Rental Property Investor · Pasadena, CA · Member since 2016 · 85 posts · 19 votes
Hi,
We are investors from California and are looking an opportunity in Philly UPENN area and the seller offers to sell the LLC which was established to hold the title of the property or the property only. It is a newly built 5-unit apartment. Four partners in that LLC. If we don't wanna take their LLC. It's okay for them. They will just dissolve the LLC.
We will have to have a LLC to hold title of the subject property eventually. Buying their LLC sounds cost saving to both parties. I haven't discussed with any attorney yet, but there must be some disadvantages.
Here to reach out to you to hear your thoughts about the pros and cons. And any referral on good real estate attorney in Philly area?
Thank you very much for your precious time in reading this post
Real Estate Agent · Philadelphia, PA · Member since 2018 · 428 posts · 484 votes
6y
@Greg Dickerson unfortunately Philadelphia is a real stickler for transfer tax so regardless if the property was purchased in an LLC or personal, you are paying a minimum of 4% split between seller and buyer
Investor · Cherry Hill, NJ · Member since 2016 · 860 posts · 324 votes
6y
@Yannes Chiang
I'm curious as to why you would ever want to buy someone else's LLC. I would suspect that any attorney would advise against this especially creating a new LLC won't cost more than $500 to have an attorney do it
Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
6y
@Yannes Chiang purchasing the LLC is a great strategy if you can save on transfers taxes etc. You want to make sure to do an UCC, SCC and legal search to make sure there are no liens or debts. Your attorney will advise and draft documents of indemnification in the event something arises in the future.
Investor · California, CA · Member since 2016 · 117 posts · 26 votes
6y
Seems very risky. Any not obvious debt, liability, pending litigation... your gonna spend more researching to feel safe then starting fresh. No brainer.
Apartment Syndicator · Charleston, SC · Member since 2016 · 973 posts · 728 votes
6y
@Yannes Chiang you could buy their LLC but it seems like just as much legal paperwork and more risk to you as the buyer in case they've done "bad" business with the LLC. I'd ask an attorney first before proceeding but it seems better to buy with a new LLC
Real Estate Agent · Merritt Island, FL · Member since 2017 · 974 posts · 1k+ votes
6y
@Yannes Chiang - are you being charged extra for the LLC or is it included in the price? If the former, you may find it cheaper to create your own. If the latter, grab it. Just be sure it's an LLC solely for that property and no other business.
For the naysayers, my bidnis partner and I sold an LLC a number of years back. We got a short sale and decided to wholesale it to another investor, however the lender conditioned the short with a 30-day seasoning. So we simply sold the entire LLC to investor. His attorney drew up the forms that had as resigning as directors and the investor being elevated. It was THAT simple. Some may be confusing an LLC being used to hold a property with a true company that's engaged in a variety of things.
Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
6y
When you buy the LLC, you are buying whatever their document has set up for the LLC. Some are pages upon pages of their business strategy, who and how and what, roles and authorities for every person/position and so on.
Have you actually read their LLC and determined if you are in agreement with their business strategy, goals, etc.? Maybe their LLC is pretty slim and does not say much at all.
What state is it set up in and what are the filing and cost requirements for that state? Are they compatible with your location and the property location or will you be triple taxed and fee'ed?
What you are asking is like asking if you should buy someone's car. Well, is it a beater, a 3 year old Honda, a Lamborghini? Does it pass inspections for the state you live in, will use it in? And what kind of a car do you need/want?
You really are the only one who can decide if you want to buy their LLC, and you need to read what it says and know your own goals.
Then if you want to buy their LLC, you need to vet it. Just like you would vet anything else you buy. Is THAT LLC desirable, have liability that is acceptable or not? Have debt that is acceptable or not? Have players that can legally sell (no minors, incapacitated folks who need to agree to a sell)? And so on...
Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
6y
Do you like paying attorneys? If so, please proceed with buying the LLC. It's a complex transaction that will require an attorney for the due diligence process, the Term Sheet creation, and notification phase.
Buying assets is less complex. It's the reason that LLC purchases are not commonplace.
A cost-benefit analysis will give you the answer you're seeking.
Rental Property Investor · New York City · Member since 2019 · 703 posts · 538 votes
6y
Get your own LLC so all paperwork from the sellers LLC is null and void. Either way, you'll need an attorney and its not worth it for a couple of thousand dollars.
