legal entity is undoubtedly confusing.

Beginning Of Analysis

I think we’ve all heard the statistic that 95% lawsuits are settled. This isn’t because of the legal claims per say, it is because of the risks, benefits and costs of litigation when weighed together favor settlement. The more risky, lower benefits and higher costs you can make it for them, the better off you are. This is the premise of my legal strategy as a litigator myself in my “former life” suing insurance companies for failing to pay claims that they owed.

The Land Trust: There is a misunderstanding in the order of how things are set up, so let me clarify. There is only one transfer, from your name into the Land Trust, which is exempted from the Due on Sale Clause because it is an inter vivos trust. The land trust is then owned by an LLC to pair the anonymity of the land trust with the asset protection of the LLC. The LLC is in turn either created in an anonymous state like Wyoming, or in any other state with an Agent Trust listed on the filing documents for anonymity purposes. You are the sole beneficiary of the Agent Trust, which could be utilized as an estate planning trust or "living trust". The entire structure is pass through for tax purposes, but layers in anonymity and asset protection together. The entity is wholly owned by you and you are the sole beneficiary, so there is no change in the rights of occupancy and you are ultimately the beneficiary of the entire entity through the Agent Trust. This is compliant with the code in both text, spirit, and apparent application through the case law.

Moreover, even if the event happens which has not happened to any of my clients, and the bank begins a foreclosure proceeding on a performing note, which they haven't done in decades, then the client can "cure" the breach of contract by deeding the property back into the name of the original borrower. For the non-attorneys reading this, the mortgage is a contract with a clause called the "due on sale" clause. So, if you violate that clause you've violated the contract, and this violation is called a ‘breach'. In contract law, if one party breaches they can be sued for that breach. However, a defense to the breach of contract is to "cure" the breach, meaning that you fix whatever it is that your "broke" in the contract. In this case, the allegation would be that it would be the transfer of the property from one name to another, and that none of the other protections apply that I'll get more into here and other places. Even in that event, you can still cure the breach by deeding the property back and the legal claim disappears. Again, this is layers deeper of fail safes that I've never had to use, but it exists as ultimate protection in saying you're not going to be in a position where you lose the property.

For the structure of the roles of grantor, beneficiary, and trustee, the original owner of the house is given the trustee powers of the land trust and can carry out the management of the property.

To provide anonymity you have an attorney sign and be listed on the public records as a "nominee trustee" at the point of formation for the Land Trust. Once the trust is established, the role of “trustee” is immediately given to the property owner according to the terms set in the formation documents which are not public. When you want to see who owns the Land Trust, all that is available to search is the attorney's name. At that point there is attorney-client privilege to deal with. At this stage there is no name of owner, so for all the plaintiff and opposing counsel know the property can actually belong to a group of partners. This will rack up discovery fees for any potential plaintiff and attorney willing to assume that risk, and turn many others back before they even start. The land trust does not provide any liability protection. The reason it is used for asset protection, and identity protection, is that it removes a homeowner’s name from public record in this manner. I have not made claims that it provides liability protection - simply that it is a tool for asset protection by creating anonymity so that during the initial search for assets when determining to sue it looks like the person owns little to nothing.

The St. Germain Act: 12 U.S. Code § 1701j–3 : This still applied to the homeowner who transferred the property into the Land Trust. While the LLC is listed as the beneficiary, the homeowner can provide evidence that they formed the LLC. They are still eligible to receive the exemption listed in the St. Germain Act and receive the protection of the LLC. (https://www.law.cornell.edu/uscode/text/12/1701j%E2%80%933)

The Transfer: A Warranty Deed is used, as opposed to a Quit Claim Deed, in order for the Client to maintain Title Insurance. A transfer with warranties has preserved the title insurance protections in every policy I have reviewed, but you should always check. Most Title Insurance companies will cease to offer insurance if a Quit Claim Deed is used for the transfer as the Quit Claim Deed offers no warranties as to clean title. Once a property is owned by the Land Trust, the Client must contact their insurance agent and have the Land Trust listed as "additional insured."

