Transferring title into LLC could trigger loan repayment

Why strategy to protect asset is likely to upset lender

By Ilyce R. Glink
Inman News

Q: I purchased a fourplex, and wanted to protect my personal assets. I formed a limited liability corporation (LLC) and transferred the title to the fourplex into the LLC.

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 LLC.

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 property title. 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 transferring 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 wants 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 it will work with you in the transfer. Many lenders will send you a letter and tell you what you've done is OK; 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.

Q: I am purchasing a lot next door that has an easement giving me a right of way to my otherwise landlocked home. In order to preserve this lot next door as a lot plus the easement, do I have to deed the property to a limited liability company?

I have been told that if I deed it to myself, the entire lot would become one giant easement, instead of a lot plus an easement.

A: Someone is giving you good information. If you are the beneficiary of an easement -- in this case the easement gives you access to your landlocked property -- and you buy that property, the easement is no longer needed and merges into the newly formed property.

The easement does not become a "giant easement." The easement is eliminated.

Whoever gave you the advice of buying the property in the name of a limited liability company -- or in any other manner other than in the name in which your landlocked property is owned -- is giving you sound advice to preserve the separation of the adjacent lot and easement.

But if you are consolidating the two properties and plan to always use them as one, you wouldn't have to worry about the easement and could buy the adjacent property any way you want.

You may have various options in buying the adjacent property and you should really consult with a real estate attorney in your area.

www.LagretRealEstate.com

Best way to sell house in buyer's market

Consider rate buydowns when buyers are short on cash

By Jack Guttentag
Inman News

These days, I hear many complaints from home sellers. Among them: "It's been on the market for nine months with nary a nibble"; "I cut the price three times, still hasn't sold"; and "Three other houses on my block are up for sale, so I took mine down."

In a buyer's market, sellers not only compete with each other, they are also in competition with builders. But builders have an advantage: they have affiliations with lenders through whom they offer financial inducements that most individual home sellers don't know about. Yet the fact is that there is nothing that builders offer that individual home sellers cannot match, provided they know how.

Typically, the first thing sellers think about doing to make their houses more marketable is reduce the price. Very often, that doesn't work, because the price is not the problem. If potential borrowers are cash-constrained or income-constrained, a price reduction provides very little help.

Here is an example. Jones has her house listed at $200,000, and lenders will lend 95 percent of that at 6.5 percent on a 30-year fixed-rate mortgage to a borrower with adequate income and good credit. The cash-constrained borrower, however, can't come up with the $14,000 in required cash, consisting of a $10,000 down payment plus (say) settlement costs of $4,000.

If Jones cuts the sale price by 7.5 percent, or $15,000, the cash required from the borrower drops from $14,000 to $12,950, or by a measly $1,050. (These and other numbers below can be found in a spreadsheet on my Web site). For this potential buyer, it makes far more sense for Jones to pay the $4,000 in settlement costs, which reduces required cash by $4,000.

Next, let's consider the case of an income-constrained buyer. The income constraint may be imposed by lenders, who set maximum ratios of income to expenses, or the constraint may be self-imposed, based on what buyers believe they can afford.

The $15,000 price decrease, which reduces the loan amount from $190,000 to $175,000, reduces the payment by $90.07, or 7.5 percent. From the seller's perspective, that is not a lot of bang for the buck.

A better option is to pay points to reduce the rate on the buyer's mortgage, retaining the same sale price and loan amount. If the interest rate on the $190,000, 30-year, fixed-rate loan were reduced from 6.5 percent to 5.5 percent, the payment would fall by 10.2 percent. The cost to the seller would be about 4.6 points, or $8,740. This is about 40 percent less than the price reduction needed to reduce the payment by 7.5 percent.

Points paid to reduce the rate are sometimes termed a "permanent buydown" because the lower rate and payment run for the entire life of the loan. An even more powerful way to lower the payment is for the seller to buy down the payment in the early years of the mortgage. This is called a "temporary buydown" because the payment reduction doesn't last.

On a 3-2-1 buydown, the mortgage payment in years one, two and three is calculated at rates 3 percent, 2 percent and 1 percent, respectively, below the rate on the loan. On a 2-1 buydown, the payment in years one and two is calculated at rates 2 percent and 1 percent below the loan rate. And on a 1-0 buydown, the payment in year one is calculated at 1 percent below the loan rate.

I will use a 2/1 buydown to illustrate because it is the most common. Using the same mortgage as before, the payment in year one is calculated at 4.5 percent, which is 2 percent below the 6.5 percent rate paid the lender. The payment in year one is reduced by 19.8 percent, which is almost twice as large as the reduction with the permanent buydown. In year two, the payment is reduced by 10.2 percent. And in year three it is back to what it would have been without the buydown.

The total cost to the seller is $4,324, which is about half the cost of the permanent buydown. The $4,324 is placed in an escrow account from which monthly withdrawals are made. The total payment received by the lender, consisting of the payment made by the borrower plus the withdrawal from the escrow account is exactly the same as it would be in the absence of the buydown.

WARNING: The buydown cost assumes the seller is not credited with any interest on the buydown account. Don't fight about that; the interest is reasonable compensation for setting up the arrangement. But some lenders go beyond that and calculate the buydown amount on a 2/1 as 3 percent of the loan amount, which would increase the cost to $5,700. (On a 3/2/1, they would charge 6 percent). This is a rip-off, which you can avoid by making your arrangement through an Upfront Mortgage Broker. Since their fee to the borrower is set in advance, they don't profit from any such rip-offs and won't use a lender who practices them.

