Involved In Real Estate · Sacramento, CA · Member since 2014 · 4 posts · 0 votes
I have heard you can accomplish this with a Trust. But how do you make a trust? Now considering I get an REO under contract and plan on wholesaling it and at what point of the transaction do you make it? Before locking it up?? Any guidance would help, I know the bare minimum as to how it can be done.
The 90 day restriction is for "more than 120% of the purchase price". 123 LLC buys, immediately sells to 1234 LLC for the same price. The deed restriction doesn't apply to 1234 LLC, so 1234 LLC can immediately sell it for whatever it wants, so the current "creative" investors say. Does common ownership of 123 LLC and 1234 LLC create "circumvention of the intent of the restriction" and could they come after you for that? Perhaps.
Because as everyone else has said on here before like @J Scott and @Bill Gulley as a buyer there is a lot of unknown risk from buying an LLC. Why buy something that can have unknown factors when I can use that same amount of money and buy something that I know I have a legal protection with? To be successful in Real Estate you have to take calculated risk. Buying someone's unknown LLC is not a calculated risk, that's what I call a gamble.
Because as everyone else has said on here before like @J Scott and @Bill Gulley as a buyer there is a lot of unknown risk from buying an LLC. Why buy something that can have unknown factors when I can use that same amount of money and buy something that I know I have a legal protection with? To be successful in Real Estate you have to take calculated risk. Buying someone's unknown LLC is not a calculated risk, that's what I call a gamble.
Easy to circumvent. Those of us that use them regularly don't have a problem with them. I understand the fear of the unknown though. That's easy to solve though.
LLC starting dates are recorded with the state. Since all of our LLC's are disposable, and are usually no older than 6 months old before they take action (close on a deal), and the only reason for the LLC being in place is to make offers, checking to see if there is anything in play isn't much of an issue...not much to check.
Also, we have an addendum as part of the LLC transfer defining the timeline between ownership...and corresponding financial and legal responsibilities. Even older LLC's can have their credit checked.
LLC starting dates are recorded with the state. Since all of our LLC's are disposable, and are usually no older than 6 months old before they take action (close on a deal), and the only reason for the LLC being in place is to make offers, checking to see if there is anything in play isn't much of an issue...not much to check.
How do I check that you didn't take out a credit card or a Home Depot card in the LLC's name the day you registered it?
How do I check that you didn't sign a contract with a contractor naming the LLC as a party to the contract?
How do I check that you didn't do one of a thousand other things to obligate the LLC to some debt or credit?
Doesn't matter if you've owned the LLC for 6 years, 6 months or 6 hours, there's risk that the person who previously owned the LLC has encumbered or obligated it in some capacity in that time frame.
And if you did, I (or whoever owns the LLC) is now at risk for any equity in that LLC...
I do recognize that the LLC strategy is a viable one but I for one would not feel comfortable with being on the buying side of a transaction
When I purchase a property directly, I have the some protection with the purchase of title insurance
For instance, any lien, judgement or other encumbrance must be filed in the county that the property is located. So if I am purchasing the property, this would be picked up by a title search. If I purchase an LLC, an judgement or other encumbrance could come from anywhere and not be picked up by a business credit service at the time of my purchase of the LLC. Seems like a big risk to the buyer
I really could use a couple. I'm cheap, and end up screwing myself by waiting until the last minute to form them
Every state is different. Michigan charges $50 to register, and $25/year to keep current. In states like CA, you need to take out a mortgage to register one...then a LOC each year to keep it current.
Alittle off the current trend, but got t aged about my response on page 1, back in Novemeber. To clarify, that post is no longer valid. The old 90 day restriction was for the buyer, now the deed restriction applies to anyone within the first 90 days, as it is currently drafted.
I really could use a couple. I'm cheap, and end up screwing myself by waiting until the last minute to form them
Every state is different. Michigan charges $50 to register, and $25/year to keep current. In states like CA, you need to take out a mortgage to register one...then a LOC each year to keep it current.
Thanks Joe.
Anybody know about PA? I think my last one was around 400 bucks
It's incredible the amount of energy that is spent trying to "circumvent" the system. I'm sure Keating and Maddoff thought they were only circumventing the system and not doing anything wrong, and did so for many years until someone showed them the error of their ways.
