Can I purchase an LLC that owns the REO property? Any advice?

Question

Hello BPers,

I am a newbie and just venturing into the REO flipping business. Needless to say, I'm a bit nervous and can use some advice.

I am purchasing my first REO property from a wholesaler. However, the wholesaler is suggesting that I purchase the LLC that owns the REO property so we can speed things up and avoid double closings. If I purchase the LLC and remove the current single member on the LLC, is that sufficient? Although I trust the wholesaler, there is no way for me to know if the LLC has any liabilities, is there? Not sure what the pros and cons are of purchasing the LLC directly. Any thoughts or advice would be greatly appreciated!

Thanks so much,

~GC~

Bill F. · Answer

@GC Vaghasia If you want to do some of your own research, look up asset sale vs stock sale, that is in essence the choices you are faced with.

This and this give a quick perspective from an attorney and CPA respectively.

I'm in @Tom Gimer's camp on this one; buy the assets and move on. Unless this LLC is a fully functioning operations with front of the house and back of the house services that you can't replicate, it is not worth the risk.

Tom Gimer · Answer

Let's give OP good advice.

In the LLC context, it is not about "outstanding liabilities". Any judgments? Pending litigation? Easy to figure out.

Contracts or service agreements that will survive closing? Not so easy but less of a concern.

Undisclosed and potential liabilities? Impossible. These matters are covered by the seller's indemnity agreement. The seller may be long gone with the money by the time a claim surfaces 3 years later. And if this was all to save a few thousand bucks in transfer taxes it's foolish.

Goes back to who the seller is. Does the seller's word hold any value?

Joe Villeneuve · Answer

Yes.  We do this all the time.  The LLC's have to be new.  Easy enough to verify its history.

Brian Erlich · Answer

@GC Vaghasia,

Seek legal advice.  In the previous exchange everyone is giving their best advice, but that advice is general and not specific to your state and your situation.  They all believe what they are saying, but the advice is contradictory.  The best approach based on your willingness to spend a few dollars to be safe, consult an attorney.

A one hour meeting and a little legal research may amount to $400.  Well worth it in my opinion.

GC Vaghasia · Answer

Appreciate the feedback Tom and Chris.  I will bring up your suggestions to my lawyer on Monday. Hoping to purchase 100% of the membership interest in the LLC, IF it makes sense from a liability and cost perspective.

Tom Gimer · Answer

@GC Vaghasia You wouldn't buy the LLC... you would buy 100% of the membership interests in the LLC. The agreement would look quite a bit different from a real estate contract. It might incorporate a real estate contract, but my bet is you would incur significant legal fees negotiating the agreement.

Like @Chris Seveney said, there are serious risks in doing this. I would only do so if:

1) it actually saves on transfer taxes (see below); and

2) I was 100% confident that the LLC has no other liabilities ... the seller will warrant this in the membership purchase and sale agreement. Is that warranty worth more than the paper it's printed on?

Check your local bulk sales laws as well as laws regarding the sale of a controlling interest in an entity as both can trigger taxes you think you are avoiding.

GC Vaghasia · Answer

Thank you very much for all the valuable feedback. There is definitely much more to consider than I had previously thought.

I will address all the aforementioned concerns with my attorney and decide what to do by Wednesday. Once again, I truly appreciate all the feedback!

Joe Villeneuve · Answer

Sure you can.

Tom Gimer · Answer

No, you cannot "do what amounts to a title search" on an LLC.

The warranties that the seller of the LLC interests makes may be all you've got... and they may be worthless. If the seller agrees to indemnify you for everything before X date, but the seller has $0, the warranty is worth $0.

You are at the mercy of the applicable statute of limitations when you purchase an entity. Those are framed in years, not days.

Can I purchase an LLC that owns the REO property? Any advice?

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