My living trust became nearly worthless

Homeowner makes big mistake after refinancing


By Robert J. Bruss
Inman News

Nobody, including me, likes to think about death. But it is inevitable, as I was reminded during a recent hospitalization for major surgery. Thankfully, because of the excellent surgeons, nurses and my friends, I came through the experience successfully.

After I recovered, I learned from the doctors I had been very close to death. When I got home and was feeling better, one of the first things I did was review my estate plan.

In the process, I discovered my old living trust had become nearly worthless. The primary reason was, like most real estate owners, in the last few years I refinanced my properties to take advantage of lower mortgage interest rates. As part of the process, the lenders required me to take my property titles out of my living trust, record the new mortgages, and then put the titles back into my living trust.

But I carelessly didn't follow up and the title companies failed to re-deed my properties back into my living trust. The result was my living trust had become virtually empty because it was "unfunded." If I could make that mistake, think of how many other homeowners and realty investors also have worthless, empty living trusts.

Especially because I wanted to revise my estate plan and change my beneficiaries, I decided to hire a trusts and estates attorney. The total cost, including recording fees, was about $1,300. That is far less than the 3 to 10 percent of gross assets it costs to probate a typical estate.

Frankly, although I am an attorney and could prepare my own living trust to avoid probate costs and delays, I'm glad I hired another attorney.

Among the extra improvements he suggested were (1) a durable power of attorney for lifetime asset management (in case I become unable to manage my assets); (2) a "living will" (also called an advanced health care directive) so the designated person can make health care decisions, such as taking me off life support if there is no reasonable hope for recovery; and (3) a "pour-over will" for any assets omitted from my new living trust. The attorney also made certain all my property titles were correctly transferred to fund my living trust.

EVERYBODY NEEDS A WILL. Shockingly, less than 20 percent of U.S. residents have a written will. For those who have a will, after they die their assets will be distributed according to their wills by the local Probate Court. Probating an estate, even a modest one, usually takes six to 18 months or longer before the heirs can receive their inheritances.

For individuals who die without a written will, the state law of intestate succession determines who will receive their assets. Especially in second marriages, the result is often not what the decedent would have wanted. Again, the local probate court supervises intestate succession distribution, subject to costs and delays.

However, if no written will and no relatives can be found, a person's assets "escheat" to the state. That means the probate court will sell the assets and deposit the proceeds into the state treasury. That is not the result most people want.

HOW TO AVOID PROBATE. Even if you have a written will, it usually won't avoid probate costs and delays. Well-known methods of probate court avoidance include holding real estate titles in joint tenancy with right of survivorship (or as tenants by the entireties between husband and wife) and holding bank accounts or stock brokerage accounts with "payable upon death" designations.

But all these methods have major drawbacks, especially when two or more persons own an asset but one becomes incapacitated such as by Alzheimer's disease, a coma or a severe stroke.

A better alternative to avoid probate costs and delays for most individuals is a revocable living trust. This is simply a method of holding title to major assets, such as a home, investment property, bank accounts, common stocks, mutual funds, and other major assets.

When a living-trust grantor creates a living trust, he is its initial trustor, trustee and beneficiary. That means he can buy, sell, refinance and manage the assets as before.

However, if he becomes incapacitated, then the named successor trustee, such as a spouse or adult child, takes over management and can even sell the assets if necessary. There is no necessity to have a conservator appointed by the probate court. Husband and wife can either have individual living trusts or a joint living trust.

After a living-trust grantor dies, the successor trustee then distributes the living-trust assets to the individuals and/or charities named in the document. The local probate court does not become involved, so distribution usually is completed within six months.

ADVANTAGES OF LIVING TRUSTS. Among the many advantages of a revocable living trust are (1) easy amendments or revocation as desired by the trustor; (2) ownership benefits remain unchanged, including income-tax deductions and the principal-residence-sale tax exemption; (3) avoidance of multistate probates if real estate is owned in more than one state; (4) privacy because living trusts do not become public, as do written wills filed for probate; (5) the successor trustee manages the living-trust assets if the trustor becomes incapacitated; and (6) the successor trustee distributes the assets after the grantor's death.

DISADVANTAGES OF LIVING TRUSTS. Among the few disadvantages of revocable living trusts are (1) no statutory period to limit creditor claims (as occurs in probate court); (2) the cost and inconvenience of "funding" the living trust (usually far less than the cost of probating an estate); (3) when refinancing mortgages, lenders usually require taking real estate out of the living trust for a moment while the mortgage papers are signed and recorded; and (4) a living-trust trustor needs a "pour-over will" or a "back-up will" for any assets that were not included in the living trust.

SUMMARY: Revocable living trusts offer many advantages and few disadvantages to avoid probate costs and delays for heirs as well as conservatorship during the grantor's lifetime.

By avoiding involvement of the local probate court, living-trust beneficiaries usually receive their assets within six months after the decedent's death. More details are in my new special report, "Pros and Cons of Living Trusts to Avoid Conservatorship and Probate Costs and Delays for Your Heirs," available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010