Help. Mortgage says LLC is a no-no!

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Help. Mortgage says LLC is a no-no!

John G.
New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
Hi all, I'm purchasing my first property (Milwaukee) and asked my mortgage broker (Chemical Bank) about transferring the deed after the loan is secured. He said I can't do that. And that I'll need commercial lending. Is this something he HAS to say because I emailed him? And I can likely do it and he'll turn the other cheek? Or should I not have asked that? What do I do??? It's a $90 investment. Putting 20% down. Thanks!
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Brie SchmidtBusiness Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
9y

@John G. - Any residential loan has to be to a person, not a LLC. If you want the LLC to hold title it needs to be a commercial loan. You can always transfer it after, but be aware that is still not allowed and if they find out they can use the due of sale clause of your loan to demand the balance due in 30 days. Usually if you transfer it back they will let it go

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  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    9y

    Got it. @Bryan O.

    0Reply
  • Ham Merritt
    Co-Owner · New Berlin, WI · Member since 2017 · 224 posts · 71 votes
    9y

    @John G. as long as you are trying to obtain conventional financing for residential real property, you will not be able to use an LLC. As a REI, you cannot use an LLC to protect your assets.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y

    @John G. the banker told you that you cannot do that because that is what your loan contract says. I would say if you do it anyways after specifically asking and being told no, that is even worse. 

    If you hold a mortgage in your personal name, even if you transfer a property into an LLC, it becomes hard to argue it is separate. Do you see my point, you are paying for the property with a personal loan, but trying to claim it is a separate business.

    0Reply
  • Mark Collard
    Investor · Las Vegas, NV · Member since 2014 · 31 posts · 38 votes
    9y

    Hi all,  

    Forgive me in advance on this response, but I believe that the question and corresponding responses have gotten a bit out of control.   

    I've done significant numbers of transactions in real estate as an investor, a lender and a licensed agent.   My experience tells me there is confusion about residential vs commercial financing and LLCs and the like.   So, I got clarity from my mortgage broker, just to be safe and clear, and here is what he shared.   This is not intended to attack anyone but to clarify the question and give any and all answers better context. 

    "Conventional loans (Fannie Mae and Freddie Mac) do not allow the borrower to be an LLC as they require the borrower to be a natural person (with a few carve outs for trusts, nonprofit entities, etc…). if the property is purchased by an individual and later transferred to a single party LLC where the initial borrower maintains the beneficial interest in the LLC and therefore the property, I do not think it would be considered a default event under the due on sale clause. If it was transferred to an LLC which they do not retain the same beneficial ownership, it could be considered a default and yes, then transferring back to the individual would cure the default.

    There are however several other portfolio loans which are available to finance into the LLC directly along with a personal guarantee of the member. The terms maybe a bit less attractive as the loans do not have a government guarantee as Fannie Mae/Freddie Mac has, but they are available (ie.. 30% down, rates in the 5’s)."

    So in summary, let me say this... I think the question can be resolved going forward by everyone that is an investor start using their power team members at a higher level.   Some of the knowledge to make decisions on this question should start with VESTING knowledge in general, then mortgage knowledge specifically having to do with investor loans for residential finance.   Talking with your broker and/or underwriter, the things can be clarified quickly.   Then, certainly any information learned, given or received should be shared with a real estate attorney and tax strategist/accountant that helps with asset protection and tax strategy.   

    Hope my comments are helpful.

    Thx,
    Coach Collard

    0Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    9y

    Thanks much, @Mark Collard. Very helpful.

    After many different comments and point of views (some helpful, some nice, some not-so-nice), I've realized that it's possible everyone's read or heard the same things I have anyway. And have had their own unique experiences (positive or negative). Not just with LLCs, but in REI (heck, in LIFE). So I've decided to just go ahead and flip a coin.

    0Reply
  • Mark Collard
    Investor · Las Vegas, NV · Member since 2014 · 31 posts · 38 votes
    9y

    @John G.

    Nice.   Decisiveness and quick to action will serve you.  I'm glad my share was helpful.    Regards, 

    0Reply
  • Vidit S.
    Rental Property Investor · NY · Member since 2018 · 78 posts · 15 votes
    7y

    @John G. Bringing this up again. I am in the same situation as you were and looking to start building my RE portfolio but have decent personal assets at stake. Did you end up forming an LLC or went with an Umbrella Insurance or both?

    0Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    7y

    Hey @Vidit S. - I went with a $1M umbrella policy that covers the property and me, personally. But if you have significant personal assets, I'm thinking this may not be best for you. I'd consult your attorney. I'm almost positive he/she will recommend you form an LLC.

    I think your best bet is that you find someone in a similar financial situation as yourself and chat with them on what they did.

    0Reply
  • Vidit S.
    Rental Property Investor · NY · Member since 2018 · 78 posts · 15 votes
    7y

    @John G. - Ok thanks. As your portfolio grows, are you looking to turn these properties under the LLC? Also did you get any liability insurance for the property as well?

    0Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    7y

    @Vidit S. Yep. Once I have enough equity that I'm an inviting target for litigation. The plan is to form a "parent" LLC*, then "subsidiary" LLCs in each state where I own properties.

    *Delaware, Wyoming and Nevada all have highly pro-business climates, with low tax rates assessed on business assets and privacy protections on public filings. - https://info.legalzoom.com/form-llc-various-states...

    0Reply
  • Rik Patel
    Real Estate Agent · Miami, FL · Member since 2018 · 132 posts · 25 votes
    7y

    @John G. @Vidit S. I ran into this exact problem when purchasing my Orlando property last year. What ended up happening was we kept the LLC and got a great interest rate (below 7% ) for a residential property from Wells Fargo.

    What I'm going to do is buy properties without an LLC just use umbrella insurance as protection. Trust me, I got overwhelmed with the amount of opinions I received so I just decided to stick with one avenue. Everyone has great advice in this thread, it's completely up to you how you want to proceed!

    0Reply
  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    7y

    I do bring this up a lot, but due to the number of opinions on the matter many browse past this concept. There is a way to still have access to the financing options that you get by purchasing in your own name while also getting the protection offered by an LLC. You don't have to pick one or the other. I work with clients across the entire USA to provide them the protection they need, while keeping their financing options open.

    The lender shouldn't be limiting your own safety and protection. But it is up to you to chase down the options and protect yourself.

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    0Reply
  • John G.
    OP
    New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
    7y

    @Rik Patel - I went the umbrella insurance route as well.

    0Reply
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