Do You Know the Quitclaim Risks?

For years real estate gurus have been recommending that real estate investors place their properties in a business entity, like a LLC or trust, to shield them and their other assets from potential liabilities associated with a real estate holding.

This is sound advice from a legal and liability stand point.  However, this strategy can limit the investor’s access to real estate loans or can increase their cost since the cheapest loan product, Fannie Mae compliant paper, does not lend to business entities, only individuals.

Investors and certain gurus have the solution.  Get the loan in your individual name and then Quitclaim the property to your business entity.  As long as you are making the loan payment, the lender does not care and you will accomplish your objective of shielding yourself from risk.

You may be trading one risk for another!

Conceptually, imagine you lend someone money for a property and take such property as collateral for the loan.  Suppose you find out that the borrower has transferred your collateral to a business entity.  Would you feel secure?  Well neither do the lenders!  A Quitclaim deed does not guarantee the property is free of debt or liens.  You have legally breached the agreement with your lender when you Quitclaim a property.

There are two primary sections of the mortgage documents that you violate with a Quitclaim, “Due on Sale” and “Events of Default”.   Below are excerpts from real mortgage documents:

DUE ON SALE – Lender may, at Lender’s option, declare immediately due and payable all sums secured by this Mortgage upon the sale or transfer, without Lender’s prior written consent, of all or any part of the Real Property, or any interest in the Real Property.  A “sale or transfer” means the conveyance of Real Property or any right, title or interest in the Real Property.

EVENTS OF DEFAULT – Grantor will be in default under this Mortgage if any of the following happen: transfer of title or sale of the dwelling.  Upon occurrence of an Event of Default and at any time thereafter, Lender may exercise any or one or more of the following rights and remedies:   Accelerate Indebtedness, Collect Rent, Reimbursement of Attorney’s and other fees and expense.

For violating the agreement a lender can require full payment of the loan and the lender could demand reimbursement for all expenses and potentially enforce the “Default Interest” rate.

ReCasa Financial Group - Real Estate Financing - Dennis & Nelson Insurance

The financing landscape has changed.  Lenders are closing and being taken over by the government, other lenders or financial institutions.  Many of the loans are now handled by “Servicing Companies” who are under severe scrutiny for their actions and inactions.  All constituents are following the “Letter of the Law” to minimize exposure, risk and protect their collateral interests in real estate mortgage.

With the witch hunts that regulators, service companies, lenders, banks and their attorneys are conducting due to the financial crisis, do you want to take the chance that they enforce their legal rights per the documents with your Quitclaim transaction?

Proper insurance combined with an umbrella policy can cover most of your risks.

Which is more risky?  Insurance or Quitclaim?   Are you feeling lucky?