Quitclaim Deed to LLC – Is it okay to do?

Protecting Your Real Estate Investment

I am often asked by clients whether it makes sense to transfer a real estate investment property to a limited liability company. This question comes up for investors who own or only a few residential investment properties. There is no question that this is probably a very good asset protection strategy. By operating the rental property through an LLC, if you do it properly, you can protect your other assets from claims of third parties relating to the specific property.

Similarly, if you own more than one property, keeping each property in a separate LLC will shield the others from being accessible to creditors who have a claim against the first property.

Keep in mind that you must observe the formalities of running each LLC like a business and co-mingle income, expenses or assets with personal ones or those of other LLC’s. You should also speak with your tax professional about how to structure the LLC’s for income tax purposes. Be aware that an LLC will not be protected from any personal claims against you since it your asset.

How to Quitclaim to your LLC

A quitclaim deed is actually a very simple process. You will need a deed form and a copy of the existing deed to make sure you identify titles properly and get the legal description of the property. Legal descriptions are written in odd language which either describes where the original description was recorded with the county recorders office or language, called metes and bounds, that read like a map with references to points, compass directions and distances. A cover sheet may be necessary. You can do this yourself, but most attorneys will only charge $75 to $150 plus small recording fees to do this for you. A title company may also be willing to help you.

I would recommend language in the deed that in some way reflects that the transfer is subject to the underlying mortgage.

Will the Quitclaim Deed Violate My Mortage?

This is another question that comes up frequently and, I think, often misunderstood. The reason for the confusion is that most if not all mortgages contain a “due on sale” or “due on transfer” clause. This clause basically says that if the real property is sold or transferred, the mortgage becomes accelerated and the entire amount is due. This is also known as an “acceleration” clause.

When you took out the mortgage to buy the property, the bank made its decision to loan you the money based upon your income, credit and the value of the real property. Seemingly the transfer of the title to an LLC would trigger the acceleration clause.

Due-on-sale and due-on-transfer clauses are regulated by the federal Garn-St. Germain Depository Institutions Act of 1982. 12 U.S.C. § 1701j-3(b)(1). That law provides exemptions from enforcement of acceleration clauses including transfers on death and transfers to trusts.

Keep in mind that the mortgage with an acceleration clause does not prohibit the transfer, but merely gives the lender an option to accelerate. There is no duty to report such a sale,but you probably should. Whether you should or not is something you should decide with advice of counsel. I would recommend that you request approval from your lender and expect that most if not all will agree as their collateral is really not being undermined since you are still on the mortgage personally, not the LLC. In legal speak, the LLC has not “assumed” the debt.

A lender might accelerate the mortgage because of title transfer when the transfer presents additional risk to the lender. The lender is concerned about ensuring that payments on the note are made and that their ability to foreclose in the case of default is protected.

Do be wary of using “trusts” to avoid triggering the acceleration clause. Several people on the internet recommend such a ploy. I won’t go into it other than to suggest you do not do this without the advice of counsel.

These days, transfers of real property into LLC’s is quite common. While technically a violation of a due on sale/transfer clause, the reality is that if the lender continues to be paid, even if through the LLC, it is unlikely that there will be any consequences. The prudent course is to notify your lender and get their written approval before you make the transfer.

 

How to Amend or Change your Contract

Changing or Amending Your Contract

There are many advantages in using standard contract forms if you do similar or multiple transactions. Often such forms have evolved from earlier litigation battles and the editing of legions of attorneys. While I often counsel clients who are presented with such contracts to have them reviews at the first transaction, they do have their use. Often the use of such contracts might reduce disputes and legal action within the industry and most practitioners are familiar with them.

On some occasions it is necessary to include specifics about a particular or specific project in the standard contract. Or, some of the terms can change over time due to the evolving course of dealings between the parties. Amending the contract IN WRITING gives you the opportunity to make changes without having to rewrite the entire contract. It also documents the course of conduct changes.

How Not to Amend a Contract:

Most contracts contain a clause that says that they can only be changed, amended or modified in writing. For businesses that are engaged in a series of transactions over a period of time, maybe even years, that clause is a time bomb if there is a dispute. Why because odds are you will have modified the terms of the contract in practice, but if there is a dispute, you may be bound only by the terms of the actual contract. It can get ugly.

Oh, by the way, marking up the original contract with notes and changes then initializing them is another recipe for trouble. It never reads the same when you look back at it when there is trouble. And, I can almost guaranty that someone is going to claim that the changes were put there after the fact.

The Right Way to Amend a Contract:

Do it in writing. But make sure that the amendment clearly references the original contract and states that whatever is not being changed in the amendment remains as is. A basic format is something like this: Amendment to Contract Form.

Might I suggest that if you are doing business under this type of contract that you periodically take a look at it to make sure that you are still doing business the way the contract says you are. If not, get your pen out and make those changes.