Can someone tell me if this is accurate regarding LLC's please!

Question

For my first deal I had to take title and mortgage in my own name as the bank would not lend to the LLC.

However I do keep all the property's income and expenses in and out of an LLC that I formed because someone told me that there is a difference between the "mortgage" and the "property" and that having the money flow in and out of an LLC would offer some kind of protection from my personal finances. Is this true or untrue?

I just now asked a lawyer if my second property should be in its own individual LLC again even though the mortgage and title will again need to be in my name and he informed me that this would really be pointless as it's who is on title that counts and that there really wouldn't be any limited liability at all. Is this true or untrue?

Andrew Postell · Answer

@Nicholas Lohr this is such a common area of discussion for most investors. Do not feel that you are the only one who has this issue. First a little background to help your understanding with this: A conventional loan (loans governed by Fannie Mae and Freddie Mac) do not allow you to close in an LLC name. A portfolio/commercial loan WILL allow you to close in an LLC name. Conventional loans have the best rates and terms. But portfolio loans are significantly more flexible. For example, a conventional loan will have around 5% rate in today's market on a 30 year fixed rate with 20% down. A 30 year fixed rate portfolio loan will have about a 7% interest rate. Now there might be portfolio loans that have a 5% rate but they might be on a 15 year mortgage...or they might be an adjustable rate...and in many cases with a rate like that they are BOTH adjustable and a shorter term. There are pro's and con's to everything right? So it's important to find a lender that has their own portfolio'd money to lend and to find a good conventional lender.Now, having said that, you can ABSOLUTELY change title after closing to your LLC on a conventional loan. Many investors do this action. They close in their personal name and then switch to the LLC on title after closing. There is an important clause for you to know about in your loan documents that many investors call the "Due on Sale" clause. This clause states that if the bank finds out you switched title they lender MIGHT call the note due. And if they do call the note due then they have to give you 30 days MINIMUM to fix the issue. And that's even if it's legal for them to do in your state. I hope this information helps.

Nicole A. · Answer

Yes, did your bank not tell you until the last minute they wouldn't lend to the LLC? They should have simply required that you personally guarantee the mortgage. Next time, make sure you get clear on that info and shop around if needed. So yes, not fun to hear, but with your name on the title, if for some crazy reason someone sued you, it'd be you individually since you're the owner of the house. As long as you do everything right, you should be fine. If even then someone sues you for something, you could be okay. Get an umbrella policy for yourself.At this point though, you need to determine if it's worth keeping your LLC or dissolving it. There's no point of it right now since it owns nothing and is only costing you.Oh, and no, a new LLC for every single property is overkill. Just more paperwork and more cost. At this point especially with fairly little equity, there's no need to worry much.

Kristina Inglis · Answer

@Andrew Postell I thought you COULD close with a conventional loan in the name of an LLC so long as the contract contains a personal guaranty clause. Is this not the case?

Kristina Inglis · Answer

Thanks Account Closed, I have heard that but I'm questioning the validity of it if there is a personal guaranty written in the contract. If even with a personal guaranty written in, the lender will still not lend to an LLC, my question is why? Also, why do you say that an LLC will not protect 100%? Can you provide some detail around that statement?

Levi T. · Answer

Nicholas Lohr Residential lenders normally wont let you take a loan in an LLC, or let the property be in a LLC, as the loan is secured by the property. A commercial lender on the other hand will, and you personally would guarantee the loan. Commercial loans cost a little more money and have shorter terms, normally a 20 years with 5 arm, but if your planning to really do some real estate investing, it's the way to go!Some people will quick claim their property into a LLC after or at closing to get around the residental LLC. The bank could call in the loan as the property switched owners, but I've never heard of it happening.An LLC will protect you, unless you commit fraud or breach the corporate veil by mixing funds (this includes using a personal credit card for business and personal), or doing something else you know you should not have been doing or should have been doing. Shell companies exist for a reason and do work, people who think otherwise, are just uneducated.IMO If your just going to own a few properties, you can go two routes. One LLC for each property, or just batch them into groups of properties by area/town/street. If your gong to get big, dozens, hundreds or even thousands of properties, batching is more common by investment, portfolio, or investing partners. If your self managing, you can also setup an LLC to be the property manager and accept funds from tenants while the property is in it's own LLC.. see now the management and the property are separated, one would have to sue one or the other, or both, which is not easy or cheep. You can take the LLCs and own it yourself, let another LLC own it, stuff it into a trust, o'yes it can be a endless maze of entities and owners that not even the best attornies in the world could pierce. Every LLC creates a junction that every an attorney would have to get approval from the courts to pierce the corporate veil, and approval means they have to show reason, normally fraud, for that to happen.