It's incredible the amount of energy that is spent trying to "circumvent" the system. I'm sure Keating and Maddoff thought they were only circumventing the system and not doing anything wrong, and did so for many years until someone showed them the error of their ways.
"It's all good and fun until someone gets hurt"-
You honestly believe Keating and Madoff didn't think they were breaking the law???
This thread is about how to mitigate the impact of the rule/law, not how to break it. That is no more wrong than not overpaying your taxes "just to be safe"...
@ J Scott, while my examples may be egregious, there are less egregious real world examples of people out there thinking nothing is wrong with what they are doing and it ends up that they are doing something wrong. Is that the case here? Who knows, only time will tell but in my experience, if the rule prohibits transfer for greater than X in 90 days, and someone tries to get Y for it in 90 days, and do it in a way that requires smoke and mirros...well, if it looks quacks and smells like a duck, it might be a duck.
I'm confident Wesley Snipes, Martha Stewart, Willie Nelson, Nicolas Cage, Marc Anthony, Borris Becker, Annie Leibowitz, Darryl Strawberry, Heidi Fleiss, and Lauren Hill thought they weren't doing anything wrong with their taxes. Kenneth Lay swears he is innocent. Charles Ponzi thought he was innocent. Dennis Kozlowski and Mark Schwartz (My favorites) of Tyco International swear they didn't do anything wrong either. Finally, I have a borrower that was just sentenced to two years in prison for short sale fraud that thought he wasn't doing anything wrong, and his realtor on the transaction is awaiting sentencing this month. Both believed they were mitigating the impact of the rule and what they did wasn't even a law to break until they committed short sale fraud when they lied about it on their arms length affidavit. If only they told the truth about what they were doing, they'd be around still.
In my opinion, the best way to mitigate the impact of the rule/law regarding this post is to wait for 90 days. No one gets hurt that way and no one ever has to explain their actions to a jury of their peers or a judge...just to be safe.
I could organize an LLC and then an hour after that I could have an unsecured $500K loan in the company's name. If I were to sell the LLC an hour later, the buyer would see a 2-hour old LLC with a clean credit report...but would eventually find out that it owes $500K. If that LLC owned property, he could easily lose all equity in the property having to pay off the loan.
I think I see what your concern is. You don't know what other liabilities the LLC might have incurred hence don't want to get stuck with an undisclosed debt in addition to the property that you thought is just what you were getting.
It sounds like the issue is something that could be addressed contractually or through some other device where you could explicitly and specifically state clearly what interest is being conveyed along with the LLC, and could name the specific property (or properties) in question. You could probably also utilize the same device to declare what can and what cannot be passed along to the new buyer of the LLC.
Not to beat the dead horse, but if 123 Main St LLC owes me $40 k, I 'm coming after 123 Main St LLC. If it owns that property at 123 Main St, no documents you signed with the seller when you bought the interest of that LLC can stop me. Can tou get the seller to supposedly indemnify/reimburse you.....maybe, but not my problem. Same thing with any land trust, by the way.
Not to beat the dead horse, but if 123 Main St LLC owes me $40 k, I 'm coming after 123 Main St LLC. If it owns that property at 123 Main St, no documents you signed with the seller when you bought the interest of that LLC can stop me. Can tou get the seller to supposedly indemnify/reimburse you.....maybe, but not my problem. Same thing with any land trust, by the way.
Absolutely...
@Joe Villeneuve still hasn't addressed how that is easily mitigated... (I don't believe it can be)
Ugh. I wish the moderators started to crack down on discussions about scamming government rules. An outright ban on topics using the word "circumvent" should suffice.
Why can't people just play by the rules? I would doubt that the 90-day restriction is really injuring any investors. Buy them to rent. If you need to sell before 90 days, go find another property and don't go through the hassle of setting up a scammy structure.
In any case, exchanging an interest in an LLC is a really bad idea for the reasons enumerated above. In addition, if your purchaser for value is a stranger, there's no way he's getting title insurance. You are buying title insurance, aren't you?
@Wayne Brooks Thanks for being on top of the FNMA revisions and updating this post 4 months later! You are definitely on top of your follow up. I have clients discussing this today and I hadn't seen the switch from buyer to property. Maybe there is a benefit to being 3 hrs ahead...appreciate the heads up.
