Can I purchase an LLC that owns the REO property? Any advice?

13 Replies

Hello BPers,

I am a newbie and just venturing into the REO flipping business. Needless to say, I'm a bit nervous and can use some advice.

I am purchasing my first REO property from a wholesaler. However, the wholesaler is suggesting that I purchase the LLC that owns the REO property so we can speed things up and avoid double closings. If I purchase the LLC and remove the current single member on the LLC, is that sufficient? Although I trust the wholesaler, there is no way for me to know if the LLC has any liabilities, is there? Not sure what the pros and cons are of purchasing the LLC directly. Any thoughts or advice would be greatly appreciated!

Thanks so much,

~GC~

@GC Vaghasia
Do not purchase the LLC. What if there were fines, lawsuits or other debts the LLC owed.

You just bought them as well if you buy the LLC.

Not worth your time or aggravation to buy the LLC

@Chris Seveney - Thank you very much for your valuable feedback. I will surely end up spending a few extra bucks with closing costs, but probably worth it! Appreciate your assistance.

Yes. We do this all the time. The LLC's have to be new. Easy enough to verify its history.

@GC Vaghasia You wouldn't buy the LLC... you would buy 100% of the membership interests in the LLC. The agreement would look quite a bit different from a real estate contract. It might incorporate a real estate contract, but my bet is you would incur significant legal fees negotiating the agreement.

Like @Chris Seveney said, there are serious risks in doing this. I would only do so if:

1) it actually saves on transfer taxes (see below); and

2) I was 100% confident that the LLC has no other liabilities ... the seller will warrant this in the membership purchase and sale agreement. Is that warranty worth more than the paper it's printed on?

Check your local bulk sales laws as well as laws regarding the sale of a controlling interest in an entity as both can trigger taxes you think you are avoiding.

Originally posted by @Joe Villeneuve :

Yes. We do this all the time. The LLC's have to be new. Easy enough to verify its history.

Thanks for your feedback Joe. How would I verify the history of the LLC and if there are any outstanding liabilities that I would be responsible for if I take over the entity?

Originally posted by @Tom Gimer :

@GC Vaghasia You wouldn't buy the LLC... you would buy 100% of the membership interests in the LLC. The agreement would look quite a bit different from a real estate contract. It might incorporate a real estate contract, but my bet is you would incur significant legal fees negotiating the agreement.

Like @Chris Seveney said, there are serious risks in doing this. I would only do so if:

1) it actually saves on transfer taxes (see below); and

2) I was 100% confident that the LLC has no other liabilities ... the seller will warrant this in the membership purchase and sale agreement. Is that warranty worth more than the paper it's printed on?

Check your local bulk sales laws as well as laws regarding the sale of a controlling interest in an entity as both can trigger taxes you think you are avoiding.

Appreciate the feedback Tom and Chris. I will bring up your suggestions to my lawyer on Monday. Hoping to purchase 100% of the membership interest in the LLC, IF it makes sense from a liability and cost perspective.

Originally posted by @GC Vaghasia :
Originally posted by @Joe Villeneuve:

Yes. We do this all the time. The LLC's have to be new. Easy enough to verify its history.

Thanks for your feedback Joe. How would I verify the history of the LLC and if there are any outstanding liabilities that I would be responsible for if I take over the entity?

 You can do what amounts to a title search, like you would if you were buying a property.

More important is the Addendum you add to the LLC when you buy it, that defines the timeline and dividing date of when you take responsibility, and when you are not responsible. It states who the owners were before and after, and makes the previous owners/members responsible for everything before the date of transfer. It's a doc that should be drawn up by your attorney, so you and they are comfortable with it,

One of the biggest problems with grabbing an existing LLC is there might be a lien on the LLC due to some sort of problem with a contractor. This really isn't a problem due to the lien laws in this country...specifically the timeline requirements to file that lien. You aren't going to get sued by someone for non-payment, for example, where the problem happened 3 months previous. You really are only going to need to look up the last 60 days (actually 30).

If the LLC has an EIN number, as it should, it should also have a DUNS number (the business version of a FICO score). Much like the credit issues you find in your credit report, you will find a similar set of financial/debt info in that report for the LLC you are buying.

Originally posted by @Joe Villeneuve :
Originally posted by @GC Vaghasia:
Originally posted by @Joe Villeneuve:

Yes. We do this all the time. The LLC's have to be new. Easy enough to verify its history.

Thanks for your feedback Joe. How would I verify the history of the LLC and if there are any outstanding liabilities that I would be responsible for if I take over the entity?

 You can do what amounts to a title search, like you would if you were buying a property.

More important is the Addendum you add to the LLC when you buy it, that defines the timeline and dividing date of when you take responsibility, and when you are not responsible. It states who the owners were before and after, and makes the previous owners/members responsible for everything before the date of transfer. It's a doc that should be drawn up by your attorney, so you and they are comfortable with it,

One of the biggest problems with grabbing an existing LLC is there might be a lien on the LLC due to some sort of problem with a contractor. This really isn't a problem due to the lien laws in this country...specifically the timeline requirements to file that lien. You aren't going to get sued by someone for non-payment, for example, where the problem happened 3 months previous. You really are only going to need to look up the last 60 days (actually 30).

