LLC and the due-on-sale clause

[David Pascual]

I've been reading a lot of debate where people argue about whether one should or shouldn't put their property in an LLC , that isn't what I'm asking, what I would like if to know is if investors who put their properties in an LLC do it without letting their lender know that they have OR if they disclose with the lender that they plan to move the property to an LLC (or maybe you try to get agreements without the due on sale clause?) . I was reading an earlier post about a person who told the lender they were moving the property Into an LLC and they basically told him the bank wouldn't allow that. I would imagine that many banks would tell the same thing to everyone. The clause is there for a reason. I know that the due-on-sale clause is not really enforced in many areas but why don't banks enforce it? Is it because they don't know or they don't care?

[Luke H.]

yes, the clause is there for a reason. if you have the deed then do it and see what happens (keep me posted to!). when i use a mortgage I don't get the deed until i finish paying the loan off. might be different for you. 

Note: this is not legal advice, for entertainment purposes only.

[Russell Brazil]

We have been in a perpetual falling interest rate environment for 30 years. I think as we enter a rising interest rate environment there would then exist the conditions for banks to be more incentivized to use the due on sale clause. 

[Clayton Plank]

They don't enforce it because if you do not pay them the sum of the loan then the have to foreclose. Are you going to continue to make the payments knowing they are trying to take the property back? No so they then began to loose that money. Then when they get it back after a year or more is the property even worth what the loan amount was?

[Andrew Postell]

@David Pascual I have been lending for 7 years. I don't know everything but I have not had any of my lenders use this clause. I have had other people say, "I knew someone that had it happen" but as I've tried to inquire about these incidents it always seems that it's never happened. My customers buy in their personal name and switch the deed over after closing. These are customers who use conventional loans. We do it each and every time. Portfolio loans allow you to use the LLC on deed even at closing. So if there is a real concern for you then always go portfolio. Remember, the bank doesn't want your property. They want their interest on the loan. As long as you pay on time I've never heard of a bank caring who's on title.

[Immanuel Sibero]

@Andrew Postell

Great info Andrew, thanks.  I do have a few of questions.

Once the deed is transferred to the LLC, legally the property is now owned by the LLC but the loan is still under your customer's name, correct?

Who then pays the mortgage payment? The LLC? or the customer?

Obviously, you do not record (book) the loan on the LLC's books, do you?

Thanks... Immanuel

[Andrew Postell]

@Immanuel Sibero you are correct. Once you deed it to the LLC, the LLC owns the property. The mortgage will still be under the individual's name until he/she refinances or pays the loan off. It will report on his/her credit, etc. Technically the customer pays the mortgage. But normally the bank won't question what name is on the check/money order/bank account deposit because they just want the money. So if you want to setup an automatic deduction from the LLC account to pay the mortgage you can do that. I have people who have others pay their mortgage for them. As a bank we don't care as long as we get the money. If the payment is late - then we care. As far as recording the mortgage, the portfolio loans can use a LLC for the mortgage. A conventional mortgage will not - it is a requirement by Fannie Mae/Freddie Mac that the mortgage is under a personal name. Since a portfolio loan is governed by the bank and not Fannie/Freddie it's up to the bank itself on how they would want to record it. I've seen it go either way with portfolio loans. Private message me with any other information you would need. Thanks!

[Immanuel Sibero]

@Andrew Postell

Thanks. It's good to know that banks won't normally question who pays for the mortgage. However, being a newbie, I'm still stuck with the bookkeeping on your customer's side (i.e. I'm in this exact position with my rental houses). For example, so I transfer the deed to my LLC, my LLC's balance sheet now shows the houses under Asset. Every month I show the LLC collecting rents, paying for expenses and paying the mortgage payments, but the balance sheet does not show the conventional loans under Liabilities. So effectively the LLC's balance sheet shows as if the LLC owns the houses free and clear (i.e. since the loans do not show up).

Now alternatively I could book the loans on the LLC's books and have them show up under Liabilities and everything would look good, EXCEPT the issue here (at least in my head, maybe this is not an issue...lol), the LLC would be showing the conventional loans belonging to ME. Isn't this co-mingling personal finances with the LLC finances? I'm thinking of a scenario where a lawyer is trying to prove that I have failed to separate business and personal finances.

Do your customers show the conventional loans on the LLC balance sheet?

Thanks... Immanuel

[David Pascual]

@Andrew Postell 

Andrew, so hypothetically speaking lets say i partner up with a friend where i find a deal and my partner puts the mortgage in his name since he was good credit but both our names are on the title. i put the property in an LLC, will it matter if i am the one who makes the mortgage payments at this point?

someone above was talking about not having the deed to a home, does that come to play in this scenario at all? will that cause issues?

[Andrew Postell]

@David Pascual what you are describing is probably best suited for a business entity and a portfolio loan.  If you have a partner then forming a company is likely the best method of keeping the percentages of ownership open and easily trackable.  I would certainly suggest consulting an attorney for this type of question for the proper guidance.  From a lending perspective if there was a business entity it would be unlikely that a business would be able to support a 30 year note at the initial formation of the business.  So likely a person will have to use his/her personal credit and income to qualify for the mortgage even if using a portfolio loan.  A portfolio mortgage can keep the business on the mortgage at inception and on title at inception.  I would lean on that route over a conventional loan if you have a partner.  A portfolio loan will carry a higher rate but all parties will be protected in the most effective method.  Hope this helps.

[Andrew Postell]

@Immanuel Sibero your question is a little outside of my scope of expertise.  I would suggest to ask it as a different topic under a different forum area to get better responses.  That way we aren't taking over Mr. Pascual's post here.

[David Pascual]

@Andrew Postell

Ok I see. would doing this process of using an LLC work with a conventional loan as well?

[Immanuel Sibero]

@Andrew Postell

Thanks for your help. I have been going to real estate meetups and the next one is supposed to cover the tax aspects of real estate investing. I will have my question ready. Looks like the obvious solution is going to commercial or portfolio loans as you have suggested before.

@David Pascual

Great topic. Looks like your last question is what I am somewhat stuck on. After @Andrew Postell explanation earlier in the thread a conventional loan would not work with LLC because it's not allowed by Fannie/Freddie.

Thanks... Immanuel

[Andrew Postell]

@David Pascual for the conventional route you will have to close in a person's name and title it in a person's name. Then switch to the LLC after closing. So if the person who's name is on title doesn't switch it to the LLC then that would be an issue. I don't know what the relationship is like between you and your partner but to avoid potential problems like this just closing in a portfolio loan would avoid it entirely. Hope this helps.