Moved five properties into LLCs with a document service, cleanup ran $11,300

1ryanmck27SC2C

Portfolio of five, four single family and one duplex, roughly $1.7m of value and $890k of debt across three lenders. I wanted them out of my personal name before I got licensed and started taking on clients, on the theory that a public deed with my name on it invites problems.

Used an online document service, $1,290 for five LLCs plus five quitclaim deeds. Reasonable looking documents. Here is what the flat fee did not include and what each item cost.

Transfer tax. My state charges transfer tax on the conveyance and exempts certain transfers between an owner and an entity the owner wholly controls, but the exemption requires a form filed with the deed and specific language about consideration on the face of the deed. The deeds said "for good and valuable consideration." Three of the five got assessed on full value. $6,800, and one county would not abate it after the fact. This is state specific and mine is on the less forgiving end.

Title insurance. Nobody told me that conveying to an entity can change who the insured party is under the owner's policy. Two of the policies had language that arguably follows the grantee where the grantor wholly owns it, two did not. I ordered new policies on the two, $2,100, and I'm still waiting on an underwriter's written position on the fifth. That is the open gap.

Lender consent. Two of the three lenders had transfer language in the mortgage. One issued a letter acknowledging the transfer after I asked in writing. The other never responded to two written requests and their servicing rep said verbally that they do not consent to anything, which is worth exactly nothing to me. I've kept the payments perfect and I'm carrying that unresolved.

Quitclaim vs warranty. The service produced quitclaim deeds. A quitclaim passes whatever interest I have with no warranties, which broke the chain of warranties for anyone downstream and made one lender's counsel unhappy on a refinance six months later. Re-recording two as special warranty deeds cost $600 plus $1,700 in attorney time to sort out what the first set had done.

All in, $1,290 saved turned into $11,300 spent, and I'd guess an attorney doing all five properly would have quoted $4,000 to $6,000 in my market.

What I'd do differently. Scope the engagement to the whole event rather than the documents. Specifically: transfer tax exemption confirmed in writing with the form identified before drafting, a written position from each title underwriter on whether coverage survives the conveyance and an endorsement priced if it does not, written lender notice with a named contact and a deadline, and deed form chosen for what the future refinance needs rather than what is cheapest to produce. I'd also do one property first and watch what happens at the recorder before doing the other four the same day.

5 replies

2stephen_ok9CO2CPRO6

The transfer tax item is the one I'd never have priced. $6,800 on $1.7m of value is roughly 40 basis points and it came from a phrase on the deed. Did the counties give you any written reasoning, or just the assessment?

Also the sequencing point at the end is the real lesson. Five deeds recorded the same day means five identical mistakes. One deed, wait, then four is almost free insurance.

1dpatel_reCS4A

I'd argue with the premise before the execution. What did moving them into LLCs actually buy you? You have $890k of debt across three lenders and I assume you personally guaranteed all of it, so the entity doesn't move the debt exposure. It gives you some separation on tort claims, which is real, and it does not do much about anything you signed for.

The alternative you should have priced is an umbrella policy. In a lot of portfolios that size, a few million of umbrella coverage costs a few hundred a year and covers the scenario people form LLCs about. Whether that's the better structure for you depends on facts an attorney and your carrier would have to look at together, but the point is that $11,300 got spent without anyone comparing the two paths.

Also, on the name-in-public-records reason: about a dozen states don't publish sale prices at all and disclosure practice varies widely, so what's actually visible about you depends heavily on where you are.

3chriswalton8CC1CPRO8

@sextant the umbrella comparison is fair but halyard said he's about to start taking clients. Once you're licensed and doing deals for other people, the reason to separate your own holdings changes shape. Whether that shape needs an LLC per property or one entity with proper insurance is exactly the judgment call you pay a lawyer for, and it sounds like nobody was asked.

1jessreyes12AU1APRO8

Asking the thing I'd have been embarrassed to ask: why does the deed type matter if the seller and buyer are the same person? halyard, your answer is in there but I want to make sure I've got it. A quitclaim passes your interest without promising anything about it, so when a future buyer's title company traces the chain they hit a link with no warranty behind it, and that becomes their problem to price. A special warranty deed at least warrants against defects arising while you held it. Is that the whole of it, or is there more to why the lender's counsel balked?

Moved five properties into LLCs with a document service, cleanup ran $11,300

5 replies