Who should hold title and who has most liability.

Question

I am purchasing a flip house, I have a friend investing the purchase money and some of the repair costs. I believe I (my LLC) should hold title and give him a promissory note and a deed of trust giving him the option to record it or not, If he records the deed, what kind of liability does the investor have (in California) as a lender. Should I give the deed under his LLC name to limit liability.

Brian

Brian Weldon · Answer

Michael, thanks for your answer, I was thinking along those same lines.  It makes the investors feel secure for their investment and escrow can do all the work to divide the profit.  I love this R.E. community blog.  It is great.

Brian.

Michael Moikeha · Answer

I have done similar deals with JV partnerships. They took first position on the property with a note signed for the full amount of their investment. All this is done in escrow.

When we sell the property and it goes back into escrow, we can not get our payout till all parties agree on the split of the money. No one party got the money and then divided it up.

It was all done in escrow based on the agreements sign forming the partnership and the payout options in the promissory note.

Tom Kelly · Answer

Rob, great answer. I am on the other side of Brian's question. I am the bank in a different scenario. What compels the note holder to pay me other than an expensive lawsuit?

Brian Weldon · Answer

Rob, thanks for your reply.  It is very helpful.  You bring up more questions.  Why an S-Corp as apposed to an LLC.  I was told by many that LLC's are a great vehicle for property investors and flippers.  Outside of this flip, I have a few other assets (not 1M) that I want to protect, and in CA, people sue you if you sneeze in their zipcode.

Rob Beland · Answer

If you're flipping houses you shouldn't be doing it through an LLC. Look into an S-Corp if you are going to use an entity (especially if you will have one or more equity partners). Personally I don't see why you wouldn't just do it in your name and skip the separate entity altogether if you are the sole owner. How much equity will you have in this property? What do you have for assets outside of this flip? Is your net worth more than$1M? Either way If your friend isn't going to be an equity partner in the business then he should not hold title. You hold title and sign a note with him as you said. He shouldn't even get the deed of trust. You own the property. He's the bank. Keep it simple.