New LLC purchase power?

Question

Hi everyone,

I'm starting out in real estate and I'm going to create an LLC. I don't know a lot about entity structure yet - still in the learning phases, but would a lender finance a new LLC with no credit history for a single or multifamily home? My current plan is to mortgage either SFR or MF in my name then through an attorney sell it to my company for $1. Am I accurate in my thinking? I have a feeling its somehow not that simple.

Thanks,

Scott

Account Closed · Answer

Research as much as you can on BP about business entities and various structures. You will find a wealth of information and possibly some additional direction. These inquiries are what brought me to the forum.

I can answer your question(s) based on my research—you should however seek additional help from a professional and tap into other resources here on BP (e.g. threads, articles, blog posts, podcasts, etc.).

Answers:
Traditional banks likely won’t lend to an LLC without a personal guarantee and if they do, it would unlikely be a conventional product or eligible for delivery to Fannie Mae (read find a portfolio lender).

Selling your property for $1 to your LLC might trigger a due on sale clause in your mortgage agreement. You can key word search these various topics and probably get more information. Happy searching!

Anil Samuel · Answer

Has anyone used Hawkeye Management in New Jersey?  This may be an option for you, @Scott Arno.  When I spoke to them they said I could get an unsecured business line of credit from $25k-100k.  The only hitch is you have to setup a credit monitoring service with them for your personal credit, then I think it eventually switches from being backed by you personally to the entity's credit.  I wonder if you can really build business credit this way or should you just get business credit cards and build it that way.  Hawkeye apparently reports to Dun & Bradstreet.

Scott Arno · Answer

Great points about the loan brokers, thank you everyone and I'll definitely be doing my research slowly but surely.

@Jon Holdman I thought a portfolio lender might come into play here. I understand refinancing a mortgage can be done to pay off a balloon payment mortgage when due. If that option was all a portfolio could offer for a buy and hold property within an LLC where would you suggest finding refinancing options to make the payment when due - the same portfolio lender possibly, based on how creative they are, or a traditional lender?

Jon Holdman · Answer

Transferring a mortgaged property from your name to an LLC WILL trigger the due on sale clause.  No "might" or "could" involved.  Sell it for a dollar (unnecessary) or just deeding it over doesn't matter.  Its the change in ownership that triggers the DOS.

If you want to the LLC to own the property and get a loan that's very possible.  You will need to find a portfolio lender that does that type of loan.  It will have commercial terms, such as shorter amortization periods, balloons, ARMs and such. You will likely have to give a personal guarantee.  But its very possible.

OTOH, if you want 30 year fixed rate loans to get started you'll have to hold in your own name.  Lots of folks do transfer to LLCs after getting the loan, but that absolutely does violate the DOS clause.  Now, if your loan gets called you may be able to transfer it back and avoid the foreclosure.  And, at least for now, the risk seems low that the loan would be called at all.  If interest rates rise in the future the risk may increase.

LLC ownership is part of an asset protection strategy.  If you have lots of assets you should discuss all the details of your situation with an attorney and come up with a solid strategy.

Katharine Chartrand · Answer

Typically people have to get a mortgage on a SFR in their own name and then deed it to the LLC. I don't believe it is really a sale, but your instinct to involve a lawyer is a good one. This transfer could trigger the due on sale clause in the mortgage, but from what i understand the banks don't generally enforce that.

The lack of credit on a new LLC may be an issue, but that hasn't been the problem for me. They are going to ask you to personally guarantee the loan to the LLC. However, the types of loans available for commercial entities vs individuals are entirely different.

At least one bank I talked to simply didn't have a box for an LLC buying a single family residence...

In my experience, you have to sit down with a very good mortgage loan broker and a very specific situation to find out really what your options are.  The LLC with no credit may be a non-issue if the type of loan they have allows you to personally guarantee it. But you still may get caught up on some issue you can't anticipate.

And to some extent you get different answers from different loan brokers. So if you haven't pitched your business to at least 3 brokers, you haven't done enough research.

New LLC purchase power?

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