One LLC needed for each Fix & Flip ???

Question

Hello BP !!! I have done a few flips up until now but I have them under one LLC. I was recently told be a fellow investor one LLC is needed for each flip project that is done. I did not get the chance to understand the reasoning behind his statement but I wanted to clarify this with you guys. Am I doing the right thing or am I missing something here ? thanks in advance !!!

Scott Smith · Answer

Yes, that would change the circumstances in which the SOL would operate.

Account Closed · Answer

Is there a statute of limitations on a fix and flip?

If someone fixed and flipped a property many years ago, can they still be sued over something related to that property even though they haven't owned the property for a long time?

That varies by state and type of liability. If you did the electrical and didn't get a permit, your liability is longer than if you got a permit. Same with plumbing. If the property has changed hands a time or two it is less likely you will be sued since they presumably had the fiduciary responsibility of doing an inspection. Most lenders make sure the house is "sound" before they lend on it. So, any defect will probably arise when a lender gets involved. Most states require disclosures for the property. If you disclose known defects you are less likely to be sued. Suing people is for egregious neglect, or non-disclosure or for people who have nothing better to do with their time and money. It rarely makes sense to sue, but it does happen. About 90% of suits are settled before they go to trial.

It's a good idea to have insurance coverage, having an LLC is a good idea if you have $100k or more in equity to protect.

Scott Smith · Answer

Hey Jose,

This can vary between the level of risk different investors are willing to take, but at a certain level separating your assets out is nearly unavoidable. The reason for this is simply that each property exposes you to more liability, and over the course of 20 years of working as a real estate investor you have over 90% likelihood of getting sued. Most of these suits aren't caused by bad people, much of it is caused by miscommunication - and these issues are often not covered by insurance policies because of their "degrees of fraud" clauses.

I will avoid getting into the weeds, but this is a general piece of advice: at a certain point it is financially responsible to separate your assets. If you have more than a single property in an LLC, then they are all exposed to being "pierced" and lost in a judgment. If you are cycling properties through the same LLC, then it's liability exposure only grows. This is why people seek to compartmentalize their assets between different LLCs, because if (and eventually when) a lawsuit is initiated you are too late to do anything legally. But if you have your assets separated, then you only risk the LLC attached to the liability that initiated the lawsuit.

You can actually still accomplish this by creating a single Series LLC, compared the the Traditional LLC. You will establish the "parent" Series LLC, which can form unlimited "child" series beneath it. The benefits? Several. A couple primary benefits for you would be that you can create these "child" series from your computer at home, since they are private record, as well as offering the same protection of individual Traditional LLCs when formed correctly.

The question I pose to clients: how much is it worth to add a "stop-gap" to avoid losing everything.

Corby Goade · Answer

This is really a question for a lawyer and/or an accountant. That said, I don't see any reason for that- some people here recommend an LLC for each RENTAL property, but if you are doing one flip at a time, or even several, one entity should be sufficient, no need to make life any more complicated than necessary.

Account Closed · Answer

Thanks. I kinda meant that for @Scott Smith (I think I already know the answer ;-) I've been there, done that. I closed on a deal in 2001 and was sued by the seller in 2006. That was 3 years after the SOL but the judge let it go forward based on a "social justice" theory. 'Splain that! cause I can't. I eventually won, but it was tossed out by a couple of judges along the way before it was appealed and re-appealed and went to the 9th Circuit and was remanded again, where I won. The whole basis was I'm a white rich guy, he is a poor black guy and I "took advantage" of him. No such thing occurred. However, his lawyer was black, the original judge was black and their legal arguments were based on "social bias". We know that because the lawyer brought up race and privilege in the filings. No LLC or amount of insurance would have helped. Moral of story "Beware of who you buy from and who you sell to" if you are are at all a snowflake. Otherwise, take my approach and "come and get me". ;-) My lawyer can beat up your lawyer.

Account Closed · Answer

The situations that make it to a courtroom can be amazing. Can a burglar sue a homeowner for injuries? In some cases, yes.

Account Closed · Answer

Is there a statute of limitations on a fix and flip?

If someone fixed and flipped a property many years ago, can they still be sued over something related to that property even though they haven't owned the property for a long time?

Scott Smith · Answer

Good question. The SOL for most real estate related matters is 3 years from the act or omission, but it depends on what the particular issue is for how long the SOL might be.

John Mocker · Answer

Responding to Roger's question about Statute of limitations.  What limitations that exist would be a matter of law and you should check with an attorney.  Assuming that it is allowable, it is likely that the suit would be handled by the Insurance policy in place at the time of loss.  Whether or not it would be a covered claim would depend on what is being alleged and what your role was in the fix & flip.

Most policies are written on an "Occurence Basis" meaning that the policy covers losses that occur during the policy period.  The other form, "Claims Made", is much less common but is used for professional liability policies.  If you were the realtor for the transaction you could have an issue if you did not have current coverage for the Professional.

The likely party that would be responsible would be the contractor who did the work.  It is a good idea to keep copies of the proof of insurance from all contractors who did work on a project in case an issue arises later.

Stephanie P. · Answer

All of the wholesale lenders we use require there be no additional debt in the LLC they are lending to, so that means separate LLC's for each flip or buy and hold you do.  It ensures the lender isn't walking into a title claim or lawsuit from something totally unrelated to the property they're lending on.

Stephanie

One LLC needed for each Fix & Flip ???

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