Andrew Postell · Answer

@Kristina Inglis yeah, sorry, you cannot close a conventional loan in an LLC name. This is a hard Fannie/Freddie rule. The bank has no say in that. It is not an overlay. If it is a conventional loan, that means it isn't even the bank's money, it's Fannie Mae or Freddie Mac's money. So they call the shots on that element of the loan. @Jon Pitcher I hope that explanation helps. For instance, if the lender does not sell their loans on the open market the loan will still be required to be titled in the individuals name because of the originating fund source...Fannie/Freddie. Feel free to ask more if you need. Thanks!

Jeffrey VanGilder · Answer

Straight from Modern Real Estate Practices(the newest edition) "When a person purchases real state that has an outstanding mortgage or deed of trust the buyer may take the property in one of two ways. The property maybe purchased "subject to" the mortgage or deed of trust, or by assumption of mortgage, in which the buyer assumes the mortgage or deed of trust and agrees to pay the debt. The tactical distinction becomes important if the buyer defaults in the mortgage or deed of trust is foreclosed. When the property is sold subject to the mortgage, the buyer is not personally obligated to pay the debt in full. The buyer takes title to the real estate knowing that she must make payments on the existing loan. Upon default, the lender forecloses in the property is sold by the court ordered to pay the debt. If the sale does not pay off the entire debt, the purchaser is not liable for the difference. In some circumstances, however, the original seller might continue to be liable. In contrast, a buyer who purchases a property in assumes the sellers that becomes personally obligated for the payment of the entire debt. If a seller wants to be completely free of the original mortgage loan the seller sellers, fires, and the lender must execute a novation agreement in writing. The novation makes the buyer solely responsible for any default on the loan. The original borrower is freed of any liability for the loan. The existence of a lien does not prevent the transfer of property; however, when I secured loan is assumed, the mortgage or beneficiary airy must approve the assumption and any release of liability of the original mortgagor or trustor. Because a loan may not be assumed without lender approval the lending institution would require the assumer to qualify financially, and many lending institutions charge a transfer fee to cover the cost of changing the records. Discharge can't be paid by either the buyer or the seller" Alienation clause- The lender may want to prevent a future purchaser of the property from being able to assume the loan, particularly if the original interest rate is low. For this reason, most lenders including alienation clause in the note. And alienation clause provides that when the property is sold, the lender may either declare the entire debt due immediately or permit the buyer to assume the loan at an interest rate acceptable to the lender. Land contract that involve a due on sale clause also limit the assumption of the contract. " Now I know you're looking at more info about an llc owning the property. And state laws differ so contact a real estate lawyer and ask them if you could have your llc assume the debt, granted you have financial capacity in your llc to purchase the property from yourself.

Jon Pitcher · Answer

@Kristina InglisI have heard the reason lenders cannot do conventional loans to an LLC even with a personal guaranty is because the loans cannot be packaged and sold on the secondary market or sold to Fannie/Freddie if the debtor is an LLC.

Mike Flora · Answer

Jeff explains it, but the due on sale clause can be an issue but my lender already knows what's going on and the lender has the right to call the loan due but they also want there money. If your making your monthly payments each month then the lender is happy. He has the right to foreclose on the property but what good does that do for them. It does happen but it's rare that a loan is called due by a lender. LLC has tax benefits and it does provide some protection for you in small claims where you have a chance to win. Some people will create an LLC in a different state from where they are doing there deals to make it much harder for lawyers to be successful to sue. California is very lax on the LLC protection and Nevada is the toughest. So some people have property in California and create an LLC in Nevada. Lawyers like to get paid and the harder it is to sue the more unlikely they are to take the job for there client against you. Done some reading on this but not an expert. If you have an LLC you have to keep keep up on your minute meetings each year and some other things otherwise your LLC is easier to be pierced by a lawyer. Depending on what your getting sued for the LLC will only offer you a certain amount of protection.

Wayne Brooks · Answer

To be clear;If the title is in your name, the mtg is irrelevant, and you "run the money" through your LLC, the LLC gives you No protection whatsoever.You can can Not get a conventional loan with an LLC as the buyer.Is the LLC worth it....not in my opinion.....just have good insurance, and an umbrella policy.