- Hey, what's up guys, Clint Coons here.
And in this video, I wanna talk about that dreaded
due on sale clause that everyone seems to get hung up on
when it comes to transferring real estate
into their limited liability company.
Okay, let's get started.
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So here's the issue, you talk to your local attorney,
your CPA, financial planning advisor,
and you tell them,
hey, I bought this rental property
and it's residential, 'cause remember,
this doesn't apply to commercial real estate,
which is more than four units or five units or more.
And typically, it's not an issue,
if you're working with a community bank,
because they're gonna write a portfolio loan,
that means they're gonna hold it themselves,
they have different underwriting guidelines.
Where this really comes into play
is with those Freddie, Fannie conforming loans,
which they control about 90% of the mortgage business
in this country.
So they have specific guidelines
and most conventional loans that you're writing,
you're going to a mortgage broker,
they're putting it together,
they're following Freddie, Fannie guidelines,
so they can sell it to one of those two institutions
after they've written a loan,
so they want to make sure they're complying with it.
Now, for years, people talked about that,
if you transfer your property that has a mortgage on it
into an LLC, a lender can accelerate
and call the note due.
Now I've been doing this for 23 years
and I own a lot of real estate
and I've transferred a lot of real estate of my own
that's encumbered by mortgages.
And I've never had a lender once call me up
and say, "Hey, Clint, you really need to pay off this loan,
we're gonna accelerate it because you moved it into an LLC."
You know, it just doesn't happen, why?
Because I'm always current on my mortgage,
I keep my property taxes paid,
and I keep my property insured.
So I'm not doing anything that's going to upset the lender.
Now, with that being said,
I understand that there were some people are concerned
about it, that the lender could come back
and let's say that interest rates jumped 10 or 15%,
they decided that they wanna start going through
their portfolio of loans and accelerating them
where the title has been transferred.
So what I wann do with this video
is give you some sense of calm
that this isn't going to happen.
Most likely, you can tell people,
"Hey, I saw this guy on YouTube,
and he was explaining this attorney about how this works.
And he actually showed me the guidelines
for the due on sale clause
when the lenders can accelerate a note."
Because what I'm focusing on here,
is that vast majority loans
that most people fall into those Freddie, Fannie loans
and what are their requirements
when it comes to transferring property?
If you move it into an LLC,
does it automatically result
in a property acceleration?
Well, let me just show you this.
I'm gonna bring up my guidelines right here.
So as you can see here,
this is the servicing guide for Fannie
and it talks about allowable exemptions
due to the type of transfer this has to basically say,
when they'll allow you to transfer title to real estate,
and it won't result in the acceleration.
So let me just scroll down.
It talks about a lot of other things in here,
joint tenancy when you pass on,
but we're really interested in his real estate investors,
how do we get our property into that LLC,
and we sleep well at night on our pillow
without worrying the lender is gonna come up
and ask us to refi the property?
Well, first off, look this clause right here an exemption,
it talks about moving the property into a trust.
So this would apply to the land trust
or living trust scenario,
but you can move it in there
and it's not going to be an issue
when you put it in into the into one of these trusts.
Now, keep in mind that there are certain situations
where this could be a problem,
and that is if the property is your personal residence.
And so if it's a personal residence,
and you've got a loan,
specifically for your primary or secondary residence,
then the lenders could potentially accelerate
when you move the property into an entity
until you've met the 12 month residence requirement,
which means that you've lived in the property for 12 months.
But typically, what they're looking for there
is they wanna know whether or not you've changed,
that is you're no longer living in that property.
And so the way it's interpreted
and you should understand that,
is let's assume I bought a house,
it's my personal residence,
and then I move out in six months
and I turn it into a rental,
well, that's gonna violate this clause
and it could give rise to acceleration
if the lender found out about it,
put it into an LLC, you're no longer living there,
you've converted it from a personal residence
into investment property.
And I understand, what they're trying to do is,
is prevent people from qualifying for these
lower interest rates, more favorable loans,
'cause they're gonna treat the property
as a personal residence and not an investment property,
when in reality, that's what they intended to do.
