LLC Deed Transfer - Due at Sale Concern

[Nick Bourgeois]

Hey everyone! Hope y'all are getting geared up for the holiday weekend.

My partner and I continue to come to the same hurdle... deed transfer to a series LLC. We've spoken to numerous lenders across DFW, and every single one will give us a different response. We intend to do a cash-out refi after the 6-12 month seasoning period, which will force us into a conventional mortgage. Have any of you successfully been able to transfer the deed to their LLC after refinance or purchase? From all the people we've spoken to, we've never heard of a lender invoking the "due on sale" clause as long as the lender gets their money, but once it's on the secondary market, there's just too much separation. It's just one of those risks that we don't like having hanging over our head. So in summation...

1) Have any of you out there transferred the deed to your LLC? Any issues?

2) What is the deed transfer process? What channels does it go through? Does the lender receive notification, or is it something they have to stumble across? 

We don't want to do anything illegal, just looking for advice!

[Carl S.]

My partner and I are in the exact same boat! Following to hopefully see some positive experiences and suggestions

[Jon Pitcher]

@Nick Bourgeois 

The question here is whether transferring the property is worth the risk and hassle - usually it isn't, in my opinion.

If you manage the property yourself, the LLC isn't providing much liability protection. An injured tenant could just sue you personally for negligence in your management of the property. In Texas, an LLC does have charging order protection, so the LLC could protect your equity in the property from unrelated claims/judgments against you. But if you recently borrowed the money, you probably don't have all that much equity to protect.

The deed transfer itself is simple. All you need to do is file a quitclaim deed in the county where the property is located. But you also need to change your insurance beneficiary, and start paying the mortgage payments from your LLC. The lender does not receive notice directly of the transfer, but it does receive notice of the change of insurance beneficiary.

If you don't want the lender to find out at all, you can use a trust to take advantage of a loophole under federal law. Essentially, you transfer the property to a living trust - this looks to the bank like an estate planning transfer, which they see all the time and does not trigger the due on sale clause. But then you change the beneficiary of the trust to be your LLC. The downside of this strategy is it isn't necessarily bullet-proof, it will cost you some legal fees, and is illegal in at least one state (Michigan).

I have heard of at least one investor having his loan called after transferring to an LLC, although the bank did give him 30 days to transfer it back...

https://www.biggerpockets.com/forums/311/topics/18...

[Account Closed]

@Nick Bourgeois Your questions "

1) Have any of you out there transferred the deed to your LLC? Any issues?

2) What is the deed transfer process? What channels does it go through? Does the lender receive notification, or is it something they have to stumble across? "

All I have done for twenty years are Subject To. I always record the Deed for my protection and in an LLC. My attorney in Texas told me that I don't need a Series LLC in Texas. I heard rumors someone, somewhere 10 years ago had the DOS call. If that happens you can refinance, sell, work out a deal with the bank, cash it out. They have to notify you and then you have time to do something about it. No, it has never happened to me. I personally don't worry about it. But, then I do everything through an attorney and escrow company. I don't try to do the Deed work on my own.

It is unclear what you are trying to do with your "cash out refi". You would no longer have to worry about DOS if you refi.

@Carl S

[Bret Allen]

The short answers is that the transfer is a legal event of default.  I have represented banks for several years performing foreclosures.  Out of thousands of foreclosures, I have only used the due on sale breach as my primary declaration of default on one occasion -- and that case was very particular.   In this economy, as a practical matter,  it is not used much.   But it is still an event of default.  To enforce the default, a lender would likely need to send a default letter with a 30 day cure period.  A borrower that previously transferred can likely cure by transferring back. . . 

 In my opinion,  commercial property lenders and high end residential lenders are more likely to enforce based on due on sale violation than small residential properties.  I have used the default as a secondary default item in Default Letters when the borrower is already in default for missing payments.  

As a general rule, I would advocate against hiding or disguising the transfer through the use of trusts. Under most loan docs, the borrower can transfer to a revocable trust that the borrower is using for tax/estate planning.  I'm not sure what you have to gain by transferring to a revocable trust and naming a new beneficiary -- liability still attaches to the trust same as it did when the borrower was an individual.  If you transfer to irrevocable trust then it is a true transfer and the due on sale applies. 

Good luck everyone!

NOTE:  Bret is an attorney but is not your attorney.  You should not rely on advice in a forum but should contact a competent attorney.  Nothing in this post creates an attorney-client relationship! 

[Cody L.]

When I started doing real estate, I put all of my properties into an LLC to protect my personal assets. I was just told that was the thing to do.

Over the years, I quickly realized that the LLC was what had all of my net worth and not me personally. Thus asset protection was not being achieved.

So what I started to do is put each new property into its own LLC and I transferred 20 or so properties out of my "main" LLC into their own LLCs.

