Quit Claim Deed to LLC: What You Need to Know
A quit claim deed to LLC transfers ownership between one or more persons or entities to others.3 min read
A quit claim deed to LLC transfers ownership between one or more persons or entities to others. A quit claim is not a guarantee that you have a claim to the property. If you do have a claim, you are releasing ownership to a new party or parties.
Overview of a Quit Claim Deed and a Limited Liability Company
For owners of real property, a limited liability company (LLC) can provide protection if the LLC is documented as the property's legal owner.
Although you may release ownership of the property to someone else, a quit claim deed does not guarantee that the property is free and clear of liens or other encumbrances. A quit claim deed does not change the name on your mortgage, and you are not released from the responsibility of making payments.
Using a quit claim deed is a simple process that requires a deed form and a copy of the existing deed. The actual deed is used to identify the legal description of the property and identity names, titles, and other items properly.
A cover sheet may also be required on a quit claim. You can do this on your own, or you can have an attorney do it for you for a small fee ranging from $75 to $150.
Quit Claim Deeds and Mortgages
Your mortgage may contain a due on sale or due on transfer clause stating that if the real property is transferred or sold, the mortgage becomes accelerated. This means the entire amount is due. This is called an acceleration clause.
When the mortgage was first assigned to the property, the loan was based on several factors, such as income, credit, and the property's value. When a transfer to an LLC is instigated, it triggers the acceleration clause.
The 1982 Garn-St. Germain Depository Institutions Act, which provides exemptions from the enforcement of accelerations clauses, regulates the two clauses. The law provides exemptions from enforcement of acceleration clauses, which includes transfers to trust and transfers on death. A mortgage with an acceleration clause does not in any way hinder or prohibit the transfer. However, it does give the lender the option to accelerate.
While there is nothing in place that requires the sale to be reported, it is recommended that you consult with a lawyer. It is also recommended that approval from the lender be requested. This should not pose a problem; the collateral is not in jeopardy since your name is still on the mortgage, not the LLC.
In legal terms, the LLC has not assumed the debt. If there was any risk to the lender, they may opt to accelerate the mortgage. This would include payments on the note not being made, and the lender's ability to foreclose due to default is in jeopardy.
Using a trust as a means to avoid the acceleration clause can be tricky and should be avoided unless being advised by an attorney.
Quit Claim Deed Versus Warranty Deed
Investors are aware of the practice of granting a title to another entity, such as an LLC, in order to provide liability protection. In most cases, conventional lenders will require the investor to take the title to the property in their personal name. Once the loan is finalized, however, a quit claim deed is used to transfer the title to the entity.
The main problem with this process is that it nullifies the title policy obtained during the initial purchase of the property under the owner's personal name. Once transferred, the new titleholder, such as an LLC, will most likely not be covered under the title policy.
With a warranty deed, ownership is transferred to an entity. It guarantees that the title is free and clear of encumbrances, and it provides an LLC with some recourse in the event that an issue arises with the title at some point in the future. It also preserves the chain of title to the property, meaning the title policy would still be in effect to cover any claims.
Because a warranty deed provides protection to the owner, it is the typical choice for transferring property between unrelated parties. It is recommended that you consult an attorney before transferring the title to any person or entity using a quit claim deed.
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