But I'm just focusing on in investment property,
let's get that property into a limited liability company
and not worry about it.
So here's what you're gonna see down here,
you come down a little bit further
in this servicing guideline.
And I'm gonna put these both links to both of these
in the show notes.
If you wanna go read themselves, by all means,
check them out on your own send them to professionals
who tell you can't do this.
You can transfer it into an LLC
provided that a the mortgage occurred after 2016.
Again, we're dealing with Fannie here,
and the LLC is controlled by the original borrower,
or the original borrower owns a majority interest
in the LLC.
Now, this is what we're getting at here,
you can put it into the limited liability company,
provided you're in control
of that limited liability company,
or you own a majority interest.
And most of us when we set up our LLCs,
we're gonna be controlling them.
So it's allowed to do this,
now the only exception they have the caveat, again,
is that 12 month occupancy,
if it's a personal residence, okay?
If you'd bought the property originally for that,
then you gotta live in it for 12 months before you do this.
But for investment property,
you know, it's pretty obvious here,
that's Fannie's okay with you putting it in,
and the servicer is not going to accelerate
when it moves into a limited liability company.
Now, we also have Freddie to consider
'cause they're the other big player in the business.
And so what do they say?
Well, here's there's 8406.4 the servicing guideline
deals with Freddie Mac and transfers of ownership.
So in their guidelines,
they state that you can transfer it
to a limited liability company or limited partnership,
provided that the managing member general partner of the LLC
is the original borrower.
So again, it's similar they use different language,
you just have to be in control.
And if there's multiple borrowers,
let's say you and your spouse,
then you must be members in that limited liability company.
And at least one of you must be a manager
or general partner in the case of a limited partnership.
So basically states this,
if my wife and I bought a property together,
we're both on the loan,
and we take that investment property,
and we put it into a limited liability company,
we both need to own those LLC,
and we both should be controlling,
or one of us needs to be controlling it.
Well, that's the way we're setting them up.
Now, we may be using a holding LLC in there,
but you're still the member indirectly
through that LLC so it's just you.
What they're concerned about,
obviously, in this type of situation
would be if you bought a property,
subject to existing financing, which a lot of people do,
and I got some videos on that,
and then you transfer that interest over.
But again, in those situations, they'd have to go searching,
but for you for your investment properties,
it's not going to create an issue for you
where the servicer will come in
and accelerate your mortgage.
And you can also put it into trust,
trusts are acceptable as well, with Freddie,
let me just go to in fact,
Freddie's more adopting of this,
and they'll even allow you to take title to property,
investment property and refinance property
that's in a land trust.
So I know many of you investors use land trust,
I talk about them a lot on my channel.
And here's this another situation
where you can take advantage of that
if you're using one of these types of loans.
And the thing about it, of course,
is that all the beneficiaries of the land trust
must be individuals.
And the mortgage premises must be the only asset
in the trust, which states this,
when you provide your trust to them,
they want to review it,
you gotta make sure that the only beneficiaries
don't list an LLC, it needs to be you.
And that trust is only gonna hold one property.
So the thing is, is that the due on sale clause,
I think, for many of us is not the issue
we make it out to be.
I know a lot of people like to beat those fear drums
that you shouldn't move and protect your assets.
But Freddie and Fannie,
the largest controllers of mortgages in this country,
they're now accepting of it.
These are recent regulations that have been passed
in the last few years and their servicing guide
that allow for this.
And so I hope you take away from this that,
putting properties into limited liability companies,
it's not going to be as bad as
so many people make it out to be.
And a lot of reasons why is because,
you know, back in 2010, 12, 13 in earlier,
there were issues with that,
they said that Freddie and Fannie
would accelerate these notes.
I never saw it happen.
But everyone said it did.
I guess like everyone says,
Bigfoot is in the Pacific Northwest.
Haven't seen it yet,
but enough people believe it.
And then you know what happens,
it kind of get this group think around it,
wouldn't worry about it.
Anyways, hope you liked the video.
If you got any questions, put them down below.
Also, check out those links yourself,
there in the show notes
and thanks for watching, guys.
Take care.
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