Rental Property Investor · Summerville, SC · Member since 2017 · 169 posts · 36 votes
Hello, I have four properties and 10 units. All were purchased in my name. My accountant advised me to set up an LLC for them, so I did. I contacted my lenders to see if it would cause the due on sale clause to be triggered and they said it wouldn't.
Well, it just might for one of the properties at least (each property has a different lender). I got the insurance docs transferred over to the LLC's name, and that's what started everything with the banks. The one lender I'm having an issue w/ said that transferring ownership to an LLC is not a valid transaction and could trigger the due on sale clause. However, if I transferred ownership to a living trust and I remained the occupant, that would be allowed.
It's an investment property and I've never occupied it. I've responded to them saying as much (via email, they're extremely difficult to get on the phone) and am waiting for a response.
Does anybody else have experience with this or any ideas on how to proceed?
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
@Andrew Merritt, do those lenders hold the loans or simply service them? If the actual loans were sold to Fannie/Freddie (as most are), you should be fine. Fannie Mae, for example, explicitly allows you to move title into a LLC.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
@Andrew Merritt, do those lenders hold the loans or simply service them? If the actual loans were sold to Fannie/Freddie (as most are), you should be fine. Fannie Mae, for example, explicitly allows you to move title into a LLC.
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
6y
Be very wary of an accountant giving legal advice.
Moving rentals to an LLC is completely a legal/asset protection play and has nothing to do with taxes or accounting. If your accountant is licensed, they are putting their license at risk by giving advice outside of their purview.
Regardless, they are not a lawyer. I always recommend that my clients speak to a lawyer about this topic when they ask me about it. Your accountant is not qualified to decide whether this was a good move for you or not.
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
6y
@Andrew Merritt
Transferring to a LLC and leaving the loan in your name whether it triggers due on sale or not will not provide you any asset protection if you were to get sued. Definitely talk to an attorney as an LLC needs to be run as a separate company and everything should be arms length and cannot commingle funds. An attorney who sees the loan in your name and house in a LLC will have no trouble piercing the corporate veil as the LLC independent.
Transferring to a living trust is allowed as long as you are the beneficiary. Living trust (contrary to what many are told) does ZERO for asset protection. It’s to avoid probate.
Again talk to a real estate attorney before doing this as you may end of creating more problems down the road
Transferring to a LLC and leaving the loan in your name whether it triggers due on sale or not will not provide you any asset protection if you were to get sued. Definitely talk to an attorney as an LLC needs to be run as a separate company and everything should be arms length and cannot commingle funds. An attorney who sees the loan in your name and house in a LLC will have no trouble piercing the corporate veil as the LLC independent.
Transferring to a living trust is allowed as long as you are the beneficiary. Living trust (contrary to what many are told) does ZERO for asset protection. It’s to avoid probate.
Again talk to a real estate attorney before doing this as you may end of creating more problems down the road
I'm not an attorney but I don't believe this to be correct.
Asset ownership and loan signing being different I don't believe would pierce the corporate veil.
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
6y
Natalie
I believe you are correct. Mistyped and was not clear in my post, so everyone disregard Originally posted by @Natalie Kolodij: Originally posted by @Chris Seveney:
@Andrew Merritt
Transferring to a LLC and leaving the loan in your name whether it triggers due on sale or not will not provide you any asset protection if you were to get sued. Definitely talk to an attorney as an LLC needs to be run as a separate company and everything should be arms length and cannot commingle funds. An attorney who sees the loan in your name and house in a LLC will have no trouble piercing the corporate veil as the LLC independent.
Transferring to a living trust is allowed as long as you are the beneficiary. Living trust (contrary to what many are told) does ZERO for asset protection. It’s to avoid probate.
Again talk to a real estate attorney before doing this as you may end of creating more problems down the road
I'm not an attorney but I don't believe this to be correct.
Asset ownership and loan signing being different I don't believe would pierce the corporate veil.
