Flips: Buy each house in a new LLC? Use cash or HML'S?

Question

I started flipping last year in the Poconos,PA , completed 3. I netted 80k total, 40 on one alone. I am currently using a realtor, and am their "assistant" for MLS use permission. I have a great contractor that is reasonable, and timely. He flipped a lot of properties before the credit crunch so he knows the tricks and what buyers are looking for. I just purchased a  small home for 15k, needs 20k, ARV is 80k. My questions are,should I start a new LLC for every house for liability issues? I'd hate to get sued and a possible judgment against an LLC that currently holds a property. I am going to ask my attorney and accountant but I'd like to know what everyone on here is doing. Also, I am working with 200k. I love that I don't have any mortgage carrying costs and the "cash" offer buying preference Ive been receiving along with the quick closings cash buying brings. Am I silly not to be looking into hard money guys as I can spread that 200k over much more houses? Although, I can't really say I can find properties fast enough to purchase more than one or two at a time. Any advice will be greatly appreciated! Great forum you guys have here! Thanks

Brian Burke · Answer

@Brian Albelli I don't know if your state requires you to disclose all known defects to your buyer or not, but my state does.

In addition to disclosing anything that I DO know about, I also put the following sentence in all of my disclosure forms on my flips: "Seller has never lived in the property and has owned it for a very short time. Seller is not aware of all of the property's defects and features and advises buyer to obtain, and rely upon, professional inspections to determine the condition and suitability of this property."  This isn't in the boilerplate language, it's either handwritten or typed in one of the form fields so it stands out.

While this isn't a get out of jail free card, and it certainly won't help you if you fail to disclose a KNOWN defect, it may come in handy as an additional defense in a lawsuit or mediation.  It won't prevent you from being sued if someone is so inclined, but it doesn't hurt and it might just stop someone from pushing bogus issues after closing.

Just something to think about on the next flip.

Brian Burke · Answer

There's no need to leverage unless you have enough deal flow to need the extra capital or another investment option that will earn you more return than you are paying in HML interest.

As to the LLCs, what will you get sued for that insurance won't cover that you are worried about?  If you aren't out there screwing people your risk may be too low to justify the expense of multiple LLCs. And if you are out there screwing people they'll probably find a way to reach through the entity to sue you for negligence or fraud personally.  If it's a guy who falls off the roof, your insurance should protect you if you have the proper coverage and liability limits.

Besides, if you are flipping a house or two at a time it's very likely you could sell your inventory by the time a suit could move from complaint to judgment. Civil cases can take years.  A judgment is unlikely to sneak up on you suddenly.  If you move fast enough you could sell any remaining flips before the case even gets to discovery.

Brian Albelli · Answer

Thanks for all the replies. I am not anticipating any lawsuits but we were just sued on our first flip because the one bathroom toilet isn't connected to the septic. I saw it flush, and their inspector reported it worked fine in his inspection. My attorney says it shouldnt be a problem but still. I am always looking for ways to limit my liability with any transactions. I am making an offer on a pretty good deal tomorrow, hopefully the bank accepts! Thanks again

Mark Gagner · Answer

I don't think you need a separate LLC for each house project you do, however I would suggest an entity (ie LLC or S Corp) for your "house flipping business".  This will keep your business assets/liabilities and personal assets/liabilities separate.  Regardless of the quality of your work or your mindset, there is always the risk of lawsuits when it comes to real estate.  If you are truly treating this as a business, you should operate like a business and create an entity.  In CA, my S Corp buys all the properties that I flip.  Once you get to a certain dollar volume in gross sales here in CA, the S Corp offers tax advantages over an LLC.  Not sure how that works in Pennsylvania.   The good news is that I only operate one entity for my flip business.  ope that helps!

Mark

Adam Drummond · Answer

@Brian Albelli

cash baby!

Flips: Buy each house in a new LLC? Use cash or HML'S?

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