Refinance in an LLC or Personal Name?

Question

We bought a 3 unit property at auction using private money in March. We made some repairs to the units and approached a few banks about refinancing. We were told we needed a 6 month to 1 year seasoning period, depending on the bank. Which is fine, we can wait till September.

The issue that we are running into is that banks are saying that we can't refinance if we own it in an LLC. One bank recommended we Quitclaim the property into our personal names, refinance, then we could quitclaim it back to the LLC. Has anyone else run into this issue? If so how did you solve it? Thanks.

Jeff Copeland · Answer

There are literally thousands of posts in these forums discussing this topic and the due on sale clause.

Here are some resources and discussions on the matter:

https://www.biggerpockets.com/forums/48/topics/848440-question-about-loan-and-llchttps://www.biggerpockets.com/blog/purchasing-property-llc-why-how

Peter Walther · Answer

The Conditions section of the policy will have a definition of Insured.  I'm recommending you make sure the Grantee of the deed meets the definition otherwise the Grantee will not be an Insured.  The policy is never voided, it continues in force under its terms and conditions but that doesn't help someone or an entity that is not an Insured.  Some might recommend using a Warranty Deed assuming if a defect arises after the conveyance the Grantee could sue the Grantor for a breach and the Grantor's title company will step in and take care of the defect.  I believe there are many situations that are not covered under the deed warranties or may not be covered if a statute of limitations runs so it's always best be sure the current title holder is an Insured.

Jason Boice · Answer

@Scott Wolf have you done this with any local banks? If so what type of terms have you gotten (LTV, interest rate, amortization period). I’m curious what type of options are out there for a commercial loan. It seems like residential rates are generally significantly lower than commercial and the amortization periods are longer (30 yr residential vs 20 or 25 for commercial).

Jason Boice · Answer

@Peter Walther are you saying that if we quitclaim it from the LLC to our personal names, do the refi, then quitclaim it back to the LLC, that we could void the title insurance policy?

Peter Walther · Answer

Make sure you don't create a coverage problem with your existing title insurance policy.

Scott Wolf · Answer

@Jason Boice, you should contact local banks.  They will usually finance something like this, even if it's in an LLC.

David M. · Answer

@Jason Boice

That's interesting.  I never included in my profile that I as an accountant of any sort...

Just wondering how you were going to proceed since what you have is a "sticky" subject that comes up every time.  Between concerns like the Due on Sale clause, maintaining your corporate veil (we had a separate thread on that where the Title and mortgage was split), Title Insurance, etc its a troublesome subject.  People keep making LLC's but not accepting the consequences, or trying to find a way to 'have their cake and eat it too.'  I'm curious what you figured out.

Evan Polaski · Answer

@Jason Boice I would confirm in the mortgage docs this strategy is allowed.  A lot of loan officers will say to do this, I have had a few say the same, but upon review of the actual mortgage docs, you will learn that you COULD have your mortgage called.

Fannie does allow the transfer into an LLC after any owner-occupant period burns off, but doing so in short order would be a default in mortgage and could have it called immediately.  As Jeff mentioned, there are 1000's of posts here about this, and the consensus is the risks of having it called are very low, but not 0.  And your loan officer has no control because the servicer will likely change 3 times in the first 90 days, and the services is the one that will place the default of mortgage and make it due immediately.

Jason Boice · Answer

@David M. we have not decided yet. We cannot refi until September due to seasoning requirements, so we have time. When the time comes, I was going to compare options, see what the difference is in rates and amortization period, then decide.

At this point though, I’m leaning towards quitclaiming into personal name, doing the refi, then quitclaiming back into the business. I like the lower rates and longer amortization period of the residential loans.

Why do you ask? Your profile says you have a background in taxes and accounting....any tax or accounting implications I should be aware of?

David M. · Answer

@Jason Boice

Have you figured out what you are going to do?  Are you going to get commercial loan?  Drop the LLC?  Or something else? Curious. Thanks

Refinance in an LLC or Personal Name?

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