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.
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?
You're right, there is an ambiguity. In traditional legalese, "executed" meant a contract where all obligations have been fulfilled, and an "executory" contract was one where parties still had to perform.
In modern terms, "executed" often refers to the parties signing the contract (or otherwise agreeing to it).
I have bought a few properties from Fannie Mae, whose deed contains a 90-day restriction. I reviewed the documentation and addenda that Fannie Mae made me sign, but there was no mention of any kind of promise not to contract to sell the property before 90 days. The only mention of the period came in the form of an agreement that a deed restriction would be placed in the deed.
@Christian Carson It wasn't obvious to some, but @J Scott was referring to a different 90 day restriction....where a FHA financed buyer can't finance a house from a flipper if the "contract that resulted in the FHA Financing was executed within 90 days from the previous sale/settlement". We've had this debate about which definition of "executed" they are using. I believe it's the "signing". Others, including some lenders apparently,are going with the "elements fulfilled"/closing date.
I'm part of several "90 day rule" threads, and there are actually two 90 day rules:
1. FNMA has a 90 day rule prohibiting the buyer/owner from reselling or encumbering the property within 90 days for more than 120% above purchase price.
2. HUD/FHA has a 90 day rule prohibiting an end-buyer from getting an FHA loan on a property prior to the seller/owner owning the property for at least 90 days.
This thread is about #1 above...in my post above (April 15, 1:02pm), I was talking about #2 (and specifically related to putting a property under contract prior to Day 90). There's another thread going on about that, and I got the two confused...
Very sorry about...ignore that post above, please...
Back to this topic, here are my thoughts:
- Selling an entity that owns a property within the 90 day period is legal, based on discussions I've had with attorneys who specialize in this stuff;
- That said, I still think it's a very bad idea to buy an entity from an untrusted source. Joe V. still hasn't answered my question about how to protect yourself from purchasing an unencumbered entity -- my guess is that it's because there's no good way, unless you have strong/expensive legal resources at your disposal (like you might in the purchase of a larger, longer-standing company);
- I agree with the others above that trying to get around this rule is pretty futile, as the deed restriction is pretty airtight. I haven't found anyone who has figured out a legal way to do it (other than the entity sale), and I'm guessing there isn't a good way.
All that said, I'm not an attorney...so take it for what it's worth...
agree to disagree jason. Funny thing about law, is that its subject to interpretation. I certainly understand what youre saying, and technically its correct. However, there is a large difference between a conpany that regularly trades shares of ownership, not specific to the property in question vs an llc that was created solely to camouflage title to evade a deed restriction. Fannie reps are smart and can probably tell the difference between the former and later. As far as a sale not occuring, also false. The llc that owns the property was sold from one party to another, and bank statements/llc amendments would verify it. A=b, b=c, a=c The fact that the restrictions run with the land means that can prove the land was sold circumstantially or therwise would have a convincing argument.
Truthfully, nobody would probably ever care, but if they all of a sudden do and u do aomething like this, you may have a problem.
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.
Q: 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? A: In most states, like MI, unless the LLC has established a long enough income history, any credit issued to the LLC would have to be also in the name of the individual...so it shows up, and the individual is ultimately responsible.
Q: How do I check that you didn't sign a contract with a contractor naming the LLC as a party to the contract? A: That would be in the form of a lien, which the LLC, if they did any work already, would have the appropriate "Waivers of Lien". In any case, all the LLC's that own the property only own one property, so this wouldn't be an issue.
Q: How do I check that you didn't do one of a thousand other things to obligate the LLC to some debt or credit? A: An LLC is a trickle down entity, so it appears on the personal taxes.
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... A: As I stated at least 3 pages back, there is an attachment to all of the LLC sales/transfers stating the specific timeline of financial responsibility of either party.
when A transfers 100 percent ownership of an llc to B and receives money in exchange for it, A has _______ the llc to B.?
A has sold the LLC to B...
Of course, that's completely irrelevant, since we're not talking about the ownership of the LLC, we're talking about the ownership of the property.
So, let's do another fill-in-the-blank:
The answer for both is "the LLC."
You're confusing the owner of the entity with the owner of the property (which is the entity). This is the whole point of business entities -- they are SEPARATE from their shareholders/owners. That's why they provide asset protection (and often have their own tax identification numbers).
As an example, I hold all my properties in LLCs. I own the LLCs. Do you think I can personally sell those properties? Absolutely not. Only the LLC can sell the properties. I can sign as an officer of the LLC (if the business has given me authority to do so), but if I try to sell the properties personally, the title company wouldn't let me. Just like they wouldn't let you sell my properties or my best friend sell my properties.
