Buying LLC to obtain properties

13 Replies

I would like to buy an LLC to obtain the 6 rental properties owned by said LLC. What should I look out for? What are the tax implications for both buyer and seller? Properties are in Prince George's County Maryland

Make sure there are no judgements and ask for indemnification for anything that happened prior to the sale. Also in MD I would be concerned about potential lead lawsuit if the properties were build prior to 1978.   You may want to speak with lawyer before you sign an agreement.

A number of things to look out for, @James Isaacs :

  • Are there mortgages on the properties? Are they in the LLC's name or personally guaranteed by the current members? If personally guaranteed, the bank's not going to be okay with this.
  • You could be missing out on a bunch of depreciation, especially if cost segregations were done. You're buying the entity, not the properties, so you will stay on the current depreciation schedule. This could really mitigate some of the upside.
  • @Beth H. 's point is an important one. You could be responsible for future judgements agains the LLC, even if you didn't own it when the "event" happened.

The real question is, why? Why do this instead of just buying the properties in the normal way? I don't see the upside to purchasing the LLC.

One way to avoid taking the liability of the old LLC and the doc stamp in certain states, is to use a new LLC created by the current owner. The current owner will deed the property to the new LLC, and immediately transfer the new LLC to you.

You all make good points and have given me a lot to think about.

@Beth H. you are right. It would be a good idea to ask for indemnification from any prior judgements. I don't think lead will be an issue as these are condos were built in the 90's

@Jaysen Medhurst According to public record the properties were bought by the LLC and I figured if an LLC buys an LLC the bank will not have a problem if there is a mortgage because the mortgage would still be with the original LLC. Since these are condos that the owner has only held since late 2019 there wouldn't be much depreciation claimed especially when it comes to cost segregation. Why do this? The amount in equity is easier to come up with than 100% cash, which is what the seller wants. I could do one but not all six. I also don't qualify for a loan for that much even if I put down 50% which I also cant do. If there is less tax implications to just selling the LLC with the properties I'm sure he would go for it and his search for buyers would be over.

@Mike S. This is a great idea if the owner owns the properties out right but if there is a mortgage I'm afraid the banks might call the loan(s) due

To All...I would never do any of this without consulting a lawyer. I just want people with more experience to poke as many holes as possible in this idea so I can see if its worth approaching the seller with it and contacting a please continue..I need to consider all angles from people who know better

@James Isaacs , title and mortgage are not the same thing. Title can well be in a LLC that doesn't tell you anything about the mortgage. Your agent should be able to pull the details from the MLS, though. It's all public info.

If they've been owned for only a few months, then there probably hasn't been a lot of depreciation claimed. Why a cost seg? Because it pulls a ton of depreciation forward and offsets operating income. Once you have the depreciation it can be carried forward into perpetuity to offset any passive gains (or active if you're a RE pro).

@James Isaacs The seller likely has a personal guarantee which of course he is not going to leave in place.  There is likely a due on sale clause addressing the change in ownership of the llc also, not just a title transfer.

@James Isaacs I don't like the idea of buying an LLC. It is hard to do due diligence on an LLC.

Besides traditional real estate liabilities mentioned, what if their company has signed contracts for goods or services that you don't know about. They may have signed a long term contract with the worlds most expensive lawn mowing service and the worlds worst property manager. You have no way of knowing for sure what liabilities and responsibilities you are taking on.

An indemnification is only as good as the person making it.

“Why do this? The amount in equity is easier to come up with than 100% cash, which is what the seller wants. I could do one but not all six. I also don't qualify for a loan for that much even if I put down 50% which I also cant do.”

Can you please clarify? Why would buying an llc that owns six properties be cheaper or easier than buying the properties from the llc? 

Second @Ned Carey on this one. There are a lot of unknowns when buying an LLC. In addition to the possibilities Ned mentioned, what if the LLC also owns a bunch of boarded up West Baltimore townhouses with liens stacked up against them that the seller isn't telling you about?

Its almost impossible to do properly due diligence on an LLC, so you're taking on a ton of risk and the only real advantage is avoiding transfer taxes. Personally I can't imagine a situation where I'd be comfortable with it.

Originally posted by @James Isaacs :

@Wayne Brooks this may be a stupid question but why is that likely? With there being 6 properties (there originally were 11 units but the others sold) I would think it more likely all be under the business. I’m ready for the wisdom.. what don’t I see?

 James, When the other five properties were sold the loans were likely paid off. If you are buying the business it might be possible to keep the loans in place. However then you have the issue of "Due on sale" that Wayne Brooks mentioned