All Forum Posts by: Jason Marino

There is a benefit to using an LLC as a property manager and for other interactions related to a property from a legal perspective. This would be called an Operating Company, and the LLC does not actually need to own the property itself. Rather, it could be authorized to act on behalf of the property owner via a contract. The benefit of this is that you are separating the liability of owning an asset (not completely without its own risk) from the liability of interactions (this generates its own liabilities). This is useful in cases in which a contractor may have a claim, as they more often than not will be inclined to sue the party that they contracted with than the actual owner. Your Operating Company does not own any property so they are essentially limited to going after a mostly empty LLC.

I would speak with lenders directly and get their express permission to make a transfer. I have seen conventional lenders force a transfer back into an owner's personal name under threat of foreclosure in situations in which the owner transferred to an LLC without permission. While this is unlikely while the mortgage is being paid, it can and does happen.

Contrary to the comment above, insurance (while being a great first defense) is not sufficient in an of itself for all liabilities. Insurers regularly deny claims, and there are many gaps in coverage that you may not even be aware of. That said, I would recommend a combination of insurance and asset protection. This can be done with an LLC (if you have the lender's permission), or you can avoid the due on sale clause violation entirely with a more sophisticated approach such as a transfer of the property to a Land Trust (this is a federal law exception to due on sale violations) and have that entity owned by an LLC. This would give you the benefit of anonymity and asset protection.

The issue with buying in your own name and transferring to an LLC is that you could have a potential due on sale clause violation come up in the future. While these are rare (if the mortgage is being paid), I have seen lenders come after homeowners and force them to transfer the property back to their own names with the threat of foreclosure. There are exceptions to due on sale clause violations that are set out in federal law. You can take advantage of these loopholes while still adequately protecting yourself. An example of this would be using a Land Trust paired with a limited liability vehicle. You just have to understand how to structure this.

There are a few different ways that you can do this, and they each vary in the level of formality, cost, and the benefits that they offer. You could own the property together as tenants in common (obviously this is assuming that, if you have a lender, they accept this). This is probably the simplest route, although it offers no limited liability protection and leaves an opening for internal disputes as there is no contract that governs your ownership and the obligations that go along with it. You could take title as tenants in common but execute a Joint Venture Agreement. This would not offer any protection, but it would set out the details in order to avoid the potential internal disputes described above. You could own a limited liability vehicle together and take title to the property in that vehicle (like an LLC). The Operating Agreement could set out each of your obligations and expectations. This would be a good way of avoiding the issues described above. Alternatively, you could each own an entity and hold title to part of the property in each of your entities, and allocate duties of both entities in a Joint Venture Agreement. This would be a decent way of avoiding the issues above as well.

The price of an attorney varies significantly based on where you are located in the Country. An attorney might bill $100.00 to $300.00 an Hour in a rural area, but an attorney in a more populated metro area may bill $500.00 to $700.00 an Hour for the same project. The price is determined by the local market as well as the years of experience that the attorney has. That said, $1,000.00 for document drafting might be reasonable in New York.

I think that this issue comes down to risk aversion. A single-member LLC is simple and relatively cheap to establish, operate, and maintain, and it provides you with the ability to compartmentalize your assets in a way that an insurance policy cannot do. I believe that insurance should be a part of every investor's structure, but it does have significant gaps. The thing that you are looking to protect against are both internal liabilities (for example, you are found liable in a car accident) and external liabilities (an individual trips and falls in your rental property). If you have a primary residence and even just a single investment property without an LLC or other limited liability vehicle, both are at risk in these types of law suits if insurance coverage is insufficient or denied.

I do not believe that there would be any substantive difference between a Quit Claim Deed and a Warranty Deed in this instance, and the risk of a due on sale clause violation would exist in both scenarios. Using a Quit Claim Deed can invalidate your title insurance though. There are very limited exceptions to due on sale clause violations, and none of them would turn on this distinction of a Quit Claim Deed versus a Warranty Deed. As you stated in your post, the risk of a due on sale clause violation is fairly low ( but I have seen it occur) if the note is being paid.

I think that this can be handled several ways. You could do all of the research on maintenance and formation and do this yourself at a low cost if you have gathered all of the information. You could additionally use a service like Legal Zoom that provides templates and some loose guidance for a slightly higher cost. Lastly, you can hire an attorney to walk you through the process in detail and handle the ongoing maintenance (if applicable) at a higher cost. It all depends on how much of your own time you want to invest in the process.

I agree with the comment above by William. Probably the most simple way of creating anonymity at the record title level is to transfer the property a Land Trust. You need to list the Trustee, so the best practice is to use what is known as a "nominee Trustee" of record. This should generally be an attorney that is hired for the position as it will give you the added benefit of attorney-client privilege if completed in the right way. The nominee Trustee resigns upon recording of the Deed.

The previous comment by Mordechai is accurate. The best practice with multiple properties is to attempt to compartmentalize each property into a seperate LLC or limited liability vehicle. This limits the ability of a law suit on a single property to access assets that are not related to the law suit. At scale, some larger investors will decide to batch several properties into a single LLC.