Originally posted by @Mike Lattier:
I'm interested in this topic as well. I hear pundits all over the place (including here) saying that you must "have" an LLC, including for STRs, but then the guys at BP say that no bank will lend to an LLC for first time investors AND transfering to an individually owned property to an LLC violates the due on sale clause. I would love someone to explain the apparent contradiction. And, by the way, I'm an atty. so I have some knowledge of the liability issues here.
BP members are evenly split 50-50 regarding the "Due on Sale" clause issue and most of the feedback you're going to get is opinion. He's my opinion regarding this issue, as I've written on other posts;
The lender can exercise the "due on sale" clause if the name(s) of the buyer are not the same name(s) as the members identified as the owners of the LLC. For clarity; as with a trust, lenders do not exercise the "due on transfer/sale" clause when real property is transferred to the SAME individuals in an official capacity (e.g. Joe and Jane Smith as trustees of Smith Trust). Typically, the same applies to LLCs where you and your spouse are sole members (single or multiple member LLC).
If you take out a mortgage personally and transfer the property to your LLC that you control, you should be exempt. Also, if your loan was conventional; Fannie Mae recognizes the legitimacy of a QC between the mortgage holders and the LLC so long as the LLC is controlled by the borrowers;
If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See for additional details.)
I believe Freddie Mac follows suit. Here’s a BP post on the same topic; https://www.biggerpockets.com/forums/49/topics/610831-oh-yeah-the-due-on-sale-clause-is-now-llc-friendly-sometimes
Regardless, you should always talk to your lender and tell them exactly what you’re planning and get their approval.
Next is to check with the Title Company regarding the Title insurance. Generally, the coverage of the policy will state; “The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title.” Again, as with the question regarding the lender mentioned above, its best to ask your Title company if the insurance coverage remains intact if the asset is transferred.
Unlike you, I am not an attorney, but this is what my attorney advised who specializes in real estate law."
