FHA Subject to Limitations - Possible work around?

Question

I have always wondered what you do after you have 10 properties.  I know you can go commercial or private money, but I was wondering if there was a way to keep borrowing traditionally.  Well I think I found a way, I am just not sure how to structure it.

In the FHA guidelines it says "Joint or total ownership of a property that is held in the name of a limited liability company (LLC) or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25% and the financing is in the name of the LLC or partnership." would not count against your bag limit of 10 properties.

My question is how do I do that?

Matthew Kreitzer · Answer

If these are all disregarded entities (single member LLCs) or closely held LLCs, there is a chance you could get in serious trouble doing this kind of thing, as it is likely the Judge would just Bench Slap the idea as being a flagrant attempt to circumvent federal law.

If the ownership structure was simple LLC shareholders, the federal judge would likely want each share holder to be a distinct entity with different ownership contingencies. Not just one dude filing ten different LLCs to try and circumvent FHA.

As for Trusts, if you went the land trust route you're unlikely to have the kind of control you're wanting or the kinds of benefits you're envisioning, as you would need a Trustee that isn't one of the LLC stakeholders, and you wouldn't have very much control over the management of the land.

Generally speaking, a Judge isn't going to smile and say, "Oh yeah, he totally renamed himself Joe Smith LLC Un, Joe Smith LLC, deux, Joe Smith LLC trois" and pretend these aren't all the same owner for the purposes of FHA.

Words to live by; don't try and purposefully circumvent federal law. Ask a local lawyer for more information on why this is a bad idea.

Ed Neuhaus · Answer

@Matthew Kreitzer I was wondering if having several different LLC's would do the trick.  Im not trying to break any laws here, I assume there is a legal way to do it, I just don't know what that is.  I am worried about the "combined ownership".  I read that to mean "all the ways I own the property have to point back to less than 25%.  So if I own 24% in my name and an llc I own owns the rest, then I could not do that.

Maybe a Trust could do it.  You don't "own" a trust.

Matthew Kreitzer · Answer

You should absolutely consult with an attorney located in your state, as any opportunities to circumvent a federal law will be subject to harsh judicial scrutiny. As for how such a deal may look, you could have a new parent holding company with different individuals/LLCs as shareholders.