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Updated over 6 years ago, 07/23/2018

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Bhaskar Pandey
  • San Antonio, TX
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Mtg Due-on-Sale? - Any strategies for moving rentals in to LLC?

Bhaskar Pandey
  • San Antonio, TX
Posted

I own two SF rentals in San Antonio, Texas and before I buy a third one, as per the popular suggestion, I wanted to move both homes in to an LLC for asset protection and minimizing personal liability. However, as I started researching the process, I came across the terms 'due-on-sale' in this blog post (https://www.legalzoom.com/articles/how-do-i-transfer-title-of-a-property-from-a-person-to-an-llc) which I understood as the remainder of loan would be due in full if I attempted to transfer the deed over to the LLC. What I've read so far is that not many (or none of the) lenders would be willing to let me transfer the deed over to the LLC without calling it due. I'd like to hear from you successful RE investors who have been able to do this and find out what my options are?

So far, I've come up with the following as my options:

1. Continue to keep the properties in my name and get a large umbrella policy (dwelling policy) to cover any liability that I may be subjected to.

2. Refinance as a commercial loan (higher interest rate, larger payments, points etc.) - more expensive overall.

3. Land Trust with myself as trustee and LLC as beneficiary (http://clintcoonsblog.com/2011/01/26/transferring-real-estate-into-your-llc/).

Can anyone having done this before provide their experience?

Thanks!

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Matt K.
  • Walnut Creek, CA
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Matt K.
  • Walnut Creek, CA
Replied

Supposedly they won't call it due if your in good standing.... it could happen though. But I've never understood the thought process of doing something (LLC) to reduce risk but doing it in a way that you increase risk to get there. Plus I don't see how getting it in your name then transferring to the LLC wouldn't pierce the corporate veil and make you liable anyways... basically stripping you of the protections of a LLC.

What about just getting umbrella policy (likely cheaper than LLC related costs) and continue to do business as usual? Not much to sue for if you don't have large amount of equity in the house you're renting and likely not something your insurance wouldn't be able to mange. 

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Edward B.
  • Investor
  • Midlothian, VA
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Edward B.
  • Investor
  • Midlothian, VA
Replied
Number 3 will not negate the due on sale clause. The way most are written you will still be in violation. You are just obscuring what you are doing. I also heard recently that at least one major lender already has a system in place to question all loans that have been transferred to a trust in order to determine if the due on sale clause has been violated if they decide to start exercising their right to accelerate the loan.
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Bhaskar Pandey
  • San Antonio, TX
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Bhaskar Pandey
  • San Antonio, TX
Replied

Thanks for the replies, guys. What would you recommend doing instead? I’m new to RE investing and want to safeguard myself while being as efficient as possible. 

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Dick Stevens
  • Rental Property Investor
  • Haverhill, MA
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Dick Stevens
  • Rental Property Investor
  • Haverhill, MA
Replied

Just get a good umbrella policy.  

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Chris Seveney
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Chris Seveney
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ModeratorReplied

I 2nd the get a good umbrella policy.

  • Chris Seveney
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Matt K.
  • Walnut Creek, CA
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Matt K.
  • Walnut Creek, CA
Replied

third, and don't invest in the lowest possible priced homes.

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we have 2 rental properties and I called the mortgage holder in both of them, and both told me that I could move them to a LLC and it wouldn't cause any problems.

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Caleb Heimsoth
  • Rental Property Investor
  • Durham, NC
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Caleb Heimsoth
  • Rental Property Investor
  • Durham, NC
Replied

Some lenders let you do this and some don’t. I plan on doing it just with the ones that allow it.

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Bhaskar Pandey
  • San Antonio, TX
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Bhaskar Pandey
  • San Antonio, TX
Replied

Thank you all for your replies. I feel like the best way is to call my lenders and ask directly. As for the LLC, it would be two partner/owners and I would feel safer if the homes were moved over to it.

I will post my findings here once I have called the lenders ( in about a month as I’m in the middle of a move).

Cheers.

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Stacey Paulin
  • Investor
  • Atlanta, GA
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Stacey Paulin
  • Investor
  • Atlanta, GA
Replied

Based on my research it would be a mistake to be the trustee of your own trust. The whole point of a land trust is to provide anonymity. The deed that you will record at the courthouse will have the trustee name on it...i.e. you. So there will be no anonymity there. 