Developer · Houston TX · Member since 2018 · 423 posts · 400 votes
6y
@Yannes Chiang
I have bought an LLC that owned a building I wanted. Seller owned the property for a long time so the taxes were low. Diffidently would recommend using a season attorney to help you. If the state you are buying has high property taxes this is a great strategy.
Not sure of your states laws however you can avoid the conveyance fee as well as prevent a tax reassessment. This makes sense for high dollar transactions. 1m+
A drop down LLC transaction is a better venue for this situation. Attorneys help structure this, basically the current owners transfer 100% membership interest to a NEW LLC and at closing you get assigned 100% membership interest of the new LLC. Your newly purchased LLC will restart the depreciation based upon your purchase price of the LLC & you then aren't liable for any past debts or liens from the sellers original LLC.
Real Estate Coach · Salt Lake City, UT · Member since 2017 · 272 posts · 414 votes
6y
@Nik S.
Regarding all the comments on saving money on attorneys... I look at attorneys like I look at heart surgeons: I’m not looking for the one with the lowest rate. Regarding how much to spend, that depends on the size of the transaction. The larger the transaction, the less impactful an attorney’s fee (and more important to get it done right).
True, in some states you can escape transfer taxes or reassessments at transfer. May be a good idea to proceed this way if seller will allow and it saves you enough money once all the legal work is done.
True, you inherit encumberances on the former LLC. Try this... have the owner create a brand new entity a few days before closing and transfer the asset. This way, you save due diligence costs on the old entity and get all the benefits on the transfer....
Disclaimer... I haven’t actually done this yet. We are working this angle on one we have under contract now.
Investor · Orlando, FL · Member since 2013 · 99 posts · 69 votes
6y
@Yannes Chiang this seems like a pretty interesting transaction. I hope it works out for you. Some may have mentioned this in other posts but... with the purchase of the LLC, then you inherit whatever debts and liabilities that are associated with the LLC. In addition, please make sure that you are not only just purchasing the LLC, but also doing a full title search to make sure there aren't any liens and encumbrances on the property.
Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
6y
Keep in mind when you buy the LLC, you are also responsible for the known that can be found with a title search as well as the unknown. For example, say a person slipped and fell at the property 18 months ago and then brings suit against the owner( the LLC). Guess who is responsible?
Real Estate Agent · Philadelphia, PA · Member since 2018 · 428 posts · 484 votes
6y
@Greg Dickerson unfortunately Philadelphia is a real stickler for transfer tax so regardless if the property was purchased in an LLC or personal, you are paying a minimum of 4% split between seller and buyer
Investor · Cherry Hill, NJ · Member since 2016 · 860 posts · 324 votes
6y
@Max T.
Can you actually get away with avoiding the transfer tax this way in Philly? If so, is it truly worth it? After all there are future risks associated with it
Unfortunately, in Philadelphia at least, you will not avoid the transfer tax by just transferring the LLC instead of the property. So there's not much upside to transferring the LLC in most cases except if it's done for some specific purpose related to assumption of financing, or if you're willing to do a buyout over 6 years in order to avoid the transfer tax.
Rental Property Investor · Pasadena, CA · Member since 2016 · 85 posts · 19 votes
6y
Thank you all! Your inputs are so valuable!
Actually the question was raised just from a cost saving prospective. There are 4.278% transfer tax in Philly. Normally seller and buyer each pay 2% of the sales price. The purchase price is about $2m so that transfer tax alone is about $80K.
Thank you @Jimmy O'Connor you are right. Now it is no longer a strategy to avoid the transfer tax by buying the LLC. We will just establish our own one.
Not sure of your states laws however you can avoid the conveyance fee as well as prevent a tax reassessment. This makes sense for high dollar transactions. 1m+
A drop down LLC transaction is a better venue for this situation. Attorneys help structure this, basically the current owners transfer 100% membership interest to a NEW LLC and at closing you get assigned 100% membership interest of the new LLC. Your newly purchased LLC will restart the depreciation based upon your purchase price of the LLC & you then aren't liable for any past debts or liens from the sellers original LLC.
Nik has the best answer.
I call this "entity transfer' and it's my favorite way to buy a building and minimize the increase in property taxes. It's all legitimate and legal of course and you do need an attorney licensed in your state to ensure you follow all the real estate laws in your state.