Due on sale clause question!

[David S.]

How do you guys usually go about making sure your lender doesn't have a problem with you transferring a property into an LLC or other entity? From what I understand this usually is never really a problem but is there some way you can do it safely such as getting some sort of written letter of consent from them?

[Jeff Copeland]

@David S. - It makes perfect sense, actually (the following is pieced together from my posts in other threads on this topic, which are abundant (the threads, no my posts!).

Residential loan products are for individuals, not business entities.

Legally and ethically, you have two options:

1. Put property in LLC's name, and use commercial financing options (which are not at all competitive or comparable to residential loan products).

2. Take advantage of (still historically low) residential interest rates and 30-year fixed rate financing, and keep the property into your own name. 

It took me all of five minutes to find multiple examples of other BP members who have had their notes called by the bank based on the Due on Sale clause:

https://www.biggerpockets.com/forums/50/topics/386043-bank-called-my-due-on-sale-clause

https://www.biggerpockets.com/forums/83/topics/190300-due-on-sale-called-what-now

https://www.biggerpockets.com/forums/311/topics/183825-due-on-sale-clause-was-called-by-bank

Know the risks if you decide to go that route.

Changing your insurance impacts the situation:

1. You have to update your insurance policy, otherwise you are uninsured

2. Your insurance carrier is supposed to report to your lender any changes in the policy (the lender is a "named insured" on your policy)

It's not difficult to change over your insurance. But in doing so, you are more likely to tip off the bank to the title transfer.

When using residential financing in your own name, the key is to carry very good liability insurance.

What many people don't realize is that liability insurance not only insures you for losses up to your specified policy limits, your insurance carrier also has a "duty to defend". Meaning, If I claim I stubbed my toe on the door step of your rental property and I'm owed $5 million for the loss of my pinky toe, your insurance carrier steps in and says "Hell no, we'll give you $50 to cover your copay at the walk in clinic...Have a nice day and be on your way." And they will go so far as to fight that battle in court (or settle) on your behalf. So solid liability insurance is better protection that most people realize.

All the talk about "just finance in your name, and then immediately put the property in your LLC's name" is not legal or ethical, and every mortgage note has a due on sale clause which would allow the lender to call your note due immediately. Maybe you'll get away with it for a few years. But what about 10 years from now if mortgage rates are at 9% - do you think your lender might have some incentive to call your note then? Best case - you just refinanced out of your 4.25% 30-year fixed loan at your new rate of 9%. It's a risk you need to be aware of if you try to cheat the system.

Hope that helps!