The rules aren't clear. One of the big questions here is whether a property can be put under contract prior to the 90-day mark -- HUD's guidelines use the term "executed contract" to define what must wait until after that point. Does "executed" mean "signed by all parties" or does it mean "all terms of the contract have been met" (i.e., settlement).
I realize that it's common to use "executed" to mean "signed by all parties" when dealing with real estate contracts, but that's not the formal legal definition.
I'm not an attorney, but it appears you are. So, perhaps you can tell us from a legal perspective whether the term "executed contract" is ambiguous or whether it legally means one or the other?
NOTE: Please ignore this post...see below about why...I confused this thread with another one!
to the transfer the LLC people in this discussion.....the deed restriction usually contains this little line
"These restrictions shall run with the land and are not personal to grantee."
In other words, if fannie mae can prove that you sold the property (regardless of the grantee being the same) within 3 months of buying it, transferring it to another legitimate buyer with an LLC sale and Fannies lawyers want to make an example of you with their unlimited pocketbook, you are f-d.
stop trying to circumvent the restriction and simply wait the three months or negotiate the restriction out of the sale.
to the transfer the LLC people in this discussion.....the deed restriction usually contains this little line
"These restrictions shall run with the land and are not personal to grantee."
In other words, if fannie mae can prove that you sold the property (regardless of the grantee being the same) within 3 months of buying it, transferring it to another legitimate buyer with an LLC sale and Fannies lawyers want to make an example of you with their unlimited pocketbook, you are f-d.
stop trying to circumvent the restriction and simply wait the three months or negotiate the restriction out of the sale.
"These restrictions shall run with the land and are not personal to grantee."
.... In other words, if fannie mae can prove that you sold the property...
First, I'm not a fan of the LLC sale for different reasons (mentioned above)...
That said, Fannie Mae can't prove that you sold the property, because you didn't -- the property was never sold. The LLC purchased the property, and the LLC owned the property both before the LLC sale and after. The only thing that changed is ownership in the LLC (not ownership in the property).
To see why this argument doesn't hold water, imagine if someone purchased a Fannie property in a public entity. Every day, ownership in that public entity will change (shares will be bought and sold). Are you saying that a public company couldn't purchase a Fannie property because the 90-day restriction would be broken every time someone trades their shares (buys or sells a portion of the company)?
Additionally, you even quoted the restriction above -- it runs with the land. Ownership of the land never changes hands when an entity is bought/sold (the entity continues to own it).
Based on discussions I've had with attorneys who are very knowledgeable about the subject, deed restrictions are bound to the purchaser (the entity, in this case), not the owners of the entity. But again, there are other reasons not to do this -- specifically, the liability of purchasing a business from an untrusted source.
Although I usually don't find sufficient margins at auctions to warrant going that route for properties, I did find this discussion interesting and would like to know if there is a legitimate issue here with what was described -- having the LLC buy the property then selling the LLC. Usually when there are various loop holes and grey areas, thats like asking the investor to fill in the blanks. Why cry foul afterwards?
From what I gather and as strange as it may seem, it really appears the "circumventing" is really a form of "compliance". The investor went out of his way to sell the LLC to avoid having to sell the property.
So the question then is whether or not his profit did exceed the 20% of cost? This really depends on how technical you want to get with it. Couldn't it be considered "goodwill" in a strict accounting sense? Companies often pay in excess of what a particular company or its assets is worth all the time.
If they really had an issue with this, I think they could easily exclude non persons (entities) from purchasing properties and the fact that in some circumstances, you could also negotiate the restriction out of the sale does tend to suggest this is not necessarily an absolute.
The material question here is whether there is a severe public harm that results from this? And can the investor offer a legitimate explanation justifying why he would have to sell so many LLCs that just so happen to coincidentally be in the business of purchasing government properties.
@Account Closed: "The material question here is whether there is a severe public harm that results from this?"
I disagree. As investors, we're not arbiters of public policy and we don't get to decide whether the "spirit" of the rule was broken or not. We're pretty much at the absolute mercy of the federal government, and if a kangaroo court wants to find against us despite the best of arguments, it's going to happen, and no cute or clever structure is going to save you. That's why I ask why people constantly want to play with fire when it's obvious that the rules are arbitrary and the judges have no qualms about destroying a speculator.