Accountant / Attorney · San Juan, PR · Member since 2017 · 67 posts · 171 votes
6y
Due on Sale is a constant issue when transferring assets to an entity. Most people do it and don't tell the bank. In those cases, there is a risk that down the road the bank may call the loan due, say when interest rates go way up and you have a low-rate loan. If you tell the bank, they often refuse to allow it unless you get a commercial loan which will be another 1 to 1.5% interest rate. No perfect solution, this is definitely a case of "choose your poison". What matters more - the asset protection that the LLC provides or a point of interest (which can really add up to a lot of money)? Or get both low rate and LLC protection but risk bank calling sweet low-rate loan later when rates are higher? My personal preference with rates low now and inflation likely at some point (of course, I have been saying that for years) is a commercial loan that allows LLC to hold property with no "call" clause on the loan. A bit higher rate, much lower than rates are likely to be once inflation hits, locked in at an historically low rate, if not quite as low as non-commercial personal loan (which is what almost everyone gets and is what causes DoS issues). I have seen some trust schemes that purport to "get around" DoS issue. With exception of personal residence, those schemes would not work if challenged.
Of course, for LLC to matter at all for asset protection purposes, it needs to be properly run and reasonably capitalized, among other things. I could pierce 70%+ of REI LLC's. REI set them up and do very little to maintain them.
DoS clause does not negate asset protection of LLC - it just means bank has an automatic excuse to call the loan due and/or foreclose. Linda Weygant is spot on, don't take legal advice from CPA's, though many are willing to give it. Attorneys are typically more paranoid, they tend to avoid giving advice outside of their specific area of expertise, especially where taxes are concerned; they fear the liability.
Thanks to Jayson Medhurst for Fannie Mae link, I had not seen that before. I'd still make sure that the change in use of the property is "permitted", that's probably in the loan docs and often requires use as a personal residence initially. Which means if the property was purchased for investment from day one and the loan was not for an investment property from day one, there are two problems: The DoS exception Jayson linked to does not apply, and by saying one would live in a property when one had zero intention of doing so, one has probably probably committed loan fraud.
On the other hand, if loan docs permit use as an investment property from day one and local law allows that use (because the term "permitted" has no definition in the linked regulation - permitted by whom? I'd make sure permitted by "everybody", bank and local law unless we can find a definition elsewhere in the law/reg that narrows the meaning of that word), then you are probably safe from DoS issues with Fannie Mae/Freddie Mac.
Here's the relevant language from Jayson's link:
"a limited liability company (LLC), provided that
the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and
the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).
The "if" is important, as is the answer to the question "what is a permitted change"?
Rental Property Investor · Summerville, SC · Member since 2017 · 169 posts · 36 votes
6y
Thanks everybody and thank you @John Hyre. Lots of good info.
I was passed around to four different people when I called last week. The highest level I got to was a mortgage officer. He seemed to be on my side and said he wouldn't have any issues w/ transferring to an LLC that I own. However, he was not the person to make the decisions on the DoS and said he'd get back to me. I'm not holding my breath.
They haven't reached out to me since they sent the initial letter about 3 weeks ago. I'm trying to be proactive and get this taken care of but maybe I should stop poking the bear. I just don't want a surprise letter in a couple of weeks demanding the balance of the loan.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
6y
@Andrew Merritt Worst case scenario.....you get the letter, they Must give you 30 days to cure, so you simply transfer it back, end of issue. If it’s a Fannie loan issued in the last couple of years or so, Fannie does specifically allow you to transfer title to a single member llc. You’ll have to google up the exact date this went into effect.
Rental Property Investor · Summerville, SC · Member since 2017 · 169 posts · 36 votes
3y
I contacted them to be proactive about it and it just kind of fizzled out - they said they'd look into it and never followed up. Eventually I refinanced out of it so it wasn't an issue anymore.
7e investments53 Reviews