Creating LLC For Rental Property
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM # LAW 765
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A ThinkGlink reader owned rental
property with a mortgage. He created an LLC to protect his assets and transferred
the building to the LLC. Now he is worried that the mortgage company will call
in the loan. Ilyce and Sam explain why lenders call in loans after property
has changed hands.
Q: I purchased a 4-plex, and wanted to protect my personal assets. I formed
an limited liability corporation (LLC) and transferred the title to the 4-plex
into the LLC.
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My mortgage has a clause in it that states that the lender can accelerate the
repayment of my debt because of this transfer. However I do not think they will
find out unless I don't pay the debt I owe them.
But now my insurance company is going to notify my lender to change the insurance
policy to the name of the LLC. What should I do? I am the only member of this
A: For the most part, you may be correct. As long as a lender obtains its payments
and the property is insured, the lender may not find out that there has been
a transfer of the title to a property. Your insurance company, of course, has
to tell the lender that the policy has changed and that the new entity is the
owner of the property.
While the lender may not care, particularly since you are the sole member of
the limited liability company (LLC), you probably should have called the lender
prior to setting up the LLC and transfering title to the new company.
Now that you have done that, if the insurance policy still names you and the
LLC, you may find that the lender doesn’t care. If the lender does care,
you will have to explain to them why you transferred title to the LLC and hope
that they do not accelerate the debt.
Most, if not all, mortgages have a clause that says that if a property is sold
or title to the property is transferred the lender has the right to call the
loan. “Calling the loan” means that the lender has the right to
tell the borrower that it’s time to pay up and pay off the loan in full.
The lender reasons that it made a loan to a particular borrower and want to
make sure that that borrower always has an interest in the home. If the borrower
sells the home, the lender wants the right to quit the arrangement and get repaid.
It’s time to call the lender and see if they will work with you in the
transfer. Many lenders will send you a letter and tell you what you’ve
done is okay. Others may not.
One possibility is that the lender will approve the change, but maintain the
right to call the loan in the future.
But if you knew in advance that your lender would not approve the transfer
and did it anyway, you’re playing with fire. I hope you have enough cash
on hand or can refinance the property quickly.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com