Selling the business vs selling a property

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Selling the business vs selling a property

David Siegel
San Diego, CA · Member since 2016 · 38 posts · 12 votes

Hey all I have one LLC that owns one SFR that has been an STR for 6 years. We want to sell. I found a RE I really like. My friend who is half owner of the LLC says he wants to investigate selling the LLC instead of just the property.

Does anyone have experience selling an LLC that owns a single SFR? I saw some online content about selling an LLC but it was in the context of selling a portfolio of properties.

How does one go about selling the LLC? Is the RE involved or do we have to find the buyer ourselves? Any feedback on this topic is much appreciated! TIA!

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Michael BaumPro Member
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
3y

Hey @David Siegel, so does the LLC have any other assets? If not then the LLC doesn't have any value really.

You can't use a mortgage to buy an LLC. There is really no upside from a buyers perspective. Not much for you either.

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    3y

    You’re limiting your buyers. Not a lot, but at least a little. Obviously people looking to do a 1031 can’t buy it. More importantly you can’t do a 1031 either so you’ll owe all the taxes you could have avoided. As a buyer I would never buy the llc, only the property. What if the llc was being sued? What if it owed someone $1million? No thanks. No upside as a buyer. 

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  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y

    Hey @David Siegel, so does the LLC have any other assets? If not then the LLC doesn't have any value really.

    You can't use a mortgage to buy an LLC. There is really no upside from a buyers perspective. Not much for you either.

    6Reply
  • Luke CarlPro Member
    Rental Property Investor · Tennessee Florida · Member since 2016 · 4k+ posts · 5k+ votes
    3y

    LLC would need to be a management company that manages dozes of houses or more. Then you're selling the company.

    The house is worth what it appraises for based on residential comps. 

    If a single family home rents for 1 million dollars per year it’s worth the same as the one that rents for 5 dollars per year. 

    Commercial real estate this is a different story. In other words if your property had 5 or more front doors it would be worth what it rents for. But you’d need to have leases for that to be the case. Unless it’s a hotel but that’s a whole other conversation. 

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    3y
    Quote from @Luke Carl:

    LLC would need to be a management company that manages dozes of houses or more. Then you're selling the company.

    The house is worth what it appraises for based on residential comps. 

    If a single family home rents for 1 million dollars per year it’s worth the same as the one that rents for 5 dollars per year. 

    Commercial real estate this is a different story. In other words if your property had 5 or more front doors it would be worth what it rents for. But you’d need to have leases for that to be the case. Unless it’s a hotel but that’s a whole other conversation. 


     Exactly.

    There is no value in the LLC. The house is only worth what it appraises for based on comps.

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    3y

    I have to disagree somewhat with the other posters. There is at least some value in a STR that earns a return ABOVE what a normal return would be for the SFR as a LTR when adjusted for risk related return, management fee differential, and hassle factor. So, for example, you have been STR a property successfully for say 3 years, AND are not reliant on a third party marketer like Airbnb, in other words have repeat renters and a strong transferable web presence. Comparable properties rented as LTR show net return of say $15,000 annually before any debt service. Your STR shows net , after a full management fee, of say $35,000. We can assume that there may be a 10% "risk" factor and a 10% "hassle " factor. So subtracting 20% from the $35,000 net leaves $28,000. This is a "premium" of $13,000 per year above the net as if a LTR. To me, this has value, and I'd be willing to pay for it.

    A limiting factor in selling this "value" is that it is not financeable, except by the seller. So, if the seller is willing to carry some, or most of the excess sale price over the "appraised" (as SFR value), there will be someone willing to pay it. My gut feel is that one can sell this "excess" earning for a 4X - 5x factor. In this case that pans out to 4 x $13,000 or $52,000, or 5 x $13,000 or $65,000. If the comps are say $300,000, the sale price might be $300,000 + $60,000 or $360k to a business/investor who wants to have a walk in, successful STR operation and doesn't want the start up hassle and risk. To realize this "business" value, the seller may have to owner finance in the way of a second lien.

    I think that when analyzed this way, most STR operations would not show any "excess" net income. Many in this area self manage. If they were to pay a 25% management fee, deduct a 20% risk/hassle factor, they may not be left with any "excess" income above LTR. The properties they own that do produce significantly greater profits after allowing these additional income deducts are truly the cream of the crop and worth paying extra for.

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  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y

    Hey @Don Konipol, I don't disagree with you analysis which is why I asked if the LLC had any other assets which would include a direct bookings site that actually works.

    I guess the question Don would be if you would lend on it based on your stats. I see you said it isn't fanciable above and beyond the value of the home (if I understood it right).

    Do you do any SBA lending and would it qualify for that sort of business loan vs a simple mortgage?

