More Texas property owners are placing real estate into limited liability companies (LLCs) for asset protection and risk management, but attorneys caution that common transfer mistakes can lead to serious legal and financial consequences. According to a Congressional Research Service analysis using U.S. Census Bureau and HUD data, LLCs and similar entities owned 15.4% of all rental properties and more than 40% of rental units in larger properties nationwide. While individual ownership still dominates small rentals, structured ownership is increasingly common among investors.
"LLC ownership itself is not the problem," said Stephen K. Ganske, a real estate attorney with Texas Horizons Law Group. "Problems arise when owners transfer property without accounting for loan terms, deed requirements, or Texas statutory rules that govern real estate conveyances."
One major risk involves due-on-sale clauses in mortgages. Most Texas mortgages include these clauses, which allow lenders to demand immediate repayment if the property is transferred without consent. The Garn-St. Germain Depository Institutions Act of 1982 generally permits enforcement of such clauses upon a change in ownership, with limited exceptions. However, the Act does not automatically exempt transfers from an individual to an LLC, even if the owner controls the entity. Transferring mortgaged property into an LLC without lender approval may place the loan in default.
Another common error is using the wrong deed. Under Texas Property Code § 5.021, a conveyance of real property must be in writing and signed by the grantor. Additionally, Texas Property Code § 11.001 requires deeds to be properly recorded in county land records to be effective against third parties. Many owners use quitclaim deeds, which provide no warranties of title and can create uncertainty in the chain of title. In contrast, general warranty deeds offer assurances that the grantor owns the property and that the title is free from undisclosed claims. Most lenders and title insurers expect general warranty deeds when ownership changes, even between a person and their own entity. Failure to use the appropriate deed can lead to title defects that complicate future sales, refinancing, or estate planning.
Many owners also forget to obtain lender approval before transferring property. Most Texas mortgages are secured by a deed of trust, which frequently prohibits transfers without lender consent and may reference enforcement rights under state contract law and federal due-on-sale authority. Transferring property to an LLC without lender consent may not trigger immediate action, but it typically constitutes a technical breach of the deed of trust, giving lenders discretion to enforce remedies later, including accelerating the loan.
LLCs remain a widely used ownership structure for Texas real estate, offering organizational clarity and liability separation when properly implemented. However, transferring property into an LLC is a legal transaction governed by federal mortgage law, Texas property statutes, and the loan's contractual terms. Mistakes such as triggering due-on-sale clauses, using the wrong deed, or failing to obtain lender consent can expose owners to unexpected financial and legal consequences. Texas Horizons Law Group provides legal services in real estate, estate planning, probate, and business law. Additional information is available at https://thlg.law.
