Buying the LLC instead of the property?

Question

We’re looking at two opportunities where we might buy the LLC instead of the property.  I haven’t discussed with our attorney yet, but there seems to be some advantages.  There are always negatives too.  Just looking for any advice from experienced folks who have done this before.  We’re in Ohio.  Not newbies, we have 8 properties ranging from SFH to 6-unit.  Just have never even discussed the “buy the LLC” strategy until now.

Any feedback positive or negative is welcomed!

Thanks!

Brian

Ned Carey · Answer

@Brian LaPorte There is a serious consideration when buying an existing LLC. You are buying all their liabilities including past liabilities that have not even shown up yet.

Lets say you buy an LLC that has three properties. All looks good.  but you don't realize that they sold a property last year where a child had lead poisoning. They can come after the LLC. (up to the statute of limitations Typically three years)

What if LLC  just bought a car and had a credit card with lots of debt on it. You don't know about it yet but it is still your debt.

It is relatively easy to do due diligence on a property to see what is owed against it. It is much harder to do that for a company.

IF you are buying a property in a newly created LLC, that is created at the settlement table That is a different story.

Don Konipol · Answer

@Brian LaPorte

To clarify further

By purchasing title insurance you are insured against almost all liens and encumbrances that may exist at the time you purchase a property.

If you purchase an entity that owns the property, there is no insurance against liens or debts against that entity, so if the entity had an undisclosed debt of say $50k, that debt would effectively be a lien against all assets of the LLC, including the subject real property.

These types of transfers are often done for tax considerations.  The only win win in tax considerations are property taxes, where the fact that title is not transferred would probably not trigger a tax valuation appraisal.  However as for depreciation, capital gains taxes, recapture, etc, the gain of one party to the transaction is offset by the loss to the other.  But if the buyer and seller are in different tax brackets, and or different stages of property write offs and recaptures, it can work to both their advantages.

As everything in the real estate investment arena; risk vs reward

Brian LaPorte · Answer

Well, it’s taken six weeks just to get to the point of kind of having a rough draft of a purchase agreement drawn up. The group we’re dealing with is very unorganized, so this process has become a total pain. Figured we would at least test the waters just for experience, even if we don’t go through with the LLC purchase.

So far it has been much more painful than a standard real estate asset purchase. Will keep everyone posted as the process goes along, as of now I would not suggest this as a viable option. Maybe if you were dealing with a highly organized seller who had packaged up property is ready to sell.

Brian

John Boychuk · Answer

My mentor has done this with a large (44 Unit) apartment complex. Be careful of what contracts the LLC you are purchasing is in. We now have the joy of a 9.5year coin-op laundry contract that we don't want.....

Austin Andrews · Answer

I personally haven't done a deal like this before, but have been around it a couple times. From what I've experienced, by transferring the LLC and not the property, the basis on the property doesn't change, therefore the taxes won't rise depending on the appreciation from the previous value. I'm getting ready to do a deal like this, but mainly working with attorneys for the first one to make sure it is structured correctly, so that is a great start!

Buying the LLC instead of the property?

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