Know your Borrower, Know your Paperwork

Often rental property owners setup their ownership of their property in an LLC or a corporation.  That way if there is a tenant who sues or if there is a claim against the landlord that insurance doesn’t cover, or exceeds the insurance coverage amount, there are certain protections having ownership in an LLC (Limited Liability Company).  From time to time we receive loan requests for a refinance or an acquisition loan.  Recently a borrower who owns their income property in their LLC made a request of us to make him a loan.  Upon review of the income and expenses of the property we made a valuation and site inspection, then determined that we would be able to lend about 62% of the value of the property.  The borrower was happy with our numbers, terms and conditions and asked us to proceed.  But wait!  The borrower’s LLC operating agreement conflicted with itself!  The operating agreement sited the “Manager” of the LLC to be a Trust, well fair enough, a Trust can act as a Managing Member of an LLC, however you have to have your Trust agreement also in order.  The conflict came where we saw one of the papers signed by the individual himself in the LLC, not as Trustee of the Trust that was the Managing Member.  A signature by an individual who is not the Managing Member will not bind the LLC to the agreement!  Necessary items when you transact on behalf of your LLC is your Operating Agreement, LLC-1 filing and if there are any amendments you need a LLC-2 or LLC-12 filing as well.\, in addition the correct signature of the Managing Member, then if a Trust is involved, it is necessary to produce a copy of that trust, also any amendments and then sign a sworn, notarized statement certifying who is the person with authority to sign for that entity (the Trustee), also who where the Settlors of the Trust.

Another issue that came up is that an old lien that was paid in full still showed on the preliminary title report.  Certainly you as the owner/borrower on a property know what you owe and who you owe it to.  If you tell us there are no other loans on the property, we know that you have first hand knowledge of that information because you are the owner/borrower.  When old liens show up, we are forced to deal with them.  In this case a loan from nearly 20 years ago with a private mortgage company that went out of business 7 years ago was difficult to track down and try to obtain a release from!  The lesson here is to make sure when you payoff your loan to get a Reconveyance and record it!  The only way to make sure a loan is gone from title is to record a Reconveyance (or get a court order I suppose), but I digress.  Luckily in our borrower’s case I was able to contact the daughter of the private mortgage company that went out of business and the reason why is because the owner passed away after a long 30 year run.  The daughter had been appointed executrix of the estate of the owner and she was also appointed as an officer to the Trustee that was on title concerning the Deed of Trust in question.  What a big job and extra work for us!  But we got things done.

Having your paperwork in order and having copies of the pertaining documentation regarding your entities is essential.  Title companies will not insure new loans without proper documentation and certifications.  Being up front about liens, old loans, delinquent taxes, etc. with us is just plain good business.  We are going to find out anyway, its not like your rate will change or be renegotiated because you have some extra work for us to complete, just tell us and we can better prepare so we can avoid delays on your new loan request.  Having over 35 years experience makes a difference!  If we can assist you with your apartment building or commercial loan request, please feel free to call anytime.

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