CCIM · Des Moines, IA · Member since 2014 · 341 posts · 170 votes
Does anyone have any experience or insight on purchasing an LLC that holds property, as apposed to just purchasing the property in the LLC? Any benefits or drawbacks? I am looking at a couple opportunities; one that has several smaller properties in the LLC and he wants to sell all of the properties in the LLC.
The other only holds one property.
I can think of some benefits of not having an actual real estate transaction recorded, but wanted to see what others have experienced. Thanks!
Specialist · Cleveland, OH · Member since 2011 · 1k+ posts · 852 votes
9y
I operate in the Cleveland market and there are a lot of surrounding burbs that have Point Of Sale cities. They require inspection and many times escrow to transfer property, however if you buy or sell an LLC, it will eliminate that process.
Another advantage is Conveyance and closing fees.
I would only buy a virgin LLC that was created just to hold one property and to sell. You MUST be aware of any other issues from history of the LLC that could come back to haunt you.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
9y
One problem is you assume their current, depreciated basis for the actual pieces of real estate. And of course, any potential liabilities from past operations.
Realtor · Cleveland, OH · Member since 2015 · 2k+ posts · 857 votes
9y
Someone wanting to sell you an LLC is a huge red flag. You don't know what that LLC has outstanding, if creditors are after them. You then become the owner of the LLC and guess who the creditors are going after YOU, not the previous owner.
CCIM · Des Moines, IA · Member since 2014 · 341 posts · 170 votes
9y
That was a concern of mine. The seller's haven't brought up the idea of transferring the LLC, only selling the property. There's certainly some benefits to both of us to transfer the LLC, but wanted to get some feedback before I bring it up to the sellers.
Specialist · Cleveland, OH · Member since 2011 · 1k+ posts · 852 votes
9y
I operate in the Cleveland market and there are a lot of surrounding burbs that have Point Of Sale cities. They require inspection and many times escrow to transfer property, however if you buy or sell an LLC, it will eliminate that process.
Another advantage is Conveyance and closing fees.
I would only buy a virgin LLC that was created just to hold one property and to sell. You MUST be aware of any other issues from history of the LLC that could come back to haunt you.
CCIM · Des Moines, IA · Member since 2014 · 341 posts · 170 votes
9y
@Rob Gillespie I totally agree. The larger property has an LLC that was created at their purchase and is named the address of the property...and is owned by a real estate attorney. I make the broad assumption that it's probably a clean LLC.
The other one has had several properties in and out, making it not a great candidate.
Another benefit is that the county assessment is far below what we'd be purchasing it for, which means a great savings on property taxes, at least temporarily. A large sale would quickly lead to a jump in the assessed value.
Attorney · Durham, NC · Member since 2016 · 224 posts · 126 votes
9y
It is hard to imagine a scenario where purchasing the LLC (i.e. all its assets and liabilities) is a good idea in a real state transaction. If you wanted to purchase assets other than the real estate, you would need to do an asset purchase agreement where you only buy certain assets of the LLC and exclude basically all liabilities. You would also need representations and warranties from the seller related to the LLC and indemnifications (which may or may not be with much) against losses or a breach of reps & warranties. It is generally a better idea to just buy one asset (the real estate) and take title in a new entity in order to avoid getting mixed up in any liabilities of the selling entity.
CCIM · Des Moines, IA · Member since 2014 · 341 posts · 170 votes
9y
Thank you @David Miller. I appreciate your input. I'll shy away from that idea at this point. I'll want to research it more for the future, but doesn't sound like enough benefits over drawbacks to pursue at this point.
Commercial Real Estate Broker · Westlake, OH · Member since 2016 · 17 posts · 12 votes
9y
You want to purchase the LLC nine times out of ten. Your tax exposure, assuming the value of the property is being sold for is higher than the auditors appraised value, is the main reason for doing so. Also, you don't have to purchase the current holding company if you are concerned with the title company not finding all previous liens/judgments; however, that is the most effective way to avoid a property tax increase. You can have the seller create a brand new holding company for the property then acquire that LLC all on the day of closing. This is called the "drop and swap" technique. Contact any local real estate attorney that is familiar with/has done LLC transfers and they can walk you through it in more depth. I am not attorney and this should not be taken as legal advice, but does reflect my opinion on the matter.
CCIM · Des Moines, IA · Member since 2014 · 341 posts · 170 votes
9y
Thank you @Account Closed. I will talk to my attorney about the 'drop and swap'. I love the idea.
Have you brokered a deal like this before? What's the best way to get a broker a commission on this? You clearly would have a good idea of how that could be done.
Commercial Real Estate Broker · Westlake, OH · Member since 2016 · 17 posts · 12 votes
9y
Chase Keller not entirely sure I understand your question about the commission. The listing broker will be paid the same commission as previously agreed upon with their listing agreement. Lawyers handle the LLC formation and trade and are paid whatever their fee may be - generally one or two thousand dollars in the Cleveland area. Our team has handled hundreds of these transactions.
CCIM · Des Moines, IA · Member since 2014 · 341 posts · 170 votes
9y
@Account Closed. Perfect. I'm working with a broker on the deal and I think the listing agent was a little concerned that I was trying to push him out of the commission. I assured him I wasn't, but didn't know exactly how it would all work out. I appreciate your input!
Property Manager · Brecksville, OH · Member since 2014 · 486 posts · 464 votes
9y
I am working with out-of-country clients who purchased LLCs containing single family residential properties a few years ago. Now that they are just coming to undetstand that there were no residential property disclosure forms, no POS inspections and no title search; they feel that they were duped by the seller... a local real estate agent. I agree.
They cannot understand why the required annual inspections now reveal violations that existed when they made the purchase and why they must now provide both in order to sell the property.
Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
9y
@Chase Keller Hey Chase, if the LLC is cleared of any liens then buying the LLC shouldn't be a bad idea as in some instances apartment syndicators would do that instead of a straight buyout of the asset because there may be an increase in property taxes on the asset.
Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
9y
@Chase Keller Hey Chase, if the LLC is cleared of any liens then buying the LLC shouldn't be a bad idea as in some instances apartment syndicators would do that instead of a straight buyout of the asset because there may be an increase in property taxes on the asset.