Due on Sale Clause

[Brandon L.]

Hi,

I am gearing up to transfer my rental properties into a single member LLC. These properties have mortgages in my name. I am aware that the lender could call the mortgage due but it seems to be extremely low risk. I am also aware that using land trusts can get around this but I am not convinced it is worth the hassle since the privacy benefits offered by a land trust are mostly lost in this particular situation. I have searched a lot on this website and others and a lot of the discussions get into arguments about whether the lender can do this, and if they do will a court allow it, etc. I am not interested in that. Instead, I am hoping for comments from people that have transferred real estate with personal mortgages into an LLC. And from those experiences, was the mortgage called due or not? How many properties have you done this with and how much time has elapsed? Thanks,

Brandon

[Russell Brazil]

I think the reason in recent history (since 1980) that it has been a low chance of the due on sale clause being called is because we have been in a perpetual falling interest rate environment. If we were to enter a rising interest rate environment (And we have to at some point right?) then I think it will become much more common, so a bank can force you out of a low rate loan and force you into a higher rate loan.

[Daniel Toshner]

I would love to here more comments on this...

[Joseph Hoot]

I too am interested in this. I just purchased property with a mortgage, was intending on using a quitclaim to transfer the title into an LLC, and then realized this due-on-sale clause. I've also read a little about the land trust idea (not that I understand it, just that there may be a workaround to do essentially the same thing and not trigger the due on sale). But here is an article from September 2015 which basically seems to suggest that those tactics are gimmicks and that the due-on-sale is still valid (http://johntreed.com/blogs/john-t-reed-s-real-esta...).

This leaves me a little curious what my correct entity can/should be. I can't afford to pay of my mortgage in full. But I would like anonymity from tenants + the ability to protect my personal assets/family from liability, hence the reason I wanted the LLC.

At this point, however, I'm not sure its worth the LLC. I may just take out a large liability coverage and let the LLC die on the vine in favor of being legit and not having the risk of any due-on-sale clause being invoked. Seems to be less risky, but also doesn't seem to separate the entities as much as I was hoping.

Any further suggestions?

[Dan Mann]

I agree with @Russell Brazil in that there is no motivation for the banks to call the mortgage due when the payments are being met and the interest is low, but once they go back up they MAY want to capitalize on collecting higher interest rates.

@Joseph Hoot I just happened to be listening to podcast 49 with @Amanda Han (CPA), her thoughts were there is no need for a LLC on passive income (rental income) if you only have a few assets. She recommended a LLC for active income such as wholesaling or flipping, because of tax advantages present with active income. I'm neither an attorney or CPA and your situation is different, but you may gain a better understanding listening to this podcast.

[Jonathan Dunn]

I am also in this dilemma. I need the asset protection of the LLC. I have two LLC's setup. One real estate LLC is a passive entity and the other is an active property management LLC that my first LLC hires to manage my own properties (Passive losses can only offset passive losses/Active offset active). My "day job" is being an anesthesiologist. I simply use real estate as an investment tool to lower my tax burden and as a primary retirement strategy. For this, I do want the LLC asset protection. I know many members state you do not need the LLC. However, in my case it is in my best interest to isolate my real estate assets from my career portfolio. Regardless, I still want to utilize the leverage of a mortgage instead of paying off every note. Rather than just "hoping" a bank won't call the note has anyone found a commercial lender with reasonable rates/terms for real estate investors such as ourselves?

[Robert Gilstrap]

@Brandon L. Not sure what you mean by privacy benefits of a trust being lost in this situation. The privacy benefits of a trust are never lost unless you open your mouth and tell someone who is behind the trust.

I own about 40 properties personally. I have 3 properties where the mortgages are in my personal name and the rest I bought subject to so the mortgages are in dozens of other peoples names. Every single property I own has been transferred either into an LLC or into a trust. Some I transferred as far back as 15 years ago so hope that helps on the due on sale thing. A bank will never call a loan due for a transfer to an LLC if you are making your payments. Even if they did you transfer it back to your name to satisfy them and your good again.

I always laugh that somehow everyone thinks banks are somehow connected by a wire to the deed room in every county in America and some alarm goes off when you file a deed changing to an LLC. Banks have no clue when this is done nor do they care. Banks are interested in one thing and one thing only; getting their payments.

@Joseph Hoot if you are going to transfer the deed and you have a title insurance policy you need to get a rider covering the LLC or else your title insurance coverage goes away on the transfer and you also would not do a quit claim ever if you want title coverage to continue. Must always be a warranty deed.

My personal setup is each property in its own land trust with the beneficiary of the land trust being one of my LLC's. I have about 12 LLCs spread across all properties.

