Q: What’s my best option when it comes to transferring a property to a limited liability corporation (LLC) and avoiding the due on sale clause?
A: A due on sale clause is the provision in a mortgage that basically states that if the owner of the property that has a mortgage on it, sells the home, that lender has the right to call the loan and demand repayment of the loan in full.
The idea behind the due on sale clause is that the lender was willing to give the loan to a specific owner of specific piece of property and if that owner sells the property, the lender is entitled to decide whether it wants to continue with the loan arrangement.
In the residential marketplace, lenders can’t trigger the due on sale clause under certain circumstances. These circumstances involve the death of one of the owners, when there is a conveyance from one spouse to another, and certain other family arrangements.
In your case, you want to convey a property to an LLC. Let’s assume that you’re the sole member of the LLC. In other words, you are the owner of the LLC.
While you haven’t indicated why you want to transfer title to the property to an LLC, many people transfer properties to LLCs either for liability purposes or for flexibility in their investment strategies with other people. If you’re transferring the property to an LLC for these or other reasons, and the property will generally be financed through a residential lender, you need to keep in mind that many, if not most, residential lenders will require you to have the property in your own name to finance and refinance the property.
You may encounter a residential lender that will tell you that you can transfer the title to the property to an LLC after you refinance but they will not modify the documents to eliminate the due on sale clause.
If your property is commercial and the loan documents contain a standard due and sale clause, any transfer can trigger the due on sale clause and give the lender the right to trigger it and call the loan. But if your loan is a commercial loan, you should be able to talk to the commercial lender and get its consent to your transfer.
If your property is a residential property — even if it’s an investment property — but the servicer of the loan is a national residential mortgage servicing company, you may have a hard time getting the servicer to consent to your proposed transfer to the LLC.
At that point, you’ll have two choices: You can transfer the property and risk that the lender will decide to call the loan, or you can wait until you need to refinance the property and then transfer the property to an LLC as part of the transaction.