You went under contract on a rental in your own name because that is what the listing agent put in front of you. Three weeks later your attorney said to take title in an entity, so you filed an LLC. Closing happened on a Friday. The deed in the file is dated the eleventh. The certificate of formation from the state is stamped the eighteenth.
For seven days, the grantee on that deed was not a legal person. It was a name somebody intended to create.
This is one of the quietest defects in investor real estate and one of the most expensive to fix late. It does not show up at closing. It shows up two or three years later when you refinance, or when you sell, and a title examiner searching the chain finds a conveyance to an entity the state says did not exist on the day of the conveyance. Then it is your problem, under time pressure, with the people who could have signed a one page correction long gone.
Why a grantee has to exist
A deed is a transfer between two legal persons. The grantor conveys, the grantee receives. Both sides have to be capable of holding title at the moment the instrument is delivered. A human being qualifies by being alive. An entity qualifies by having been formed under the law of some state, which is a specific date on a specific filing, not a plan or an intention.
Convey to something that does not exist and there is nothing on the receiving end. Depending on the state and the facts, the result is treated one of three ways. The deed is void, meaning title never left the seller. The deed is voidable, meaning it is defective but curable. Or the deed is read as a conveyance to the person who signed on the entity’s behalf, individually, which is almost never what anybody wanted and creates its own transfer and tax questions.
None of those three outcomes is the one you paid for. All three are cheap to fix in the first ninety days and painful to fix later.
The three versions of this problem
The entity was never formed at all. The name went on the contract, the deed and the loan documents, and nobody filed. This sounds absurd and it happens, usually when an investor uses a name they used on a previous deal and assumes the filing carried over, or when a registered agent service collected the fee and the filing bounced for a name conflict. The giveaway is that the state’s business search returns nothing.
The entity was formed after the deed date. The common one. The deed was executed on the date the parties signed, and the filing hit the state days or weeks later. If the deed was recorded after formation, some examiners will accept the recording date as the delivery date and let it go. Others will not, because the instrument on its face says otherwise and the whole value of the public record is that it does not get reinterpreted later.
The entity existed once and did not exist on closing day. This is the administrative dissolution case, where a missed annual report quietly killed the entity’s good standing and then its existence. We cover what that does to a loan already in place in your LLC was administratively dissolved and the rental loan is still outstanding. On a purchase it is worse, because there is no cure period that makes a dead entity a valid grantee on a past date.
A fourth case looks like this one and is not. If the entity simply changed its name, the legal person never changed, and nothing was conveyed. That situation is covered in changing your LLC’s name while the rental loan is outstanding, and it is a paperwork problem rather than a title problem.
What the title company actually does
Title underwriters resolve this before they will insure. The question they ask is narrow. On the delivery date of this deed, did the named grantee have capacity to hold real property in this state. Capacity is the same concept that drives the foreign qualification question when your entity is organized in one state and the rental sits in another, which we walk through in foreign qualification, registered agent and good standing.
If the answer is no, you get one of three requirements on the commitment. A confirmatory or corrective deed from the original seller, re-conveying to the now existing entity. A ratification instrument in which the entity, once formed, adopts the earlier conveyance. Or an affidavit plus an exception, where the company insures over the defect and lives with it.
The first one is the clean fix and it depends entirely on something you do not control, which is whether the seller will sign again. A seller who closed and cashed out and moved to another state has no obligation and no incentive. Sellers who are estates, trusts, banks or municipalities are worse, because the signer who had authority in year one may not have authority in year three. That is the same reason the record is corrected by addition rather than edited, which is the mechanism behind corrective deeds, scrivener’s affidavits and re-recording.
What the lender does
A lender’s mortgage is only as good as the vesting it attaches to. If the grantee was incapable of taking title, the entity had nothing to encumber, and the mortgage the entity signed is arguably a lien on nothing. No investor lender will fund into that, and none will leave it unresolved after the fact. The reason the vesting question gets asked so early is covered in title vesting, LLC versus personal name.
