Credit Union says I cant transfer to LLC unless the LLC qualifies?

Question

Hello all,

Thanks a lot to the BP community, I am about to rent out my first property. I have learned a bunch here, and continue to do so, so thanks to all who contribute. Its not rented yet, but I met with a lawyer today to get questions answered and an LLC setup properly.

I called my credit union today, just to be safe, to see if transferring the property from my personal name (I have lived in this property for 3 years now, as my personal residence) to an LLC will trigger a due-on-sale clause. The nice customer service representative I spoke with on the phone did not know the answer to this question, and put me on hold to ask someone who knows the answer to this question. He returned, saying something to the effect of, "Sorry, we cant allow a transfer like this unless the LLC itself qualifies." In the past, I have shot this question at my loan officer and he seemed to think it would be fine to transfer, although he told me he was not 100% certain. I also called  and left messages with 2 other contacts I have at the credit union to make sure what I was told is correct.

I assume my brand new LLC would not qualify for the loan? Or would it? Have any of you run into this before? Do credit unions have this rule? And if so, what do you do? Just move forward, without the LLC, and carry the umbrella policy?

Thanks all.

P.S. I have read many times the pros/cons of LLC vs umbrella, I know an LLC is not a must, and I know there are other options I can still use. I am letting you know this so this thread doesn't turn into an LLC vs umbrella war.

Terry Portier · Answer

Well I take a different stance on DOS. If you have a contract with a bank that prohibits taking title out of your name and transferring it to an LLC and you do it, a court of law (if you ever end up there) can see the transfer as null and void per contract and treat you as a sole proprietor.

A legal entity such as a LLC is only valid to the extent it is managed especially contractually. Some may find that ridiculous, but there have been cases where the member of the LLC did not sign contracts with their LLC title and were found to be acting as SP. You can be assured that a prosecuting attorney first effort will be to tear the LLC down, all the cases I have read online that is what happen, or case law had to interpret statues.

So check with your attorney, I would play by the book. You took the time and expense to hire an attorney to set it up properly, to follow will be your ability to manage it properly and that will be based on knowledge.

I also take a different stance on the definition of assets to include avoiding judgments as a SP when conducting a business, protecting yourself against legal fees, both of which can produce garnishments against any form of income you make for the rest of your life, not just real property.

What needs to be compared here is legal protection against an insured LLC vs. SP, I think for the most part the LLC wins although there are some potential hick-ups if you don’t know how to manage them.

Regardless of what protection you choose, at the end of the day, the best defense against law suits is to make sure you understand the surrounding laws to your business model, that you pay your debts, are not negligence; knowledge is the best legal defense and asset protection out there.

Jon Holdman · Answer

That's hardly your only option.  Simply say "ok, sorry" and transfer the ownership back to yourself.  But you would start by saying "hey, I'm the one and only member of this LLC and all the payments are current.  Do you really want to call this loan?"

Will Barnard · Answer

I am a huge proponent of using entities for RE investments And insurance. That said, the excersizing of the DOS is almost never done, so I believe you are safe there. That said, if this is your one and only property and you do not have many other significant assets above and beyond your insurance, then you are safe there too. When you get a second property, you will want to make sure you add the second layer of protection via the entity.

My tale is always to ask for forgiveness rather than permission and as Jon stated, if it came down to hell or high water, then you always could transfer title back to your name.

Keep in mind an important factor, when you asked if you could have permission to transfer the title to your entity, you are asking to do something that goes against the rules of the bank and when you ask the bank employee, they MUST tell you no. Just the same, ask a cop if you can do 50 in a 55 mile an hour zone and he will say no, but do so in front of him and he is likely not going to bother for just 5 miles an hour over.

Terry Portier · Answer

First off it is impossible to compare a legal entity such as a LLC to an insurance policy that is like comparing apples to oranges.

Why don’t you ask the CU what they mean by ‘qualify’ and ask someone that knows what they are talking about that can show a CU policy in writting?  Do they want a copy of your Articles of Organization? You’re EIN? Your state tax ID or state tax clearance letter stating you are in good standing with the state, an Operating Agreement, a list of members and titles, you are active, etc.?

It is very rare that an LLC alone will qualify for a loan, even the big fish with huge assets have to personally guarantee them. The reason is piercing the corporate veil is much more difficult than a personally backed loan. Some have had success forfeiting their foreclosure rights instead of personal backing.

If in fact they want the LLC to qualify financially then find another bank to refi if you can because that is not common.  Or look at your loan papers or ask them to show where in writing it states that a QCD transfer triggers a DOS which I doubt if it did they ever call you on it.

Richard Michael · Answer

From what I have heard it is unlikely they will call upon your loan. However if they did, what would be your options? You be forced to sell the property and lose your investment! (I'm assuming you don't have the funds to cover the loan in full)

I think using an umbrella policey is your better option. It offers you a similar level of protection without the risk. With future deals I would try to use the LLC from the gecko. Also depending on your state, an LLC can be very pricey, insurance may not only be the safer route but also the cheaper route.

Lynn McGeein · Answer

This is the reason we kept them in our names and got rid of the LLC.  While many would probably feel comfortable that no due on sale would ever actually be enforced, it's been my experience that if something wacky can happen, it usually happens to me (I learn a lot this way).  If I had the funds to pay the loan in full if the due on sale were called, I'd likely transfer it and take the risk.  I don't, at least not without cashing in retirement accounts, so not risking it.

Wes Eaves · Answer

I would say the chances of them calling the loan due is slim to none. If you are current on your mortgage there is no justification for them to do so. Banks & CUs are not in the business of owning property.

Of course that is not to say that a financial institution wouldn't exercise their option to call the loan due.

This is my personal opinion and not legal or financial advice.

Jon Holdman · Answer

Funny how you seem caught between a rock and a hard place with this, isn't it?  This is the case with almost every lender.  You have several sub-optimal choices.

One is to just transfer it and hope they don't call the loan.

The other is to just leave the property in your name.

Yet another is to buy the property with an LLC and then get a commercial type loan for the purchase.  You will probably have to give a personal guarantee, which is what makes the LLC qualify.  Unfortunately, at this point this would probably be a refi and may incur some extra costs.

Credit Union says I cant transfer to LLC unless the LLC qualifies?

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