[Michael Williams]

@Robert Gilstrap Hello Robert, I have always wondered if the Due On Sale Clause has ever been invoked. I'm sure it has been used some time in history, but your post has really taken my stress level down many notches about this subject. Thanks for the clarification and I'm looking forward to you accepting my Colleague request. Hint.

[Richard Nguyen]

I think that someone on BP, Serge had the Due on sale clause invoked recently. It has never happened to me but I will let others know if I do since the company Flagstar which did it recently is who has my loan now and I recently converted from my name to an LLC.

@Jonathan Dunn

I didn't think that real estate could be used to decrease your tax burden if you had another full time job/career. If I'm incorrect, I'd like to pick your brain on how you're doing this. I would try to talk to small community banks to see if they will work with you. I found one where I live who is giving me pretty good financing options since I've banked with them for 5-6 years and opened up several loans for investment purchases originally through my personal name but now I am doing them through the LLC.

[Tom S.]

@Richard Nguyen  Real estate absolutely can be used to decrease your tax burden if you have a full time career - the depreciation is the main reason why.  It will be listed on Sch E of your tax return, and let's say you make $5k per year after all rents and eligible expenses.  Then the depreciation is $10k per year, then it's a $5k loss against your taxable income.  Multiplied over a few properties and it starts to add up.

There are quite a few limitations, especially once you make over $100k per year the deductions start to get phased out.  Talk to a good CPA if you're acquiring properties and need to address the tax implications.

Hope that helps,

- Tom

[Alan Smith]

Fellow BP'ers,

I've been researching the due on sale clause this evening. Much of this will be discussed with an attorney in the couple weeks. I'm a bit torn on what direction to go with my first deal. My desire is to get an LLC setup to offer the appropriate protection to my family and other assets, but a lender won't finance at this point unless the mortgage is in my personal name, correct?

If I want to avoid the DOS clause, is the only other option a large insurance policy? But still my personal assets could be liable.

How have others proceeded from the get go to get protection that an LLC offers, but had a mortgage?

Alan

[Todd Austin]

As to the tax benefit limitations you are correct.  at a certain income level deductions and exemptions are phased out and you cannot use real estate losses to decrease your taxable income.  

However,  Depreciation and repairs will offset your income and if those costs are more than income then the remainder is used the next year and so on until the property is sold then the excess is used to lower your cost basis of the property when figuring capital gains.

As for the LLC question. I've heard it both ways..... The bank can and all they need is the insurance showing up in a different name to find out about it. If its privacy you need then go ahead and transfer title. if you get away with it great..

If you need the liability protections then go with a LLC. I have chosen a series LLC. All of my properties are in different series insulating them both from me and from each other property. I like to carry some degree of equity in my properties.

Todd

[Mark S.]

@Brandon L., what did you end up doing?  Any issues?

@Alan Smith , what about you?  

[Alan Smith]

@Mark S. Sorry for the delay. I ended up purchasing my first and only (rental) property a little less than a year ago. I ended up with a conventional $60k mortgage in my name on a $75k purchase offer. I spoke to my attorney I used on the sale about transferring into an LLC after the fact and he advised me that it was not worth worrying about it. He basically said that banks weren't going to make an example of me as a little guy when there are much bigger mortgages that they could go after. He also said if the bank called the mortgage due that we could simply transfer back into my name. I also figure that 20% plue equity in a property (I put more into the home during rehab) in a great area, the risk is incredibly low. If for some reason transferring back into my name didn't satisfy the bank, I'd take the equity to another lender who would finance it. No burning desire to start the LLC and transfer in at this point, but still may do so in the future.

Again, this is what I did and what my attorney told me. I'm sure some legal mumbo-jumbo could be stated about how his advice could be different based on someones personal scenario. 

[Mark S.]

Thanks, @Alan Smith.  That’s basically what my attorney told me as well, but the only thing that didn’t come up in our conversation was the possibility that the bank won’t let me cure.  I’d hate to have to refinance at a higher interest rate, but I guess we’ll cross that bridge if/when we need to.  Thanks for responding.  I appreciate your feedback and sharing your experience.  

[Brandon L.]

I haven't signed on in a long while so sorry for not responding to the questions to me.  

@Richard Nguyen my thought is the privacy would be lost because I would have several properties that used to be in my name and have since been transferred into trusts.  Those dots would be somewhat easy to connect.  At least that is my thoughts on the situation.

@Mark S. Sadly between family and my primary job I let Real Estate go to the back burner so I quit growing for a while and lost focus on getting an LLC setup. I am refocusing this year so I am about to jump back into the decision on what to do.

[Matt Eklund]

From the Fannie Mae servicing guide regarding transferring to an LLC allowable exemption:

https://www.fanniemae.com/content/guide/servicing/...