Holding out of state properties in land trusts and corporation

[Jesse Zhu]

After reading posts after posts of land trust, LLC and asset protection, etc, my head is spinning. So I thought I'd start a new discussion on my specific situation and solutions.

I am closing five out of state REO properties, spread out in different states (IN, OH, MI, TX and AR) in two weeks. This is my first investment deal, I plan to sell them seller-financing, sell notes or outright for cash asap. I am thinking of holding them in land trusts with LLC (or S Corp) as the beneficiary for identity and liability protection.

Can the LLC be formed in out states such as Nevada, Wyoming or Delaware for less cost or it must be CA LLC because I live here? I've received different advice. One attorney suggests it's better to form my LLC in CA as CA is cracking down on out of state LLC, while another investor suggests forming a LLC in another State with less cost and using it just as holding entity (not operating entity). Also is single member LLC considered disregarded entity, hence losing the liability protection? Again I have limited understanding of business entity and asset protection, and might not even be asking the right questions. Any suggestion, advice or thoughts are appreciated.

[Bill Gulley]

I always ask myself, "what's the pitch here, where's the angle?" when someone advises business entities. Just looking for their motivation in suggesting something.

I'd say your attorney was probably giving the best advice for you, you're in CA, then do business in CA and he's in CA.

The proper jurisdiction for real estate matters is the state (and county or similar) where the property is located. Two choices, form an entity in each of those states or file in each of those states as a foreign corporation (entity) otherwise, your entity will likely be disregarded.

As to hiding out and hiding your identity, all you're doing is delaying the process, if you are sued, the attorney simply asks the court to have owners identified if there is some convoluted set up, which the court orders and that may tick off a judge. Now, you'll be spilling your guts documenting who is on first base or you can be in contempt of court, not a good way to begin, IMO.

Not saying that vertical entities don't have a purpose, one owning or holding another, but if the entities are simply there to deceive, and are empty shell corporations, they can be disregarded and your ploy won't be looked upon with a smile, each entity needs a business purpose. Each must be properly set up, managed, funded and operate toward the business goal, not just sit there as a fortress for liability protection.

A single member entity is difficult to obtain the level of liability protection most believe they have, they are also actively engaged in the management and operations personally. You mess up personally and you can still be had. Officers and Directors can be personally liable for their acts, jointly or severely, including the Holy Grail of business entities, the Non-Profit! This is to government proceedings, but third parties may go there as well with a small, one man shop entity.

You need to see an attorney, not other investors or RE operators or put your assets on the line based on what you are told in some real estate forums. You have no recourse taking bad advice off the internet or from some Joe giving a non-professional opinion, you do with your attorney.       

As to your plan of selling 5 properties in different states with seller financing, you still have issues with Dodd-Frank, selling to homeowners, exemptions are not deals done per state but by the owner and none of yours are owner occupied dwellings, you're in the business. That probably means you'll need a mortgage originator in the area where the properties are located, good luck, might find one authorized to originate nationally, I haven't for seller financed originations. Consider selling to other investors. I also suggest you start looking for a loan servicer doing business in each of those states, they may be able to assist you in the originations as well.

Congrats on your purchases, good luck :)