Need expert advise. A partner and I are in the process of buying a property. I live in New Jersey, my partner in Denver and the property is in Denver too. Since this our first property together, banks are not willing to provide financing unless the property is deeded to the person vs LLC.. The plan is for him to purchase the property and Quit Claim it over to the LLC. I understand only the rights and ownership transfer, and the loan stays in his name.
Can someone please let me know if that sounds like a plan or if there are any risks involved.
Real Estate Agent · Littleton, CO · Member since 2014 · 74 posts · 45 votes
6y
I'm guessing that you're talking about a traditional lender. A traditional bank will look at their liability and want there to be a person that could absorb the liability should something go wrong. Some credit unions have a little more relaxed rules. Most HML you talk to will want you to limit your liability by placing an LLC on title while personally guaranteeing the note.
Your lender might have a problem with your approach. Depending on how the note is written, they could invoke the due on sale clause of your mortgage. I'd run that one past a RE lawyer just to CYA.
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
6y
@Mallika Akkala, the cleanest way will be to title the property in the LLC and speak to local and regional banks or credit unions. They tend to be more open to making small commercial loans. You and your partner will likely have to sign a personal guaranty, but the mortgage will be in the LLCs name, so it will not show on you or your partners credit reports.
What you are mentioning has been done time and time again. Technically, it can prompt the mortgage to accelerate and be due immediately, but there have been people in these forums saying they have done it on 40 properties and never gotten a letter from their lender to pay up.
Rental Property Investor · DFW, TX · Member since 2013 · 953 posts · 910 votes
6y
@Mallika Akkala
If you want a traditional loan you would have to go the route you are mentioning. One thing to note is don't use a quit claim deed. It's the worst type. It will depend on the state but a general or special warranty deed is much better and you wont have the title headaches when you go to sell.
If you get a commercial loan you can title it into the LLC but the note will be personally guaranteed and the interest rate will be higher. Go with the first option and as long as the payments get made, the bank won't call the note.
@Mike Wadsley Thank you for your inputs. Yes, we were looking for a traditional Lender. However, planning to contact few credit unions or smaller banks to see if they can accommodate our plan (lending to the LLC).. Really appreciate if you have any referrals for the banks and RE Lawyer.
@Evan Polaski Thanks a ton. I believe, that's the best option.. However, if we find a bank that finances to LLC, my partner will be present during closing and i will be added to the LLC later. Considering the covid situation, I wasn't planning to fly to Denver as the closing is in the next 20 days. Not sure if we can do it that way. I know that this is something a RE Lawyer can answer, just wanted to know if you are aware of best way to do this.
@Peter M. Thanks a lot for your response. We were not aware of issues we might get into in the future by using Quit Claim Deed. Great to know before we started. Will research more on this.
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
6y
@Mallika Akkala, changes to ownership of the LLC issues will be outlined in the loan docs. As for being present, many title companies are doing remote closes, so you can likely get around the need of having to fly in for closing. Ironically, the bigger the deal, the less likely you need to be present for any closing. Typically, if you can get things notarized locally, you can sign in your jurisdiction and overnight docs to Denver title co, since they will typically require originals of certain docs before the closing is formalized.