Transfer Real Estate To Your LLC? No!
Transfer real estate to your LLC, and you are creating a disaster!
This is possibly the most misunderstood aspect of Real Estate Investing.
And yet, it is really the easiest to understand.
TRANSFER REAL ESTATE TO YOURSELF
Here’s how financing a property works, in simple terms.
1.) The Lender loans you $100,000 to buy a $130,000 piece of property.
2.) The funds are sent by the Lender to the Closing Agency to be given to the Seller of the property at closing.
3.) You provide the other $30,000 to be given to the Seller.
4.) At Closing, the property is deeded to you by the Seller, with a lien retained which the Seller assigns to your Lender.
5.) You sign a Real Estate Lien Note payable to the Lender.
6.) You sign a Deed of Trust to the Lender pledging a Security Interest in the property. The Security Interest allows the Lender to Foreclose on the property if you default on making the payments on the Note.
7.) Everyone goes home.
TRANSFER REAL ESTATE TO YOUR LLC
Now, many people thing that you can have the Deed to the property be in the name of your Limited Liability Company (LLC), but have the financing of the property be in your own name as an individual.
No, you cannot.
The property must be in your name in order for you to create a lien on the property, which the Lender requires in order to make the loan. No one else can create a lien on your own property. And you, personally, cannot create a lien on property that is in the name of someone else, or another legal entity. It does not matter what your relationship is to the person or entity that owns the property. It isn’t yours.
It is actually a violation of Federal Banking Regulations for a Lender to make a loan that is not secured by sufficient collateral to protect the loan funds. This is because the presumption (from long ago) is that these funds are the deposits of the bank’s customers, and they must be protected.
If you do borrow money and pledge your own property as security, once you receive the loan funds and pledge the property as collateral, you cannot transfer the property out of your own name. Not even to an LLC in which you might be the sole member.
The LLC is a separate legal entity.
It would be no different from transferring title to the property to your next-door neighbor, or to me.
You would no longer own it, and you borrowed $100,000 and pledged the property as collateral on the loan.
TRANSFER = THE DUE ON SALE CLAUSE
That is why the Lender has a clause in the Real Estate Lien Note (and the Deed Of Trust/Mortgage) that says if you transfer title to the property, the loan is immediately due and payable.
And one of the default provisions of the Deed of Trust/Mortgage is triggered automatically.
Furthermore, the Banking Regulations require that the Bank immediately collect the entire balance of the loan, or that the property be posted for Foreclosure.
It is called the “Due On Sale Clause,” and “Sale” means transferring the property out of your name.
That’s the law.
Banks are visited regularly by a group called “the Bank Examiners.”
If the Examiners find that a Bank is ignoring “Due on Sale” clauses, there will definitely be heavy fines, and possibly more.
TRANSFER THE REAL ESTATE AT YOUR OWN RISK
For you personally, there can be all kinds of horrible consequences if you do this anyway.
Say you transfer the property to your LLC, and the property burns down the next day.
Your insurance policy does not cover it because the policy is in your name insuring property that you own, and you no longer own it. And the LLC is not the “named insured” in the insurance policy.
So, the insurance policy doesn’t cover anything.
If the Bank suffers a loss, you have now committed a crime called “Hindering a Secured Creditor” and/or “Fraudulent Conveyance.”
Messing around with transferring title to secured property is treated very casually by a lot of people, but this is very serious business.
Sorry to be so pedantic, but it worries me to see this.
And everything that you read on the real estate investing forums says that you can transfer your real estate to your LLC, and you should not worry about it.
So I thought I would provide this accurate information, for the few people who do not follow the crowd, but make up their own minds.
I am an Attorney licensed to practice in Texas, North Carolina, Virginia, and the District of Columbia. But I am not your Attorney. I would be honored if I were, but I am not. Reading this Article does not create an attorney-client relationship between us. Internet content should not be used as a substitute for the advice of a competent Attorney admitted or authorized to practice law in your state or jurisdiction.