HML wants property in LLC, bank skittish of newbie LLCs. Catch22?

Question

Hey BP,

I’m about to close on my first property which my wife and I plan to BRRRR. The property was a lucky find at auction but it will need a great deal of work to bring back to life.The original plan was to purchase with a combination of cash and HML.

Currently, we are at the stage in the process where both the seller and I have signed the contract and the title company is doing its thing. However, I’ve run into a bit of a snag. The HML I’d found  requires an LLC.

I’ve read here on the forums and blogs that many banks are reluctant to refinance a property under a LLC that hasn’t shown a history of positive income. One strategy which I was planning on adopting was to simply transfer title into the LLC after refinancing. Yes, I’m also aware of the due-on-sale clause  and am willing to ask forgiveness over permission. ...but this doesn’t jive with the HML.

The executed contract already has my name as the buyer. What are my options? It seems I’m stuck between a rock and a hard place. ...or, a bank and a hard money lender. Do other HMLs lend to individuals, should I be looking for another means of financing, or is there another method that will be attractive to all parties I haven’t thought of?

Thanks all!

Jaysen Medhurst · Answer

@Aaron Hale, most banks are fine with the property being owned by an LLC as long as you personally guarantee the mortgage.

The due-on-sale clause is less of an issue now, as Fannie/Freddie updated their rules a while back to specifically allow a property title to be moved under an LLC.

As far as the contract, that shouldn't be a big deal. Just tell your lawyer what you want to do and they'll advise on the best way to revise the contract.

Aaron Hale · Answer

Update: After some searching, I have found a HML willing to lend to me vice a LLC. In fact, I’m getting a better deal on the interest and origination. However, the property is in Ohio and I had been planning on refinancing with Fifth Third. My next objective will be to discuss this with their loan officer and find out about transfer fees. Thanks for all the great advice.

Andrew Postell · Answer

@Aaron Hale this isn't a big deal.  You should get prequalified from a lender though to make sure that you can refinance.  Ask that lender what their policy is on this sort of thing.  Worst case scenario usually is that you would just change your title to your name at closing on the refinance...then you can change it back right after...if you are using Fannie/Freddie money.  HOWEVER, if you are doing this on a property in Florida you will pay a transfer tax.  It's some % of the loan balance.  New York has a transfer tax too.  So ask your title company what the transfer fee is if the property is in Florida.  Good luck!

Will Gaston · Answer

@Aaron Hale small local banks will absolutely lend to an LLC (and will likely require a personal guarantee as stated by @Jaysen Medhurst noted).

The catch there will be the shorter amortization of 15 or 20 years with a slightly higher interest rate. Buy it in an LLC and re-fi it in an LLC through a small local bank or credit union.

Bob Okenwa · Answer

Not all HML's require a property to be titled under and LLC. Try finding another HML.

Jaysen Medhurst · Answer

@Wes Thompson, this is worth a discussion with your attorney. First, to find out what the clause actually means (the bank employees are not lawyers). Second, to see if the clause is enforceable. Just because something is in a contract/ document doesn’t mean it can actually be actioned.

Wes Thompson · Answer

So folks, I am going through this attempt to transfer from personal ownership to an LLC now.  I have 7 investment properties in my name, and I've called two banks (Fifth Third and Arvest that collectively hold 4 of them.  They are both telling me that I have to refinance in order to actually do a successful move to an LLC.

They are both telling me that "per the terms of the note", if title is transferred it is reported and they can require the loan to be "paid in full", and that they WILL require that, thus forcing me to Refinance.

Here's where the BP community could really help.  Since I have significant debt tied to these properties, how high is this "refinance risk"?  I don't get the LLC protection I need if the properties continue to be held in my name -- but I also incur significant "other" risk if I have to Refinance at a much higher rate.

It seems like I'm "damned if I do, and damned if I don't" -- I either pay an IMMEDIATE cost of higher interest rates on each property via a set of Non-recourse loans -- OR I don't move my homes to an LLC structure and then I risk Negating ANY value from the LLC structure itself.

My impression is that the number of individual investors that truly maintain the LLC structure and format correctly must be small -- because the number of hurdles to correctly maintain the Corporate Veil across bookkeeping, asset ownership, and legal structure are high...

John Thedford · Answer

The HML may waive the requirement if you provide them with a business purposes statement.

HML wants property in LLC, bank skittish of newbie LLCs. Catch22?

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