Dos and don'ts of holding home's title in LLC

DEAR BENNY: I own several single-family rental homes .In talking to advisors, one says I should put the houses into LLCs for liability protection. Another said, don't bother. If you get sued, your liability protection on your homeowners policy plus your umbrella policy will cover you. Obviously, the latter provides only attorney and possible judgment costs, but does the LLC really keep you from being sued, or protect you if you are sued, so that you would not need to use the umbrella policy? --Bruce

DEAR BRUCE. It is my understanding that an umbrella policy is not that costly, so I would recommend that you consider both options: Get the umbrella policy and put all of your rental properties in separate limited liability companies.

The concept of limited liability companies (LLC) is relatively new -- probably started in the 1980s. Its primary purpose is to insulate the property owner from personal liability should there be a court judgment against the property. For example, if a child was injured because of lead paint in the property and a judgment was entered against the LLC, if the proper procedures for maintaining a LLC were kept, it would be difficult -- if not impossible -- for that judgment to attach personally against the member (or members) of that LLC.

This column does not permit a lengthy explanation of what an LLC is and how it works. However, if you own several properties, each should be held in a separate LLC. Otherwise, a judgment against the LLC will impact on all of the properties that are held by that LLC.

Some basic rules to preserve the independence of an LLC: (1) Do not commingle your own funds with that of the LLC; (2) If you are the sole member of the LLC -- or its managing member -- make sure that whenever you sign any papers, you add the word "member" after your signature. You want to make sure that the world understands that you are not acting in your own capacity but only as the representative of the LLC.

It would even be helpful to have at least two members for the LLC. Clever attorneys may be able to "pierce the corporate veil" of a single-member LLC.

DEAR BENNY: I have heard about something called CLUE that involves homeowners insurance, but never could find out about it. Can you help me out and direct me to where to look? It has something to do with how often or how many times your house has had claims against it. --Gail

DEAR GAIL: C.L.U.E. stands for "Comprehensive Loss Underwriting Exchange." You can find more information on this Web site: www.choicetrust.com.

According to Choice Trust, the C.L.U.E. Personal Property report provides a five-year history of losses associated with an individual and his/her personal property. The following data will be identified for each loss: date of loss, loss type, and amount paid along with general information such as policy number, claim number and insurance company name.

It is similar to a credit reporting company, but reports solely on problems involving your home.

Several years ago, I had a client who purchased her house and obtained home insurance coverage. However, one week after she took title to the property, the insurance company cancelled the policy based on a CLUE report that showed a serious flaw in the house five years earlier. We resolved the issue, when we convinced the insurance carrier that this flaw had long been corrected.

My personal opinion: This is a complete invasion of a homeowner's privacy. I suggest that you also go to www.privacyrights.org where a lot more helpful information can be found.

Homeowners -- and potential home buyers -- are advised to get a report on the house before buying or selling. It can be obtained on the Choice Trust Web site.

DEAR BENNY: I live in New Jersey. I purchased a house in Kentucky sight unseen. The house was listed with a dock and a walk to the lake. When I finally saw the house, to my surprise, I found out the steep path had been washed out and the dock had broken loose and floated to a neighbor's house. I was never told any of this throughout the sale even though I specifically asked about the dock. Now, I want the Realtor to bring the dock back and cable it to my property as it should have been. They refused, but offered to ask the former owner if he would. What can I do? The dock is a big expense and if I lose my dock permit the value of the house will decline. --Ralph

DEAR RALPH: What can I say? You never saw the house and now you are complaining!

But let's see if we can salvage this for you. First, you have no claim against the real estate broker unless he/she was a buyer's broker; you should be contacting the seller directly.

Is there a requirement in Kentucky that sellers must disclose certain conditions regarding their property? If so, review that document carefully; it may provide you with some guidance.

I suggest that you retain an attorney in Kentucky to assist you. Often a letter on a lawyer's letterhead produces results.

But frankly, if I were representing the seller, I would take the position that you had the opportunity to inspect the house, and your negligence should not be rewarded.

DEAR BENNY: My mother has a loan and is behind two payments. She has a reverse mortgage; can they (as they have threatened) put a lien on her property? --Karrie

DEAR KARRIE: I am confused -- and believe that you are also. If your mother has a reverse mortgage, she gets money from the lender and does not have to pay it back. The outstanding balance will be due when your mother either moves out of the house or dies.

The lender does have a lien against the property, but the lien (called a mortgage or deed of trust) must contain all of the terms and conditions regarding that reverse mortgage.

Who is the "they" that have threatened her? I think you should get a lawyer in your area to advise you.

DEAR BENNY: We want to install a fence on the property line between our property and the adjoining neighbor. Do we need a written agreement? And what would it need to cover? --Sharon

DEAR SHARON: Are you paying for the installation yourself, or will your neighbor pitch in on the costs?

If you are going this alone, why not install the fence just inside of the property line, so that you will not have to deal with your neighbor. If, for example, you put the fence a few inches inside the property line, its your property and you have the right to do anything on your own land.

Of course, you may need to get a fence permit from your local government and you will need a survey to make absolutely sure that the fence does not encroach on your neighbor's property.

If, however, the neighbor is going to contribute to the cost -- or if you absolutely have to have the fence exactly on the property line, then yes, you will need the cooperation of your neighbor.

You should have a written agreement spelling out such matters as who will maintain the fence and who is the owner of the fence. You are, in effect, getting an easement from your neighbor so as to install the fence on the property line. Keep in mind that the fence will straddle both sides of that line, so your neighbor must give permission. This document should be recorded in the county where the property is located.

DEAR BENNY: My current mortgage loan is written for interest and taxes only, and is due in five years. If I am current with my payments, will my lender be willing to rewrite the note for another five-year period or even longer? Since the bank has been making a profit with interest only with no principal reduction, I cannot see why they would not be willing to continue. --Dennis

DEAR DENNIS: Several years ago, when property values were increasing at a rapid pace, lenders would be more than willing to renew your loan. But in today's marketplace, things have changed dramatically.

If you have such a loan, I strongly recommend that you seriously consider refinancing -- especially while interest rates are still relatively low (they are, however, slowly starting to creep up). This may require that you make a larger monthly mortgage payment, but there is no guarantee that you will get a new loan (or what the rates will be) when your current loan matures.

First, one of the many causes of the current "mortgage meltdown" (as it is often called") was interest-only, 100 percent mortgages. It is very difficult today to get that same kind of loan.

Second, let's take this example: Currently your home is worth $400,000 and your loan is $400,000. If your loan comes due and your house declines in value to $375,000, there is no lender that will be willing to lend you enough money so as to pay off the loan that is now higher than what your house is worth. In fact, most lenders will now lend you only up to 90 or 95 percent of the then-appraised value.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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