It was a relatively simple affair. I had a title company do it and I think it cost about 100 or 150 for each property. That's less then the 300 or so Texas charges to register a new LLC

Yes, technically transferring to an LLC could cause a lender to use the "due on sale" clause to call the loan due. But it never happens. At least it happens so infrequently I have literally zero concerns about it (full disclosure: I have zero concerns about almost anything, even those things are most people would or I should :-)

If they raised a stink about it, I could simply transfer it back as you are given 30 days to cure.

I've done so many deals that involve wraps and other things like that which would be much more dangerous and likely to be called due that I would have zero reservations suggesting someone transfer into an LLC that they also had ownership of.

[Andrew Postell]

@Nick Bourgeois @Carl S. I saw some good posts here but wanted to include some other information here for you as well.

If you purchased a property with cash, and are seeking to do a cash out loan, there is no seasoning requirement.  There would be some rules to consider, and if that is the scenario please let me know so I can comment more.  If you purchase a home with a loan, and are seeking to do a cash out loan, you would have to wait 6 months to do so.  These rules are for "conventional" loans.  And the thing that makes it confusing is that a bank doesn't have to follow any of those rules.  Banks often will put "overlays" on top of conventional lending rules to lessen their risk...aka lend less money.  So look for a bank with no overlays...or very few overlays...and you will find the most flexible loan you can get. Try smaller to mid-sized banks.

Also, everyone is correct that lenders don't care about the "Due on Sale" clause as much as it is taught in the investment community.  It certainly is important to know about but if you are paying on time a bank will not implement that clause.  And depending on the state...it may not even be legal to implement at all.  I did attach the 2 paragraphs that are in a conventional note that talk about the process.  Key words "MAY",  "NOT LESS THAN", and "prohibited".

All good posts here but feel free to ask more questions if you need.  Thanks!

[Bret Blackburn]

Besides Due on Sale clause, are any of you worried about the title insurance policy being conveyed to your LLC?

[Scott L.]

I am interested in this issue as well. I have a single member LLC formed and am personally acquiring two SF rental houses with conventional financing. I don't want to sell them later, subject to, or lease option, etc., I just want the rental income and management run through my entity and have the ownership of the property in my entity. I know everybody says this doesn't provide much liability protection vs. just getting an umbrella policy.

Well here's the thing...my insurance canceled my umbrella policy (i'm a lousy driver). I want the entity to own the property for whatever liability protection it provides, as well as for some minimal privacy and accounting purposes. 

Has anybody transferred their investment properties with conventional mortgages to a LLC that they own, and continue to own, and had the note called? I know if you ask the Bank they will usually say no... But has it actually every happened? I could see an argument that an LLC owned 100% by the original borrowers doesn't trigger the 'due on sale' right of the bank, because the beneficial interest in the LLC and right of occupancy remains with the original borrower...Anyone had a bank call them on this and attempt to argue such?

Thanks.

[Cary O.]

@Nick Bourgeois, @Carl S., @Scott L.   

A local RE attorney I met with recommended using a warranty deed, not a quit claim deed in Texas. The cost difference is negligible for the title company to file one for you. A warranty deed guarantees that the seller owns clear title to the property and that the property is free of all liens and encumbrances. A quitclaim deed does not guarantee clear and legal title to the property. 

As for the due on sale clause, the attorneys/lenders/realtors that I have spoken with all feel obligated to tell you that your loan could be called when you change title from personal to LLC, but they have never seen it happen as long as the lender continues to receive the mortgage payments. If the lender does give you notice of the due on sale clause, you have a period of time (usually at least 30 days) to transfer the title back into your personal name.

[Scott L.]

Originally posted by @Cary O.:

@Nick Bourgeois, @Carl S., @Scott L.   

A local RE attorney I met with recommended using a warranty deed, not a quit claim deed in Texas. The cost difference is negligible for the title company to file one for you. A warranty deed guarantees that the seller owns clear title to the property and that the property is free of all liens and encumbrances. A quitclaim deed does not guarantee clear and legal title to the property. 

As for the due on sale clause, the attorneys/lenders/realtors that I have spoken with all feel obligated to tell you that your loan could be called when you change title from personal to LLC, but they have never seen it happen as long as the lender continues to receive the mortgage payments. If the lender does give you notice of the due on sale clause, you have a period of time (usually at least 30 days) to transfer the title back into your personal name.

This is interesting. I was going through the fine print in some Trust Deeds that I looked up in my area, including mine from 1998 and they particularly call out that you don't have the right to cure this type of default (due on sale), as you do with others...Now the bank may not wish to go through the trouble of foreclosing if you quickly transfer back to your name. I'm thinking the risk is even lower if you're just using a 100% owned LLC for asset protection vs. trying to sell "subject to" or do owner financing for someone else. I'm seeing an argument that a 100% owned LLC by the original borrower is NOT a transfer of ownership with respect to the "due on sale clause", but I need to ask my RE attorney. The problem is if you get in the situation to argue it with the bank you lose no matter what (credit, public records, etc.).

