Due on sale LLC Transfer Potential Workaround

9 Replies

Hey BP!

I have been working on potential strategies and tactics for buying owner occupied and moving to an LLC later down the road. In my research and brainstorming I have run into the issue of the "Due on Sale Clause". Now I might be missing something crucial on the legal side of things, but couldn't I just contract for deed/Sublet the property to my LLC when the time comes and still gain the protection of the LLC while avoiding the DoS clause? As far as everything goes, I would still own 100% of the property until the C4D is fulfilled so I dont see how a bank could call Due on Sale.

Originally posted by @Chance Stein :

Hey BP!

I have been working on potential strategies and tactics for buying owner occupied and moving to an LLC later down the road. In my research and brainstorming I have run into the issue of the "Due on Sale Clause". Now I might be missing something crucial on the legal side of things, but couldn't I just contract for deed/Sublet the property to my LLC when the time comes and still gain the protection of the LLC while avoiding the DoS clause? As far as everything goes, I would still own 100% of the property until the C4D is fulfilled so I dont see how a bank could call Due on Sale.

If the LLC doesn't own the property there is no protection offered to the property. The literal only benefit to having the property in an LLC is legal protection.

I'm not an attorney* 

@Natalie from what I have read I don't think that's necessarily true. In essence it's no different than me hiring a property management company. They bear the risk for malpractice because they are the ones doing all of the tenanting and building servicing.

Originally posted by @Chance Stein :

@Natalie from what I have read I don't think that's necessarily true. In essence it's no different than me hiring a property management company. They bear the risk for malpractice because they are the ones doing all of the tenanting and building servicing.

But at the end of the day your big asset isn't IN the LLC.

So if you get sued. They can go after all your personal assets. Since it's all in your name. 

Maybe an attorney will chime in. 

@Chance Stein

Sorry, but hiring / using a PM does NOT stop the liability at the PM.

Read: https://www.biggerpockets.com/forums/52/topics/177731-how-can-a-property-owner-be-held-liable-when-using-a-property-management-company

The PM is mirely an agent for the owner, all errors, FAIR housing violations fall through to the real owner...  ;(

Why use a PM then?  Because you are busy and don't want to screen tenants, or like screening tenants, or taking service calls etc etc, this is it.   You pay a PM a fee to get some time back.

If you buy right, screen right, landlording / self managing doesn't take much time at all.   But I agree some folks are not a good fit for direct management and screening tenants.

This LLC issue is a red herring. There's so many ways the LLC will not stand up in court, just google proper setting up and managing your LLC to prevent peircing the corporate veil.

Fix the house well, respond quickly to service calls, have $1M liability as a min, and screen for sane tenants who you treat well. Moving into an LLC is way way down at #5 or lower on the list of liability containment tactics.

Also re the OP's topic, don't worry about due on sale, banks today learned their lesson re calling loans and foreclosing.  They just want the loan kept current.

When you xfer into an LLC use a full warrantee deed DO NOT USE A QUIT CLAIM this breaks your title insurance.

Landlord policy, add the LLC as THE "named insured" take your name off. Keeping your name on the policy hooks you personally into liability vs just the LLC. IE back to me saying theres so many ways the LLC actually does not stop liability, now I mentioned the landlord policy may screw you up in court. Also Forgetting to add the LLC the carrier may choose to NOT PAY A CLAIM. Again its fairly complicated world. The same comments are in play if you re-title into a Trust,, which offers zero liability containment. FWIW revocable land trusts help with estate planning and avoiding probate. For most folks moving a rental into a trust after purchase there's no aninimity available because your finger prints are in public records, as well as on the security deed (mortage).