LLC Transfer - for Loan

[Olivier Chaine]

Somewhat unusual situation: we are in escrow on a property, and the current lender was going to underwrite the new loan. Due to complications in due diligence (seller financials), the only way that it makes sense for us is if we can assume the current debt, because it is below market rate, already underwritten etc. The lender is on board because it's in their best interests too. But they've asked to come up with a solution since the loan isn't technically assumable - something equivalent to acquiring the LLC that holds the property.

I've read enough to know that acquiring the LLC is a bad idea due to: unknown liabilities; tax liens and debts; loss of depreciation that has already been taken, and probably other reasons too. So not asking if this is a good or bad idea, because we aren't planning on doing it

Rather - what are creative solutions to do the equivalent of transferring the property without doing a direct property purchase, assuming all parties are on board including the lender?  multiple steps or extra LLCs are ok. 

And also, attorney recommendations appreciated too, as we would not do this without one that is well versed in the space. 

[Don Konipol]

@Olivier Chaine

In all trust deed or mortgage documents written by instructional lenders that I've come across, a change in ownership/manager structure of an LLC holding title to a property is a violation of the "due on sale" clause, so from a purely covenant violation sense purchasing the LLC doesn't help you.

However, if the LLC is purchased, that purchase is NOT a recorded document, and hence more difficult for a lender to ascertain, as long as the warranty deed itself is not transferred and recorded.

There’s an entire “industry” consisting of gurus, attorneys and title companies that provide services and advice for transacting real estate without paying off the existing lien(s).  However, all strategies, tactics, etc TRIGGER the “due on sale” clause, despite whatever people selling “how to” ideas want you to believe.  Not land trusts, not LLCs, not living trusts, not “divided” interests, and not quoting repealed section of the St Germain Act will work.  This has been court tested by over 40 years of case law. 

Investors transacting real property without paying off existing mortgage notes fall into three categories.  1 - the note IS assumable.  This is rare but may occur with notes originated with private parties.  2 - the lender gives his blessing to the assumption of the note.  This usually occurs if the buyer “qualifies” for the loan and an incentive - higher interest rates, transfer fees, etc. to the lender is provided.  3 - the parties entering into  a transaction, take steps to conduct business in a way that doesn’t “alert” the lender to the fact that the property ownership has transferred.  This includes the seller maintaining property insurance in their name with the buyer added as additional interest and mortgage payments being made from an account in which the seller appears as bank account holder. 

If the lender does find out that a property transfer has taken place, and chooses to enforce the due on sale clause, the lender must provide the seller (debtor) and, if applicable to state law, buyer with notification of default under the mortgage or deed of trust, and specific time as specified by state law to cure the default.  Once the “cure” period is expected, the lender has to send a notification of intent to foreclose to same parties.  The rest follows state law.  The length of time before actual foreclosure would range from a little as 21 days in Texas to “years” in New Jersey and New York, and many other “judicial” foreclosure states.  The parties can pay off the note for principal balance, late fees, penalties, back interest and legal fees any time before the actual foreclosure.  Foreclosure itself can be delayed by either a Temporary Restaining Order or a bankruptcy filing. 

[John Underwood]

What about this:

Get added to the Morgage as someone that is authorized to discuss the mortgage, but not be responsible for it.

Get added to the insurance policy as a "loss payee"

Get a Deed (Quit Claim or other) from seller but don't record it until the loan is paid off.

Keep making payments on the loan under the other person's name.

Another idea is to do the same as above but record an option against the property to be able to purchase property at any time in the future for $100. 

[Chris Seveney]

Quote from @Don Konipol:

@Olivier Chaine

In all trust deed or mortgage documents written by instructional lenders that I've come across, a change in ownership/manager structure of an LLC holding title to a property is a violation of the "due on sale" clause, so from a purely covenant violation sense purchasing the LLC doesn't help you.

However, if the LLC is purchased, that purchase is NOT a recorded document, and hence more difficult for a lender to ascertain, as long as the warranty deed itself is not transferred and recorded.

There’s an entire “industry” consisting of gurus, attorneys and title companies that provide services and advice for transacting real estate without paying off the existing lien(s).  However, all strategies, tactics, etc TRIGGER the “due on sale” clause, despite whatever people selling “how to” ideas want you to believe.  Not land trusts, not LLCs, not living trusts, not “divided” interests, and not quoting repealed section of the St Germain Act will work.  This has been court tested by over 40 years of case law. 

Investors transacting real property without paying off existing mortgage notes fall into three categories.  1 - the note IS assumable.  This is rare but may occur with notes originated with private parties.  2 - the lender gives his blessing to the assumption of the note.  This usually occurs if the buyer “qualifies” for the loan and an incentive - higher interest rates, transfer fees, etc. to the lender is provided.  3 - the parties entering into  a transaction, take steps to conduct business in a way that doesn’t “alert” the lender to the fact that the property ownership has transferred.  This includes the seller maintaining property insurance in their name with the buyer added as additional interest and mortgage payments being made from an account in which the seller appears as bank account holder. 

If the lender does find out that a property transfer has taken place, and chooses to enforce the due on sale clause, the lender must provide the seller (debtor) and, if applicable to state law, buyer with notification of default under the mortgage or deed of trust, and specific time as specified by state law to cure the default.  Once the “cure” period is expected, the lender has to send a notification of intent to foreclose to same parties.  The rest follows state law.  The length of time before actual foreclosure would range from a little as 21 days in Texas to “years” in New Jersey and New York, and many other “judicial” foreclosure states.  The parties can pay off the note for principal balance, late fees, penalties, back interest and legal fees any time before the actual foreclosure.  Foreclosure itself can be delayed by either a Temporary Restaining Order or a bankruptcy filing. 

Yep - one way people get around this is contract for deeds. That is what we see alot of times, and not record the CFD (or sometimes they do), if I was buying it I would absolutely want the CFD recorded - but technically that is the owner giving up interest in the property and could trigger DOS so unrecorded is another way, but honestly not recommended.

[Olivier Chaine]

Quote from @John Underwood:

What about this:

Get added to the Morgage as someone that is authorized to discuss the mortgage, but not be responsible for it.

Get added to the insurance policy as a "loss payee"

Get a Deed (Quit Claim or other) from seller but don't record it until the loan is paid off.

Keep making payments on the loan under the other person's name.

Another idea is to do the same as above but record an option against the property to be able to purchase property at any time in the future for $100. 

 Interesting approach. Since the loan has 5-6 more years at current rates, after which we would refinance, I could see how that might work. Though in this case, since we wouldn’t technically own it, how would paying taxes and depreciation work? 

(For reference, the seller wants out and we don’t know that they are ethical enough to keep longer term ties)

[Olivier Chaine]

Quote from @Don Konipol:

@Olivier Chaine

IHowever, if the LLC is purchased, that purchase is NOT a recorded document, and hence more difficult for a lender to ascertain, as long as the warranty deed itself is not transferred and recorded.

There’s an entire “industry” consisting of gurus, attorneys and title companies that provide services and advice for transacting real estate without paying off the existing lien(s).  However, all strategies, tactics, etc TRIGGER the “due on sale” clause, despite whatever people selling
 
.  2 - the lender gives his blessing to the assumption of the note.  This usually occurs if the buyer “qualifies” for the loan and an incentive - higher interest rates, transfer fees, etc. to the lender is provided. 

Really appreciate the detailed response. For sure there are many charlatans out there - not looking to get trapped by bs setups. 

Since this is being done with the ok from the lender - it seems like we need some version of #2 - where they give the blessing with a “change in terms” or assumption - and that we negotiate what changes are acceptable.