I'm fully aware of what you are saying and am not in any way confused,. However, if one is using an LLC to pretend one is not selling a house to another party even though one is by selling the LLC that owns the house...one is still violating the restriction. why? the fact that the restriction is "specific to the land" means that if Fannie's people can prove that a transfer of "the land" occurred in violation of the restriction, (by transferring the llc that owns the land or the land itself) you just might lose.
in conclusion, you believe otherwise, fine, agree to disagree.
Sell the LLC with the agreement to purchase...before you close. You're not selling the house, you're not selling the land, you're selling the business. Businesses are sold al the time.
I'm fully aware of what you are saying and am not in any way confused,. However, if one is using an LLC to pretend one is not selling a house to another party even though one is by selling the LLC that owns the house...one is still violating the restriction. why? the fact that the restriction is "specific to the land" means that if Fannie's people can prove that a transfer of "the land" occurred in violation of the restriction, (by transferring the llc that owns the land or the land itself) you just might lose.
in conclusion, you believe otherwise, fine, agree to disagree.
No, my two attorneys in two different states believe otherwise.
You are, of course, welcome to disagree with them...
Yep, FNMA imposes a "deed restriction" as in the Deed being transferred, not LLC beneficial interests transfers. Maybe they'll modify to include that at some point, but until then.....
WOW, Now that sounds pretty savy. Would the name of the LLC just be the name of the addresss of the house?
The name of the LLC must be: Property Commandos, LLC
I concur with Seth, and I've already covered it extensively in another post (along with citing the actual statutes involved)... any disguised sale of the property (such as wrapped in an LLC which conducts no real business - hence its only purpose is to skirt the law) is fraud, period. I do not conduct my business in a fraudulent manner, and I do not attempt to skirt or subvert the interests of those I do business with.
Those who teach how to use an LLC or a land trust (in which you later transfer your beneficial interest to another party - since that transfer is never recorded anywhere) have no scruples or moral integrity. They are the used car salesmen of real estate.
In addition, nobody seems to talk about the fact that, when you sell more than a 50% interest in an LLC within a 12 month period, IRC § 708(b)(1)(B) comes into play - which means a technical termination of the LLC has taken place.
The LLC's tax year closes on the date of the termination and the creation of a "new" LLC for federal tax purposes. Consequently, the new LLC must make new tax elections and adopt new tax accounting methods. For example, the "new" LLC must make a § 754 election to cover post-termination exchanges of LLC interests. However, any member-specific basis adjustments resulting from § 754 elections made prior to the technical termination carry over from the "old" LLC to the "new" LLC (IRC § 1.743-1(d)). A member with a special basis adjustment in property held by an LLC that terminates under the technical termination rules will continue to have the same special basis adjustment with respect to property deemed contributed by the terminated LLC to the new LLC, regardless of whether the new LLC makes a § 754 election.
In addition, if an LLC is terminated by the sale or exchange of an interest, a § 754 election made by the terminated LLC that is in effect for the tax year of the terminated LLC in which the sale occurs, applies to the incoming member (IRC §1.708-1(b)(5)).
It's interesting (and tell-tale) that those same people who touted you use an LLC to do this made no mention of all the technical problems they bring to the table. In fact, it's as if they didn't really know what they were talking about... which should not be too surprising, given that most people prefer conjecture over fact, and are hard-pressed to support their claims by citing actual statutes or case law.
Personally, I prefer facts over opinion. Of course, your preference may vary.
...an LLC which conducts no real business - hence its only purpose is to skirt the law) is fraud, period. ....
In addition, nobody seems to talk about the fact that, when you sell more than a 50% interest in an LLC within a 12 month period, IRC § 708(b)(1)(B) comes into play - which means a technical termination of the LLC has taken place.
What law is being skirted? There is no *law* against selling a property within 90 days, as far as I know. This is a contract (i.e. civil) issue. Not a criminal violation.
As for the LLC termination, I'm not a tax attorney, but this seems to clarify that your interpretation is incorrect:
All that said, I still agree that selling/buying an LLC to transfer ownership of a property is a BAD idea...I just don't believe (based on discussions with two attorneys) that it violates the FNMA deed restriction.
Attempts to justify it with "there's no law against selling a property within 90 days."
Is unaware of IRS implications of selling more than a 50% interest in an LLC within a 12 month period.
Is unaware of federally-backed loan restrictions and regulations, or simply chooses to ignore said issues.
Good luck to you in your endeavors.
You believe there is no point in responding to someone who disagrees with you? Do you spend your entire life only speaking with people who agree with you?
Regardless, I'll be sure to let my attorneys know that they should reconsider their legal opinions because there is some random guy on the Internet without a law degree who is so confident they are wrong, he doesn't feel the need to support his assertions with any data?
@J Scott full agree with you. It is simply impossible to ensure there is no undisclosed liability to the LLC to be sold. As a buyer, one single deal worth's of profit simply doesn't justify the risk.