A bit OT, but I hope not too badly, and that someone on this board knows the answer.
I'm considering transferring ownership of my home into an LLC, of which I would be the administrator. The property is subject to a mortgage, originated by USAA, currently owned by Fannie Mae, and serviced by Ocwen. I understand that one of these outfits would have to approve the transfer, but I can't get a straight story as to which one is empowered to grant (or refuse) such an approval. Is there any general statement that would apply to this situation. Thanks.
How long ago did you buy it?
Freddie Mac has a restriction on transfers/sales within X months of closing on a purchase of a Freddie Mac f/c'ed property. The penalty is Y. On most of the contracts I have seen it is a 6 month restriction and a $10,000 penalty. But your area could be different. Look at your contract, the Freddie Mac addendum and it is specified in the addendum. Same with Fannie Mae if others are reading this. BTW, this penalty applies even if you paid cash for the property. It is a deed restriction.
Check your mortgage and your note to see the restriction about transferring into an LLC. I am not sure if the mortgage and note you signed prohibits any transfers or not. You are better off speaking to a real estate attorney about this transfer anyway. Bring all your documentation (contract, closing docs and copy of your note and mortgage) Don't attempt this transfer without an attorney anyway to prepare the LLC and the deed.
If you transfer into your own trust, that would be a different answer. You still would want to speak an attorney.
Thanks for responding. I bought the property in 2003, refinanced in August 2010. I am working with an attorney for setting up the LLC, and she asked me to ask the holder of the note if they would approve the transfer into the LLC. I suppose I should ask her my question, but hoped to get a broader input here (and run up fewer billable hours). I'd also be interested in how a trust would be different.
You have had the property 10 years so it is a non-issue with Freddie Mac. I am glad to hear you are working with an attorney and not doing it yourself, you will save yourself many headaches down the road.
To check with your note holder you have to go through your servicer and Ocwen is not really known for being cooperative at all. Remember the servicer is your contact. The servicer may or may not own your note. It is more common for the servicer to NOT own your note, but just to service the loan.
A trust is different if you are the trustee as the servicer/note holder can't stop your transfer into a trust and you don't need permission from the note holder. This is a common move with estate planning. Naturally your attorney can give you the legal ramafications and details for your specific area.
Thanks. I'll update when I find out more ...
My Brother and I just formed an LLC through a Real Estate Attorney.
We are preparing to buy our first investment property, and we consulted with the Attorney about transferring this property under our LLC.
He named only two concerns/negatives:
1. We would have to pay transfer tax twice. (once when we purchase it, and again when we transfer it)
2. Banks have something called a Due on Sale Clause where if/when you transfer the deed, the balance of the Mortgage is due in full at that time.
I have been in communication with the Mortgage Company that I have my primary residence home loan through, and it's like pulling teeth to get them to tell me (in writing, preferably) that they do not enforce any such clause.
Does anyone have any input on this? Does anyone know of a bank that either does not enforce such a clause or will finance an LLC?
My father and I are members of a local Rental Owner's Association, a local affiliate of the National Apartment Association.
At last months meeting, a local mortgage broker was speaking about financing investment properties. He discouraged the use of LLCs and citied a recent situation where a former client of his transfered the property into the LLC and the servicer actually called the mortgage due. After revieiwing his options, the guy actually ended up having to sell the property to satisfy the note.
My father and I have an LLC. Our original intent was to quit claim our properties into the LLC, but now we've decided to just utilize it as the assigned management company for the properties.
You can buy property in an LLC. It is easier to purchase the property for cash if you are going to hold it in an LLC.
You can also mortgage a property that is held in an LLC name - typically you have to personally guarantee the loan.
If you are looking at condo's - not all condos will allow you to purchase with an LLC.
That is why a trust works better when discussing your primary residence - you don't have these issues.
For investment properties there are different parameters. If you are using private money (sometimes called hard money) then it is much easier to purchase with an LLC rather than a trust for an investment property. There is an exception to this though - through a Self Dircted IRA purchase. This gets very complex. Best to speak to your CPA and attorney about it.
Yes, the transfer tax is paid twice if you first buy in your personal name and then transfer into an LLC. How most investors save the extra transfer is by buying in the LLC name right from the beginning and giving a personal guarantee if it is mortgaged. That way you are only paying transfer taxes one time.
The Due on Sale clause has been around forever.
Thank you very much for your responses!
We initially wanted to finance the property under the LLC, however, my understanding is that it is VERY difficult to find a lender who will finance the property to an LLC.
That would actually be our preference. Buying it in our name, and then transferring it is more like the Plan B.
If anyone knows of a lender who will grant financing to a new LLC, that would be great!
The properties we are looking at are $50k and under. We have the 25% cash to put down, of course.
We are ready to move forward now. We just need to find the right Lender.
Great place to get leads for this type of financing is your local real estate investment club, since they'd have other real estate investors who have probably looked into this before. Realize the terms of these types of loans will be less attractive than what you could get by financing it personally in your name.