Transfer to LLC or buy landlord liability insurance?

Question

I have a few rental properties in Seattle city limits. Used conventional loan to finance the mortgage. All are individual condo units. Lender does not allow me to transfer to an LLC (which can trigger "due on sale" clause in my mortgage). My loan agent told me I can do so secretly; as long as I pay my mortgage on time, she's not sure if the lender can find out. Has anyone done this before? My concern is when I pay property taxes to my lender and my lender pay the county, and they should see in the tax statement that owner has changed from my name to an LLC?

Alternatively, I'm thinking about buying landlord liability insurance. I wonder if there's any good insurance agent/company that you recommend?

Dave Lin · Answer

Hi @Victoria Zhou I don't see how the lender wouldn't know if you attempt to change it to an LLC as they have a lien on the property and it will need to be cleared during closing.  Only thing I can think of if you do a quit claim, even then I would think they would be notified.  Otherwise what is to stop someone from getting a mortgage, transfer the house to a friend or family member and leave the lender holding the bag?  The banks probably has resources to prevent these scenarios.

If your current insurance for your condo rental units is written as owner occupied, you should definitely change the policy to tenant occupied.  You should talk to your insurance agent.  If I am in your position, I would increase the liability coverage on my insurance policy and not change it over to an LLC.  You would save the closing cost for the LLC transfer too. You can also get an umbrella policy if you feel the underlying policy's liability coverage is not enough.

Kevin Romines · Answer

I have talked about the pitfalls of holding the property in your personal name and in an LLC at length. There are draw backs for both. The best thing to do is to learn the draw backs, mitigate your risk as much as possible and go forward!!! I have been in the mortgage banking business for 20 years but I took a 5 year break and was an insurance agent for Country Financial and Farmers.

The way that the lenders will find out that you transferred the property to your LLC is that you will then be required to get a new insurance policy in the name of the LLC. The lender will get a copy of this policy and will see the new policy holder being different than the borrower they have on the loan and you can get notices of breach of contract at that point?

The shell of the LLC is an additional layer of protection and separation from your personal assets and you personally, so from this standpoint I like the LLC. However any competent attorney can look for and find ways to pierce the corporate veil. If you signed on the loan as a personal guarantor, you blurred the line of personal and business. If you personally manage the property, you blurred the line. If you do any of your own maintenance, you have blurred the line and put the shell of the LLC at risk. If you spent personal money on business or business money on personal, if you didn't properly have and record your annual meeting minutes, your at risk.

All that said, if you need to, and want to buy the properties with Fannie Mae financing due to the low rates and  better cash flows, then go that route. If you can accept a little higher rates and terms that may not be a full 30 year fixed, then go the Non-QM route and get the loan in the name of the LLC with you signing a personal guarantee.

In both cases, get the highest liability coverage you can on the landlord policy. Also, (my recommendation)  get the highest umbrella policy you can behind the landlord policy. If the insurance company says that the LLC is commercial and requires the policies on a commercial basis, then also get a personal umbrella for as high as you can get. Umbrella policies are very cheap and cover your vehicles, your home, some professional pursuits and recreational vehicles in a secondary manner. You insurance policies also pay all legal defense costs.

Now just because you hold rental properties in an LLC, doesn't mean the insurance is required to be a commercial policy. I know insurance carriers that will give you a personal lines policy to your LLC.

Steve Vaughan · Answer

I know everyone talks about DOS risk being low.  The lender rarely calls a performing loan due, and that's true.  But if your insurance accurately reflects the proper beneficiary of the policy, your mortgagee will get notice of the change.

The real risk that has been addressed here, finally - insurance!  In the name of 'asset protection' your ass(ets) could be left high and dry.

Hazard/property insurance and title insurance, too.   Some say title insurance will transfer if vesting is the same, but it is a risk, especially if you add/drop members who aren't on or will no longer be vested.

Lots of risks over-sophisticating little residential property with debt on it.  I have resi property free and clear in entites as well as commercial property (some with debt) in LLCs, but not little houses & condos with debt.

Do a probability analysis. Weigh the probability of being sued + the chance of the LLC even helping vs the probability of your screwing up your title chain, your hazard insurance, your title insurance and your loan being called.  My guess  is  .01% chance of helping vs 40% chance of hurting.

Ali Boone · Answer

I would wonder- what's the specific benefit(s) that would be so worth being sneaky about it? If you don't know that answer, I wouldn't maybe go with the sneaky route...

Personally, I've always done the umbrella insurance policy over the LLC. Here's info on it-

https://www.biggerpockets.com/renewsblog/2013/08/1...

There's tons of info in the comments too.

Victoria Zhou · Answer

Thanks Bjorn, but I don't live in Seattle (nowhere close actually).

Victoria Zhou · Answer

Hi Dave,

I talked to an agent and it seems the premium for liability insurance is acceptable. So I will decide to go this route.

Thanks!

Bjorn Ahlblad · Answer

Victoria, Dave gave you the perfect advice. In addition if you are not a member of Washington Landlords you should consider that. Plenty of current legal and other topics there for REI. The meetings are informative and fun.

Transfer to LLC or buy landlord liability insurance?

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