Now, your LLC can serve as both beneficiary (great asset protection), and co- trustee. This way the property is in the name of the trust and the LLC has beneficial interest. The trust can be listed on the deed and you have both anonymity and asset protection. You also get around the due on sale clause. Furthermore, if the LLC as co-trustee serves in a management capacity you avoid issues with IRS filings. I'm not a lawyer or CPA. Just sharing what I've learned.

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Costin I.
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  • Rental Property Investor
  • Round Rock, TX
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Costin I.
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  • Rental Property Investor
  • Round Rock, TX
Replied

@Bhaskar Pandey Do you have substantial equity and/or cash flow from these properties already? FYI, the mortgage note itself is a form of protection.

Why risk the DOS or refinance commercial with a higher rate if not needed?

You still need to worry about insurance, maintenance, property management, etc. regardless. Umbrella insurance is supplemental to regular insurance. Maintenance and proper property management is another form of asset protection. Same with LLC, trusts and other legal asset protection structures/strategies which are a form of insurance against litigation. None give you everything and you still need to learn how to employ them all in your RE investing toolbox, how and when (!) they complement each other and work in conjunction with the rest of tools (like marketing, financing, rehabbing, hiring, etc.).

With an LLC you need to proper maintain the LLC.

And I see you mention "the LLC it would be two partner/owners and I would feel safer" - can you elaborate on that? If you are talking about partnering with someone, that would have its own set of problems and you might want to be careful before forming an LLC with partners and putting assets into it.

  • Costin I.
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    Costin I.
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    Costin I.
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    Replied

    I realized my answer was more to your post (because you are mixing multiple things in there), than to your question.

    For more DOS info, you should read this: The truth about getting around due-on-sale clauses. Also, these posts:

    Bank-called-my-due-on-sale-clause

    Due-on-sale-clause-was-called-by-bank

    Due-on-sale-clause

    While unlikely (and you can also check with the lender prior and get their approval) and many investors claiming it never happens, that might been true in the past, with interest rates going lower and lower. But that might change in an environment of raising rates and/or if the lender collected most of the interest already (since you pay big chunks of interest in the first part of the loan lifetime) (and why wouldn't the lender have an interest to redeploy an old 3% loan into a current rates 6%+ loan??).

    Also, you can transfer the deed to an LLC or trust, and if push comes to shove and they hit you with the DOS clause letter, you'll just transfer it back to your name and problem solved. And you can play that game till they get tired.

    Just beware of the risk associated with transferring using a Quit-Claim-Deed:  A person receiving a purported real estate interest via a quitclaim deed may receive no legal right to the property whatsoever. If the person seeking to transfer real estate with a quitclaim deed has no legal interest, nothing legally is conveyed. In the absence of title insurance--which is not available for a quitclaim deed--the person receiving the quitclaim deed has no legal recourse because the deed itself states that only the interest of the grantor, if any interest exists, is conveyed.

    Whether title insurance terminates by transferring real property depends on the type of policy, and how “insured” is defined in the policy. You take a risk which could result in cancellation of your title insurance and complete loss of your real property without compensation in the event that a title issue regarding your real property arises. Contact your title insurance company to determine coverage and if your policy does cover transfers , and when or how.

  • Costin I.
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    Robert Gilstrap
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    • Cartersville, GA
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    Robert Gilstrap
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    Replied

    @Bhaskar Pandey First of all you don't ask you do. Of course a mortgage company is not going to grant you permission to move it to an LLC or trust but why would you ask in the first place? As far as violating the due on sale clause it would but so what? Mortgage companies are interested in one thing and that is on time payments. As long as you are current the chances of anything ever happening are slim to none and yes I have moved 40+ properties into trusts/LLC's over the last 25 years of investing.

    @Matt K. Moving a property to an LLC is no different than a sale since the entity is a separate legal "person" so there is no piercing the corporate veil by transferring ownership. Also Umbrella insurance does nothing to protect you legally.