    1Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    3y
    Quote from @Michael Baum:

    Hey @Don Konipol, I don't disagree with you analysis which is why I asked if the LLC had any other assets which would include a direct bookings site that actually works.

    I guess the question Don would be if you would lend on it based on your stats. I see you said it isn't fanciable above and beyond the value of the home (if I understood it right).

    Do you do any SBA lending and would it qualify for that sort of business loan vs a simple mortgage?

    We are actually a commercial hard money lender, $500k - $5 million. While STR is not actually in our criteria, we've done two loans on STR properties I can think of off hand. One was a larger property with a 8,000 sf 6 bedroom home with 6 baths used as an STR / MTR mostly temporary stay business with a little vacation rental thrown in due to it Proximity to Lake Conroe; the other was another large lodge/house with 8 br near Yellowstone. We lend on real estate value only. Both were refinances, so I don't know if they would have sold for above real estate value. Truth is my analysis (thesis) is based on sales of different type investment/business hybrids; I have no hard, factual basis as it relates specifically to STR for my position.

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  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y

    Thanks @Don Konipol! I appreciate the explanation. 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    3y

    @David Siegel, Selling the LLC could avoid a new appraisal for real estate tax purposes. If the basis in the property is extremely low then that could be a benefit. It could also eliminate a 2nd real estate closing and new title insurance.

    But along with that, buying the LLC means buying the history of the LLC known and unknown. So not buying title insurance could be a potential for disaster.

    And if you sell the LLC you and your partner cannot do a 1031 and defer the tax on the profit from the sale.

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  • Zach Edelman
    Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
    3y

    The only time I've ever heard of this being done is for a Nashville, STR in which the STR permit was directly linked to the property (or so the borrower and potential buyer told me) and the only way to obtain the STR permit was to purchase the LLC. Regardless, not a good idea.

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  • Luka Milicevic
    Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
    3y
    Quote from @Zach Edelman:

    The only time I've ever heard of this being done is for a Nashville, STR in which the STR permit was directly linked to the property (or so the borrower and potential buyer told me) and the only way to obtain the STR permit was to purchase the LLC. Regardless, not a good idea.


     This is correct. It's a way to transfer the property without losing the permit. It makes sense in this case. 

    1Reply
  • Jacob GomesBusiness Member
    Real Estate Consultant · Nashville · Member since 2020 · 70 posts · 22 votes
    3y
    Quote from @David Siegel:

    Hey all I have one LLC that owns one SFR that has been an STR for 6 years. We want to sell. I found a RE I really like. My friend who is half owner of the LLC says he wants to investigate selling the LLC instead of just the property.

    Does anyone have experience selling an LLC that owns a single SFR? I saw some online content about selling an LLC but it was in the context of selling a portfolio of properties.

    How does one go about selling the LLC? Is the RE involved or do we have to find the buyer ourselves? Any feedback on this topic is much appreciated! TIA!


    This happens quite a bit in Nashville, but that's because if you own an STR in a residentially zoned lot, then that permit is no longer allowable if you ever sell the property. This is due to the new restrictions that began 1/1/22.

    My understanding is that the LLC needs to own all the assets in the home for it to work out. So the LLC needs to own all the furniture, future bookings, etc, and the buyer needs to buy the entire LLC.

    Thing is you can't buy an LLC with a mortgage. So the potential buyer is going to need to either pay cash or do a commercial loan.

    Real Estate agents can definitely be involved. It functions very much like a normal deal, you just need specific paperwork includes. We have attorneys here in Nashville that are pros at this type of deal but every state is different. 

    Overall, if you don't have to sell the entire LLC to keep the permit, I'm not sure I'd advise it.

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    3y

    Above posts are correct to be somewhat concerned about the potential liabilities of purchasing the LLC. But if the property has its fans and booking site without the major intermediaries dictating the rules, a sale of the real property separately from the sale of any furniture, inventory, website, licensing, and goodwill would eliminate this concern. All the above are assets, including goodwill, which can be sold by the LLC to another party.

    The real concern seems to be where because of the rules of the intermediaries (Airbnb, VRBO) or Government regs, there is a need to maintain business continuity in that the same business organization own and or operate the STR business and facility. There are "work arounds" even here. As an example, a deed does not have to be recorded to be legally enforceable. So someone could purchase an LLC that owns real property, sell the property to another clean entity they own or control, and have the warranty deed held by a third party escrow/attorney. The deed is legal and evidentiary on the notarized date of transfer, even if not recorded. However, anyone recording valid encumbrances against the former LLC will still have a valid lien even when recorded after the sale because no "notice" of sale was provided through the recording of the deed transfer.

    The use of owner financing and "offsets" against undisclosed or undiscovered liens plays a very prominent role when acquiring an existing  business entity.  definitely not a "clean" deal. 

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