Attorneys seeking to file claims (i.e. Plaintiff’s attorneys): There is no such thing as absolute protection from any possible hypothetical scenario that could exist. It isn’t cost effective to prepare for every possible hypothetical, but common sense expenditures for protection are the only thing that is necessary to keep you protected. The idea isn’t to make everything in you and your life absolutely invulnerable, it isn’t necessary and it isn’t possible in absolute terms. What is possible is making it a very bad business decision and a horrible investment for anyone to come after you. This is where Asset Protection comes into play because it attacks the business of lawsuits just as much as the lawsuit itself. The more you can drag a case on, the more layers they have to fight through, the more discovery requests they have to make, the more those expensive attorney bills start to become extremely painful to someone pursuing you.

Attorney's aren't in the business of gambling, just like real estate investors. The bottom line is that they get paid by settlements and judgements. There is a lot of work out there for good attorney's, so they can pick which cases to take on. If an attorney reviews the case of an investor with a good asset protection plan in place, or someone who appears to be anonymous, the attorney understands the money it will take to dig into the case. At that point there is still no guarantee of payout. Even if they do dig through everything and get a settlement or judgement, there will only be access to the property in the LLC. At this point the plaintiff and attorney will have a small mountain of bills to try cover that case.

Why would they take that risk when there is another case on their desk with someone who owns everything in their personal name and is an easy target? This is very easily the real estate investor who is so afraid of the due on sale clause that they never put protection in place.


Legal Cases: There is a difference between having someone’s name and being able to prove they are actually an owner. If the plaintiff cannot provide proof that the defendant is the owner of a property, then the case will get thrown out. That means the defendant will have to foot the bill of discovering all of this information, which is a pretty tall order. There is a chance that the attorney may be willing to cover some of the costs of discovery; however, as I mentioned above, most attorneys aren’t inclined to do that since it is a lot of work and is a tough case.

@Scott Smith , the part that addressed some of my concerns is helpful. Do not use the term "Land Trust" relating to property in Wyoming. Here Land Trusts are simply trusts holding large amounts of property. probably 90% of them are permanent trusts for holding large amounts of land or other real estate rights. They will invoke the due on sale clause. What you described is not a land trust under Wyoming law, it is an intervivos trust which the owner must be the beneficiary of. They normally contain clauses for passing the property to the next generation or or at least the spouse. I have no idea what you refer to as an Agent Trust. I have never heard of one, and the phrase does not even exist in the Wyoming statutes that I could find. I agree with the concept that you can have an attorney, or actually anyone, even your registered agent you pay $50 to for the purpose of forming an LLC, sign to create it giving you brief anonymity. Now in order to file the deed the buyer MUST file a statement of consideration. Guess who signs it? There are ways to get an agent to sign for you, but it is pretty hard to justify it in a transfer to yourself, and you will run up a pretty good cost. There is an exception to the document if you certify that the land is in effect being transferred to yourself. You don't want to file that because you then admit under oath to still being the constructive owner to the property that was in your name just a minute ago. While there are statutory protections on disclosing the document, there are also ways around that. Even if you clear those hurdles, and put the LLC as Trustee, Aaron is not going to be anonymous. He will be at closing signing documents and exchanging keys with the Seller, he will also have to be the one to sign the 72 hour notice to quit, or the tax appeal, or the one who meets and shows the property to the tenant, he is the one they call for repairing the furnace, or filing the small claims for keeping the damage deposit. He must write the 30 day deposit disposition letter and sign it. Who will sign the water payment guarantee for getting city water? If he is a hands on investor he will not be able to be anonymous. Now if he uses an LLC to buy it and uses a different LLc to manage it, how is his protection any less than using a trust? Your system can work for a small percentage of folks who do not self manage. If they bought the property through an anonymous LLC and managed it through a paid management company, they would have very little liability, however when you self manage as most owners here do, anonymity just won't work.

Sorry I must break for sleep.  I will try to get back tomorrow.