  • Robert Gilstrap
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    Matt K.
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    Matt K.
    • Walnut Creek, CA
    Replied
    Originally posted by @Robert Gilstrap:

    @Bhaskar Pandey First of all you don't ask you do. Of course a mortgage company is not going to grant you permission to move it to an LLC or trust but why would you ask in the first place? As far as violating the due on sale clause it would but so what? Mortgage companies are interested in one thing and that is on time payments. As long as you are current the chances of anything ever happening are slim to none and yes I have moved 40+ properties into trusts/LLC's over the last 25 years of investing.

    @Matt K. Moving a property to an LLC is no different than a sale since the entity is a separate legal "person" so there is no piercing the corporate veil by transferring ownership. Also Umbrella insurance does nothing to protect you legally.

    This is just my thought process.... But if you bought a property under your name wouldn't it fall into one of these categories below? Again, maybe I should stress the likelihood of this actually going to court probably slim same with the due on sale... but again isn't the entire point of the LLC to reduce risk? If the situation was bad enough and the lawyers good enough... couldn't it be pierced? Also... doesn't the umbrella policy provide you legal representation in addition the coverage amount?

    Now, for the first one I could see exception being made for properties prior to the LLC.... but how would one explain to the courts why you bought a property under your own name, then transferred to the LLC... rather than buying under the LLC from the start?

    • There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners' alter ego) and that the owners are personally operating the business as if the corporation or LLC didn't exist. For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn't entitled to the limited liability that the corporate business structure would ordinarily provide.

    For the second point, depending on the answer of the first....couldn't it fall under this? Someone not buying under the LLC is typically doing so because it's cheaper/easier to get funding .... again otherwise they'd just buy under the LLC to start out with.

    • The company's actions were wrongful or fraudulent. If the owner(s) recklessly borrowed and lost money, made business deals knowing the business couldn't pay the invoices, or otherwise acted recklessly or dishonestly, a court could find financial fraud was perpetrated and that the limited liability protection shouldn't apply.

    https://www.nolo.com/legal-encyclopedia/personal-liability-piercing-corporate-veil-33006.html

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    Chris Mason
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    Chris Mason
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    ModeratorReplied

    As rates continue to climb, DOS becomes more likely. I haven't heard any high mucky mucks say anything, but eventually someone is going to realize that they can invoke DOS on all these peeps with borrowed money at 4.5% or 5%, when current prevailing rates are back to historic norms of 7%, and force them to refinance (at 7%) or pay the loan back (so the money can be re-lent at 7%). Same with all the people that are doing "subject to."

  • Chris Mason
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    Robert Gilstrap
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    Robert Gilstrap
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    Replied

    @Chris Mason  You give waaaaay too much credit to mortgage holders/servicers. It just doesn't work that way. Mortgage companies are in the business of loaning money not foreclosing on performing loans and despite any tales you've heard about banks doing this when rates rise or fall I have never seen a  concrete example of that happening in all the years of me investing. Lots of stories and tales but nothing real.

    @Matt K. You're getting caught up in too many "what if's". Under what scenario are you having to "explain to the courts" your reasoning behind anything? If you've ever been to court in a major lawsuit (and yes I have many times) It just doesn't work that way unless you're being deposed for fraud and if you are then why would you expect an LLC to protect you from criminal acts because nothing does that. Not insurance and not an LLC.

    People spin all kinds of tales about no real separation and the corporate veil being pierced and yes that could happen IF you are doing the bad things you described BUT why would you do those things if you knew not to do them? The long and the short is this: owning property in your personal name is just dumb for about a thousand reasons. LLC's (and more important in my opinion trusts) are there for a reason; utilize them for their intended purpose. You need insurance but the person who thinks that will cover them fully is grossly misinformed.

  • Robert Gilstrap
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    Matt K.
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    Matt K.
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    Replied
    Originally posted by @Robert Gilstrap:

    @Chris Mason  You give waaaaay too much credit to mortgage holders/servicers. It just doesn't work that way. Mortgage companies are in the business of loaning money not foreclosing on performing loans and despite any tales you've heard about banks doing this when rates rise or fall I have never seen a  concrete example of that happening in all the years of me investing. Lots of stories and tales but nothing real.

    @Matt K. You're getting caught up in too many "what if's". Under what scenario are you having to "explain to the courts" your reasoning behind anything? If you've ever been to court in a major lawsuit (and yes I have many times) It just doesn't work that way unless you're being deposed for fraud and if you are then why would you expect an LLC to protect you from criminal acts because nothing does that. Not insurance and not an LLC.