My attorney also said the same thing about Warranty vs. Quit Claim Deed. There is very little reason not to do a warranty deed as the difference in filing fee is minimal, and it makes it much easier to insure and defend title.

[Cary O.]

Thanks for the words of caution @Account Closed. Do you think that this is a change in the mindset that banks are now wanting to enforce the due on sale clause? The attorneys/loan officers/realtors that I have spoken with are all real estate investors themselves, and have stated that they have transferred many properties from personal name to LLCs without triggering the due on sale clause. They are aware of the fine print and the due on sale clause in the contract. It just seems that banks have not been enforcing it as other posters have mentioned. 

[Scott L.]

Originally posted by @Account Closed:

@Cary Ogello Banks have in the pass enforce the due on sale clause, but they don't go around telling everyone and the ones that got to foreclose on don't tell their friends or family that they lost their property because they violation the bank's policy. When the top brass step in they will start the process, and the loan officers don't have access to what the top brass is thinking. Bank of Texas is the one that brought the meeting together.

Did they say whether they're aiming only at 'Subject To' and 'Lease Option' sellers? What about no transfer of beneficial interest? Everyone keeps talking about using LLC's as creative seller financing, but are there a body of cases relating simply to asset protection LLC's? It seems that if the right of occupancy and beneficial interest don't change they may have a tougher case, even with Garn-St. Germain.

[Jim R.]

My concern evolves around rising interest rates. If interest rates continue to rise over the next few years the banks may very well be required to enforce these clauses. It would make perfect sense for the banks to be able to force new higher rate mortgages on these loans. Additionally they could be sued by bank stakeholders for mismanagement for not enforcing the clause in a higher interest rate environment, i.e., failure to be fiscally responsible in managing the loans.

[Joanne Szewc]

I agree that banks can decide to enforce the clause at anytime.  Just because not typical, doesn't mean they can't. Change of anything from bankers management, shareholders, economic concerns, etc. can change their intent and go for the Due on Sale.

I believe the question should be: "How can a deed transfer be done, if at all, into a Series LLC if the property has a loan that is not in the name of the Series LLC to minimize or eliminate the Due on Sale clause?"

[Kurt Schultz]

The best advice I've ever heard about coping with a "Due on Sale" Clause is this: 

"Do not try to hide what you want to do.  Ask the Lender before you move the asset into an entity."

IMHO, this is clearly a situation where it is far better to ask for permission than to ask for forgiveness.

If I am concerned about potentially triggering a DoS Clause, I will write a letter to the Lender, explaining what I want to do and why, as well as ask them if they will allow it in this one instance and waive the DoS Clause.  The letter will be sent Certified, Return Receipt requested, and the Return Receipt will go into the file that holds the property's paperwork, along with a copy of the letter.  If the Lender ignores you, that Return Receipt will become an essential piece of evidence.  If the Lender agrees, you have no problem in transferring the property; if they state that they will invoke the DoS Clause if the property is transferred, you know where they stand on the matter (so don't try to work around it).

There is a time limit on their ability to react to you transferring a property into an entity in violation of the DoS Clause.  It may actually be a "Statute of Limitations" issue.  If you hide the transfer, the time limit doesn't START until the Lender discovers the DoS Clause was violated (even if it's many years later); if you ask the Lender ahead of time, the time limit starts when they receive your letter asking for permission (which means the clock will run out sooner, rather than later).  Also, if the Lender allows the transfer, then later claims they will invoke the DoS Clause, you have recourse (in the extreme, you could ask for a court to issue an injunction, etc.).  Start by showing them the letter giving you permission.

I'm not qualified to answer to the insurance aspect of this matter - consult with a pro!

I've had some experience in transferring real estate into and out of estate planning trusts.  I'm a little surprised that the attorney posting above didn't state that transfers into and out of Living Trusts are exempt from DoS Clauses by federal law.  The difference may be whether the trust is "Revocable" or "Irrevocable".  I've successfully used Quitclaim Deeds to effect the transfers.  They included notices that the transfers were exempt from transfer tax and stated why they were exempted (check with your local Registrar or your local Attorney on this issue).

This doesn't mean that you can use this approach to 'dodge' the DoS Clause.

One important thing I've learned is that you really should read and contemplate the meaning of the DoS Clause in your loan documents.  I've seen DoS Clauses that are triggered by "...sale..." and others that are triggered by "...any transfer of beneficial ownership..." (regardless of whether it's a sale, foreclosure, gift to relative, etc.).  The more restrictive the DoS Clause is, the more important it is to ask for permission!