Underwriting an LLC buyer for seller financed property?
Bryan HartlenPro Member
Investor · Phoenix, AZ · Member since 2018 · 313 posts · 157 votesUnderwriting an LLC buyer for seller financed property?
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Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
1yCompliance-wise, this would not be owner occupied so a lot of Dodd Frank goes out the window. From an underwriting perspective, I wouldnt do this without a PG and a solid workup on the members/operators to understand who they are and their background. Most KYC/AML will still apply. I would also get a copy of the articles of org and operating agreement to verify that the members have authority to dispose of assets, borrow, encumber, etc. Make sure the entity is in good standing with the State - I could be wrong on this, but I believe some states have issues with allowing a UCC to be filed on an entity that is not in good standing. Also, watch the state in which the entity is domiciled - some states like NV, CA, WY, and the Dakotas can complicate matters.
Some other documents for NOO/investment properties that I would want are a collateralization of leases/rents and an affidavit of non owner occupancy. Title policies will likely be long form instead of short form, so you'll want someone knowledgeable on your side to look over the exceptions for any landmines.
I'd recommend a background check for any other entities owned by the members with a history of BK, tax liens, etc, and for any UCCs/tax liens currently filed against the entity. IRS liens/UCCs are particularly concerning. I've havent personally seen an IRS UCC foreclosure directly but have been warned by people who know their stuff that this could potentially prime the mortgage, so IRS filings for the sponsors/members, the entity, or any other correlated entities are a hard-decline for me (unless there's an installment plan and situation that makes sense). If there are any non-tax UCCs filed on the entity, make sure Title is aware/has the info (shouldnt impact the title policy, but you never know).
For the mortgage, I would be more aggressive with the covenants/agreements since this an NOO entity borrower - provisions for cross-default, financial and management performance requirements, change of entity management/ownership, minimum capitalization, etc. Depending on who you ask and the state, a confession of judgement/executory process may or may not fly. I've received conflicting advice on that. A lot of this will vary by state.
I'm not super knowledgeable when it comes to trusts, so I cant really speak to that part.
5 Replies
- 1yDenise SuppleeBusiness MemberRealtor · Willow Grove, PA · Member since 2017 · 979 posts · 642 votes
Many banks turn away from lending to an unestablished LLC. Many property investors will use an LLC for protection. I have done this myself. However, banks want to be protected in case of a non-payment issue. It is very difficult to go after an LLC and frankly, there may be no assets except the prperty in question. Therefore, most lenders will require a personal guarantee. And even that arrangement may be hard to come by. Sage Grubbs operates in Alabama. I have worked with him before. He is the principal at Sage Legacy. Look him up :)
Spark Rental Co-Investing Club577 Reviews - Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes1y
Compliance-wise, this would not be owner occupied so a lot of Dodd Frank goes out the window. From an underwriting perspective, I wouldnt do this without a PG and a solid workup on the members/operators to understand who they are and their background. Most KYC/AML will still apply. I would also get a copy of the articles of org and operating agreement to verify that the members have authority to dispose of assets, borrow, encumber, etc. Make sure the entity is in good standing with the State - I could be wrong on this, but I believe some states have issues with allowing a UCC to be filed on an entity that is not in good standing. Also, watch the state in which the entity is domiciled - some states like NV, CA, WY, and the Dakotas can complicate matters.
Some other documents for NOO/investment properties that I would want are a collateralization of leases/rents and an affidavit of non owner occupancy. Title policies will likely be long form instead of short form, so you'll want someone knowledgeable on your side to look over the exceptions for any landmines.
I'd recommend a background check for any other entities owned by the members with a history of BK, tax liens, etc, and for any UCCs/tax liens currently filed against the entity. IRS liens/UCCs are particularly concerning. I've havent personally seen an IRS UCC foreclosure directly but have been warned by people who know their stuff that this could potentially prime the mortgage, so IRS filings for the sponsors/members, the entity, or any other correlated entities are a hard-decline for me (unless there's an installment plan and situation that makes sense). If there are any non-tax UCCs filed on the entity, make sure Title is aware/has the info (shouldnt impact the title policy, but you never know).
For the mortgage, I would be more aggressive with the covenants/agreements since this an NOO entity borrower - provisions for cross-default, financial and management performance requirements, change of entity management/ownership, minimum capitalization, etc. Depending on who you ask and the state, a confession of judgement/executory process may or may not fly. I've received conflicting advice on that. A lot of this will vary by state.
I'm not super knowledgeable when it comes to trusts, so I cant really speak to that part.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @Bryan Hartlen:
We’re selling a SF rental property and offering seller financing. We’ve bought, sold and created a handful of notes but they’ve always been to individuals.
Do you treat underwriting an LLC buyer differently than an individual? We've previously used Call the Underwriter to underwrite individuals, but my understanding is that compliance is less of a concern when selling to an LLC?
Are there any LLC-buyer specific potential pitfalls that we should be wary of?
We’ve had one group want to do the purchase within a trust; specifically put the property in the trust and then sell the trust. Any concerns with doing this rather than a straightforward sale and having them handle trust steps after the sale and without our participation?
We don't plan to sell the note, BUT we want to keep that exit open should the need arise. Anything unique about re-selling a note held by an LLC that we should take into account? Are they more/less desirable than a typical owner-occupied note?
Any recommendations on attorneys that would have experience in this that could advise and handle the transaction (in Birmingham, AL)
Thank you in advance for sharing your experience and wisdom.
we like rubin lublin in alabama. When underwriting a LLC I still underwrite it the same and underwrite the people behind the LLC. What does the LLC own, they have other assets? Anytime we lend to a LLC we always get a personal guarantee from the borrowers.
7e investments53 Reviews - Investor · Phoenix, AZ · Member since 2018 · 313 posts · 157 votes1y
@Chris Seveney, @Patrick Roberts and @Denise Supplee thank you.
- 1yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
Quote from @Bryan Hartlen:
We’re selling a SF rental property and offering seller financing. We’ve bought, sold and created a handful of notes but they’ve always been to individuals.
Do you treat underwriting an LLC buyer differently than an individual? We've previously used Call the Underwriter to underwrite individuals, but my understanding is that compliance is less of a concern when selling to an LLC?
Are there any LLC-buyer specific potential pitfalls that we should be wary of?
We’ve had one group want to do the purchase within a trust; specifically put the property in the trust and then sell the trust. Any concerns with doing this rather than a straightforward sale and having them handle trust steps after the sale and without our participation?
We don't plan to sell the note, BUT we want to keep that exit open should the need arise. Anything unique about re-selling a note held by an LLC that we should take into account? Are they more/less desirable than a typical owner-occupied note?
Any recommendations on attorneys that would have experience in this that could advise and handle the transaction (in Birmingham, AL)
Thank you in advance for sharing your experience and wisdom.
As a commercial hard money lender and buyer of commercial property notes, almost all our borrowers are entities. Unless the LTV is VERY low, or the entity borrower VERY strong, we require a personal guarantee of all "owners of beneficial interest".
However, any of our "rules" can be relaxed, at our option, with compensating factors, such as low LTV, large down payment, high borrower liquidity and net worth, additional collateral, profit participation, prior experience with borrower, etc.
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