Getting a Conventional Loan Under an LLC

[Lauren Hogan]

Buying a property that will eventually be owned by a LLC, as "child" of a series LLC. There are two owners, however, for the purchase of the property - one owner is paying all cash, the other owner will be financing their half - splitting the property 50/50 for ownership.

For the owner financing, what is the option(s) for getting a conventional loan that will then be quitclaimed to the LLC?

Can the owner financing their half get a loan for 50% of the property purchase price without including the other owner? Or would the loan need to be with both owners, putting a large % for the down payment, then quitclaimed to the LLC with an operational agreement that covers the split?

Any advice on either the loan portion or the LLC portion is appreciated.

[Andrew Postell]

@Lauren Hogan first, how the heck did you "sticky" this conversation? I've always wondered about that...

Now, your questions almost should be separate posts since would could spend hours on each but I will try to summarize them separately. :

1. What are options for conventional lending changing to LLC?  - Let's peel back the curtain here a bit.  The ultimate item that most people are concerned about when doing this is the "due on sale" clause.  Now, most probably have not even read it.  And I don't blame anyone for not reading legal wording of notes but the Fannie/Freddie version does contain 2 important elements in the "due on sale" clause:

• MAY - this is a really important legal word.  The lender "may" call the note due.  And since it's optional...that also means that the lender "MAY NOT" call the note due.  Lenders make a lot of money on mortgages.  Like, A LOT.  They are not going to jeopardize profits by calling your note due.  The other element with "may" is that if a lender were to call your note due, they would have to take your "performing asset" and change it to a "non-performing asset" on their own balance sheet.  If a lender does this to much, that starts to affect their own credit rating!  Thirdly, do you remember when all of those people were protesting banks during the housing crises?  When people were getting foreclosed on because the lenders had them in loan that they couldn't pay?  And that's when they were being foreclosed on for not paying...could you imagine the public backlash if a lender starting foreclosing on people that were paying on time?  Wow.  Forget it, they would be ostracized.  Now, if you don't pay on time, you better believe they will be exercising that clause and it does help them foreclose on you faster.  If you pay on time, they are happy.  So just make sure you pay on time.

• 30 days - the other element to the "due on sale" clause is that the lender MUST provide you AT A MINIMUM of 30 days to rectify the scenario if they enact this clause.  So even if they do ignore all the above items....they still must provide you ample time to fix it.  However, if you are owner financing, this will be pretty challenging since you don't actually OWN the property anymore.  There are still ways around it but you should certainly research owner financing thoroughly and specifically lean on the "lending against a note" concept to know how to solve this if it were to occur.  Lots to know here for sure.

2. Does the owner financing get split? - The short answer to this is no.  Most transactions will have 1 loan per property....maybe you could get a small "second lien"....but in most scenarios you would have 1 loan.  You are your partner would need to discuss this with your lender AT LENGTH.  What's best here....both signing?  Using a commercial loan and having your company sign?  Only one of you signing?  And there are pros and cons to all of those scenarios.  So please get with the lender that has you prequalified and discuss this so you know ALL the good and bad to each of these.

*WHEW* Hopefully that wasn't too much but feel free to ask anything additional if needed.  Thanks!