If the LLC has an EIN number, as it should, it should also have a DUNS number (the business version of a FICO score). Much like the credit issues you find in your credit report, you will find a similar set of financial/debt info in that report for the LLC you are buying.

No, you cannot "do what amounts to a title search" on an LLC.

The warranties that the seller of the LLC interests makes may be all you've got... and they may be worthless. If the seller agrees to indemnify you for everything before X date, but the seller has $0, the warranty is worth $0.

You are at the mercy of the applicable statute of limitations when you purchase an entity. Those are framed in years, not days.

Originally posted by @Tom Gimer :
Originally posted by @Joe Villeneuve:
Originally posted by @GC Vaghasia:
Originally posted by @Joe Villeneuve:

Yes. We do this all the time. The LLC's have to be new. Easy enough to verify its history.

Thanks for your feedback Joe. How would I verify the history of the LLC and if there are any outstanding liabilities that I would be responsible for if I take over the entity?

 You can do what amounts to a title search, like you would if you were buying a property.

More important is the Addendum you add to the LLC when you buy it, that defines the timeline and dividing date of when you take responsibility, and when you are not responsible. It states who the owners were before and after, and makes the previous owners/members responsible for everything before the date of transfer. It's a doc that should be drawn up by your attorney, so you and they are comfortable with it,

One of the biggest problems with grabbing an existing LLC is there might be a lien on the LLC due to some sort of problem with a contractor. This really isn't a problem due to the lien laws in this country...specifically the timeline requirements to file that lien. You aren't going to get sued by someone for non-payment, for example, where the problem happened 3 months previous. You really are only going to need to look up the last 60 days (actually 30).

If the LLC has an EIN number, as it should, it should also have a DUNS number (the business version of a FICO score). Much like the credit issues you find in your credit report, you will find a similar set of financial/debt info in that report for the LLC you are buying.

No, you cannot "do what amounts to a title search" on an LLC.

The warranties that the seller of the LLC interests makes may be all you've got... and they may be worthless. If the seller agrees to indemnify you for everything before X date, but the seller has $0, the warranty is worth $0.

You are at the mercy of the applicable statute of limitations when you purchase an entity. Those are framed in years, not days.

 Sure you can.

Originally posted by @Joe Villeneuve :
Originally posted by @Tom Gimer:
Originally posted by @Joe Villeneuve:
Originally posted by @GC Vaghasia:
Originally posted by @Joe Villeneuve:

Yes. We do this all the time. The LLC's have to be new. Easy enough to verify its history.

Thanks for your feedback Joe. How would I verify the history of the LLC and if there are any outstanding liabilities that I would be responsible for if I take over the entity?

 You can do what amounts to a title search, like you would if you were buying a property.

More important is the Addendum you add to the LLC when you buy it, that defines the timeline and dividing date of when you take responsibility, and when you are not responsible. It states who the owners were before and after, and makes the previous owners/members responsible for everything before the date of transfer. It's a doc that should be drawn up by your attorney, so you and they are comfortable with it,

One of the biggest problems with grabbing an existing LLC is there might be a lien on the LLC due to some sort of problem with a contractor. This really isn't a problem due to the lien laws in this country...specifically the timeline requirements to file that lien. You aren't going to get sued by someone for non-payment, for example, where the problem happened 3 months previous. You really are only going to need to look up the last 60 days (actually 30).

If the LLC has an EIN number, as it should, it should also have a DUNS number (the business version of a FICO score). Much like the credit issues you find in your credit report, you will find a similar set of financial/debt info in that report for the LLC you are buying.

No, you cannot "do what amounts to a title search" on an LLC.

The warranties that the seller of the LLC interests makes may be all you've got... and they may be worthless. If the seller agrees to indemnify you for everything before X date, but the seller has $0, the warranty is worth $0.

You are at the mercy of the applicable statute of limitations when you purchase an entity. Those are framed in years, not days.

 Sure you can.

Let's give OP good advice.

In the LLC context, it is not about "outstanding liabilities". Any judgments? Pending litigation? Easy to figure out.

Contracts or service agreements that will survive closing? Not so easy but less of a concern.

Undisclosed and potential liabilities? Impossible. These matters are covered by the seller's indemnity agreement. The seller may be long gone with the money by the time a claim surfaces 3 years later. And if this was all to save a few thousand bucks in transfer taxes it's foolish.

Goes back to who the seller is. Does the seller's word hold any value?

Thank you very much for all the valuable feedback. There is definitely much more to consider than I had previously thought. 

I will address all the aforementioned concerns with my attorney and decide what to do by Wednesday. Once again, I truly appreciate all the feedback!

@GC Vaghasia If you want to do some of your own research, look up asset sale vs stock sale, that is in essence the choices you are faced with. 

This and this give a quick perspective from an attorney and CPA respectively. 

I'm in @Tom Gimer 's camp on this one; buy the assets and move on. Unless this LLC is a fully functioning operations with front of the house and back of the house services that you can't replicate, it is not worth the risk.

@GC Vaghasia ,

Seek legal advice.  In the previous exchange everyone is giving their best advice, but that advice is general and not specific to your state and your situation.  They all believe what they are saying, but the advice is contradictory.  The best approach based on your willingness to spend a few dollars to be safe, consult an attorney.  

A one hour meeting and a little legal research may amount to $400.  Well worth it in my opinion.

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