Mortgage Loan Transfer to a LLC

[Ruchi Patel]

One of the lenders i am working on with buying a two family said once i get the loan under my name, a 30 year conventional said the deed of the property can be transferred to a LLC. Can someone please explain what the pros and cons are. How does this really help the owner?

[Scott Smith]

The LLC is essentially a "stop-gap" in regards to liability. If you get sued and have all those properties in your own name, then all those properties are at risk in the case of a judgment. If you are properly operating an LLC, then it is considered a separate entity from yourself: liability remains either in your LLC, or with you and any personal assets, depending on where the lawsuit originates. I usually break it down like this:

A good insurance policy is vital to cover the majority of a real estate investor's exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

After you have good insurance you need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely with no additional fees. If you're interested in using an LLC, this article also further explains the advantages of a Series LLC.

Hope this helps a bit. Most lenders are allowing these types of transfers, but the old strategy before these changes regarding the Fannie Mae updates was to introduce a Land Trust into your ownership structure of your property, bypassing the Due on Sale Clause

For a more detailed explanation of asset protection you can also refer to this article.