    People spin all kinds of tales about no real separation and the corporate veil being pierced and yes that could happen IF you are doing the bad things you described BUT why would you do those things if you knew not to do them? The long and the short is this: owning property in your personal name is just dumb for about a thousand reasons. LLC's (and more important in my opinion trusts) are there for a reason; utilize them for their intended purpose. You need insurance but the person who thinks that will cover them fully is grossly misinformed.

    Aren't these what if's that lead one to getting a LLC ? I haven't been part of a major lawsuit, but I'd imagine it wouldn't be that hard for someone going after me to piece together me buying a house under my name, then transferring it to an LLC... and I'd imagine they'd ask why I did that? But I've never been part of major lawsuit so maybe they're busy asking why I did whatever they are suing me instead of why I bought a property?

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    Caleb Heimsoth
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    Caleb Heimsoth
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    Replied

    Robert Gilstrap I’ve seen some threads on BP where this happened but usually it’s with subject - to and wraps.

    I may have seen one instance where this happened when it was a quit claim deed.

    Most lenders I’ve talked to say just do it post closing. I mean I’ve been paying my one lender out of an llc bank account for years now and they don’t say anything. Lol

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    ModeratorReplied
    Originally posted by :

      You give waaaaay too much credit to mortgage holders/servicers. It just doesn't work that way. Mortgage companies are in the business of loaning money not foreclosing on performing loans and despite any tales you've heard about banks doing this when rates rise or fall I have never seen a  concrete example of that happening in all the years of me investing. Lots of stories and tales but nothing real.

     I don't work on the servicing side, and wouldn't disagree with your IQ assessment, but something else to consider is that as rates continue to climb, people that used refinances as the bedrock of what they did for all these years while working for a loan servicer will need to either find something new to justify their existence, or become unemployed. 

  • Chris Mason
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    Robert Gilstrap
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    Robert Gilstrap
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    @Caleb Heimsoth   I have 40+ subject to's that I personally own today and I have never had one called in my 25 years of investing. I have even gone as far as to inform the bank that I bought it sub-to just to see what would happen but guess what nothing ever happens. Why? Because at the end of the day the loans were being paid and were current. Not saying it couldn't happen just saying it doesn't. 

  • Robert Gilstrap
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    Caleb Heimsoth
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    Caleb Heimsoth
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    @Robert Gilstrap that’s good to know.  It does seem increasingly rare.  I wouldn’t go as far as to say it would never ever happen but I’m guessing the likelyhlld of it Happening is very small

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    Spencer Hilligoss
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    Spencer Hilligoss
    • Investor
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    Replied

    @Bhaskar Pandey I went through this process last year and did two lengthy posts on he process. Here’s the second one. 

    In summary: it helps to work with investor friendly lenders up front, but if you have a convention bank lender: ask for permission and jump through their hoops https://www.biggerpockets.com/forums/48/topics/518873-llc-transfer-approval-from-a-large-conventional-lender-part-2

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    Jack B.
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    Jack B.
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    Replied

    People are waaay too focused on LLC's as if they are some magic protection. The fact of the matter is a couple hours of research would show you that LLC's are easily pierced. It's called a charging order. All these people who have LLC's in their own name are fooling themselves.

    An umbrella policy will provide legal representation by law if they decline to pay out and you get sued. That happened to me with a car accident and my car insurance.

    I fix any liabilities my inspector shows me when I buy a property. Prevention...other than that, don't look at fancy driving a Ferrari to show units, etc. 

    I know one girl who shows up in her 120K Benz to show units that rent for 1K a month...Also don't reveal your assets. I have lot's of tenants during tours ask me how many rentals I own. I decline to answer usually. Plus I always get a weird vibe and worry about why they are asking me when they ask me....

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    Caleb Heimsoth
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    Caleb Heimsoth
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    Jack B. Just put your address as a P.O. box. It’ll give you some relief from wholesalers and junk mail lol. Much cheaper.

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    Jack B.
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    Jack B.
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    Replied
    Originally posted by @Caleb Heimsoth:

    Jack B. Just put your address as a P.O. box. It’ll give you some relief from wholesalers and junk mail lol. Much cheaper.

     I do already, and I still get both.