Question: I own Arizona real estate that I rent to tenants. I don’t want to be sued personally if somebody gets hurt on the property so I formed an Arizona limited liability company to own my investment real estate. If a tenant or guest is injured on the property and he or she wants to sue the owner the defendant will be the LLC not me because the LLC will own the land. What do I have to do to transfer the land to the Arizona LLC?
Answer: Forming an LLC to own the real estate and to shield you from liability if something goes wrong with the real estate is definitely a good idea. The plan, however, will not work unless you actually transfer ownership of the land from the current owner(s) to the LLC. To transfer the land to the LLC the owner(s) must sign a deed and the deed must be recorded with the county recorder of the county in which the real estate is located.
1. Title Insurance Issue #1. Example: After the LLC acquired title it discovers that the property is encumbered by a $25,000 lien. The title insurance policy acquired by the prior owner(s) did not list the lien as an exception from title insurance coverage.
Quit Claim Deed Bad Example. Because the LLC acquired title by a Quit Claim Deed the title insurance policy will not pay the $25,000 lien. A Quit Claim Deed does not contain any title warranties. This means that if a title defect is discovered while the LLC owns the land the LLC does not have a claim against the prior owner for breach of a title warranty. Because the LLC does not have a claim against the prior owner for breach of a title warranty the prior owner’s title insurance policy does not cover the $25,000 lien. The LLC must pay the lien or risk losing the property in a foreclosure.
Warranty Deed or Special Warranty Deed Good Example. A Warranty Deed and a Special Warranty Deed both contain title warranties that if breached give the new owner a claim against the prior owner(s). If a properly drafted Warranty Deed or Special Warranty Deed had been used to transfer title to the LLC the deed would contain a warranty that the land was not subject to the $25,000 lien. The breach of this title warranty gives the LLC a claim against the prior owner(s). Because the LLC has a claim against the prior owner(s) for breach of the title warranty the prior owner(s) could then make a claim under the prior owner(s) title insurance policy and the title insurance company would pay off the $25,000 lien.
2. Title Insurance Issue #2. The LLC should contact the title insurance company that issued the prior owner(s) title insurance and purchase an endorsement to the title insurance policy that names the LLC as an additional insured under the original title insurance policy issued to the prior owner(s) as of the date the prior owner(s) acquired the title insurance. With the endorsement the LLC can make a claim on the title insurance policy directly to the title insurer rather than against the prior owner(s) for breach of a title warranty. This type of endorsement typically costs $75 – $125.
3. Insurance Issue. When the LLC acquires title to the land be sure to contact your insurance company and notify it that the LLC owns the property and arrange for the LLC to be the named insured under the policy or added to the policy as an additional insured. If the property burns to the ground you don’t want the insurance company to deny coverage because it insured the prior owner(s) not the LLC. Make sure the LLC acquires all types of insurance that is appropriate for the property and its use.
4. Due on Sale Clause Issue. If the property is encumbered by a lien, the lender may have an option to call the loan if the borrower(s) transfers title to the LLC. This type of option is called a “due on sale clause.” If you ask the lender for permission to transfer the land to your LLC the lender will always say no. I’ve formed thousands of LLCs that acquired real estate subject to due on sale clauses. I’ve never had a client tell me that their lender called their loan when they transferred their land to their LLC. If you transfer your land to an LLC and your lender calls your loan, please let me know. The good news with respect to Arizona real estate encumbered by a Deed of Trust is that Arizona Revised Statutes Section 33-813.A allows the prior owner(s) to cure the default and stop a trustee’s sale under a Deed of Trust by deeding the property from the LLC back to the prior owner(s) who must also pay the lender its foreclosure costs.
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If you need to transfer Arizona real estate to a limited liability company, purchase one of my editable do-it-yourself Word documents for $47. Each deed comes with instructions on how to complete the deed and record it with the appropriate Arizona county recorder. Purchase a deed in my legal forms web form store.