I recently gave a presentation on this topic at our Colorado Springs Investors Happy Hour; as often as it happens I am always surprised when this issue comes up. Your exit strategy will affect the way you take title and the way you take title may affect your exit strategy. I want to share just a couple tips that will help investors understand how to take title depending on their exit strategy.
Fix and Flip-
When fixing and flipping the property you can take title in your personal name or an entity and should not affect your retail sell. If you change title after closing it could be challenged buy your retail buyers underwriting. For instance you close on a property in the LLC the wholesaler had the property in, wait three months and then quit claim it to your entity or personal name, some underwriters may require a seasoning period from that day forward. Seasoning periods could be 60, 90 or even 180 days. If your retail buyer faces a seasoning issue it is possible they can take their file to a different lender and get it closed, but not guaranteed. If you want to take title differently than how you purchased property change the title the day you close, this way you will not get be faced with an additional seasoning period.
Know what your exit strategy is and plan accordingly.
Fix and Hold-
If you will be keeping your property as a long term rental it is best to take tile in your personal name. It is near impossible to get a Freddie/Fannie refinance when the property is titled in an entity. If you purchase the property in an entity, quit claim the property to your personal name immediately to avoid any more seasoning than necessary. I have most recently seen lenders requiring 6 months seasoning if the title changes from and entity to personal name.
If you buy the property with hard money, get it fixed and rented, then change title it could affect your refinance. This could be a heart breaker when you find out you have to make your hard money payments for 6 more months because you took title incorrectly.
Also consider your loan product when planning on refinancing. Are you going to take a rate and term refinance or cash out? Are you refinancing based on your cost or new appraised value. Is the local bank going to allow you to refinance in the name of the LLC, if so what is the seasoning period. It is very important to ask your lender all of these questions so you do not get stuck with a property or hefty payment.
Fix and Flop-
This is the one that worries me the most with investors. You found a great little property to fix and flip, you take title in an entity, a couple months to rehab the property then you market the property for 5 months, no bites, no contracts. After seven months your loan hard money loan is now due in just two months, you decide to refinance the property and keep it as a rental. You call your local mortgage broker and tell her you took title in an entity, she then tells you it will be 6 months before you can refinance, ouch. You are then faced with a fire sale to get rid of the property or a discussion with you lender on what a extension is going to cost.
Know what your exit strategy is and plan accordingly. I encourage everyone to take a couple minutes to walk through each situation before closing and put a plan together assuming worse case senerio.
Ask your lenders, hard money, soft money or mortgage brokers for your options. A 10 min phone call now could save $10,000 out of pocket later, Gieco can’t promise that.