Practically, underwriting will pull the state filing and compare three dates. Formation date, deed execution date, and the date on the borrowing resolution that authorized the signer. Any one of them out of sequence stops the file. If you already hold other rentals in that entity or elsewhere, the same file will also carry a schedule of everything you own, which is the form described in the schedule of real estate owned. The authority piece is its own document and its own failure mode, described in borrowing resolutions and manager managed entities, and the document that governs who may encumber property at all is the one covered in the operating agreement your lender actually reads.
What the delay costs, in real numbers
Price this the way you would price any other three week stall. Take a purchase at 300,000 dollars with a 240,000 dollar loan at 7.25 percent on a thirty year amortizing structure. Principal and interest run about 1,637 dollars a month. Add 430 dollars for taxes and insurance and the full payment is roughly 2,067 dollars. At a market rent of 2,650 dollars, the coverage ratio is 2,650 divided by 2,067, or 1.28. If you want the mechanics of that calculation rather than the result, start with how to calculate DSCR, and run your own numbers in the DSCR deal calculator.
Now stall the file three weeks while a confirmatory deed gets chased. Two things happen. A rate lock extension on a 240,000 dollar loan at an eighth of a point is 300 dollars, and a second extension doubles it. If the lock cannot be held and the rate resets a quarter point higher to 7.50 percent, principal and interest go to about 1,678 dollars, the full payment to roughly 2,108 dollars, and the ratio to 2,650 divided by 2,108, or 1.26. On a program with a 1.25 floor, you just spent nearly all of your cushion on a filing date.
The second cost is the rent you do not collect. Three weeks of a 2,650 dollar rent is about 1,855 dollars, and a stalled purchase usually stalls the tenant placement behind it.
How to keep it from happening
File the entity before you sign anything that names it. Not the contract, not the deed, not the loan application. A same day filing is available in most states for a modest fee, and it costs less than one lock extension.
Put the entity’s exact legal name on the deed, character for character. The name on the state filing is the name that exists. A trailing comma, a missing LLC, or Co versus Company creates a different problem in the same family, and it is the same class of error that produces the mismatch described in when the legal description leaves out your garage.
If the contract is in your personal name, assign it rather than re-vesting after the fact. Most purchase contracts permit assignment to an entity you control. Assigning before closing keeps one conveyance in the chain. Deeding to yourself and then into the entity creates two, and the second one carries the due on sale and recording consequences laid out in moving a rental you already own into an LLC.
Check the state filing yourself the week of closing. Pull up the business search, read the status line, and read the formation date. Thirty seconds. Investors who do this catch the dissolved entity case before it becomes a closing table surprise.
Get the recorded documents back and read them. The window where a seller will still sign a correction is measured in weeks, not years. The sequence and timing of trailing documents after funding is covered in recording, trailing documents and the call you get three weeks after closing.
Where this sits among the other title defects
This one belongs to a small family of defects that share a shape. The record says something the parties did not mean, and the record does not correct itself. An old encumbrance nobody released behaves the same way, as described in an old unreleased mortgage or judgment on title. A split that was never approved by the municipality behaves the same way, which is the subject of your parcel was never legally subdivided. And the form of deed you receive sets how much protection you get when any of this surfaces, which is why it is worth knowing the difference between the instruments described in which deed you actually get at closing.
All of them are cheap in the first month and expensive in the third year. The grantee capacity problem is the cheapest of the group to prevent, because the prevention is a filing receipt and a date.
The short version
An entity cannot receive property before it exists. Check the formation date against the deed date before closing, not at your next refinance. If the dates are already out of order, chase the confirmatory deed now while the seller still answers the phone. If you want a second set of eyes on a chain of title before you commit, reach out and we will look at the documents with you.
FMC Capital is a Pittsburgh-based mortgage brokerage, NMLS #1840537. We place loans on rentals and flips for investors across Pennsylvania and additional states. Reach us at 412-990-2941. Loan terms, program parameters and pricing vary by lender and by property and are subject to change. Nothing here is legal or tax advice; title and entity questions should go to a licensed attorney in the property state.