To form an LLC during offer process?

Question

Hello, I have a question regarding LLCs... My goal is form a new LLC for each project such a 519 Main Street llc etc for max asset protection... My question is each time you form an llc it will take some $. Do you form the llc when making the offer and if you don't get the property that $ is flushed down the toilet? Because I know if you go to switch deed after closing to an LLC that needs an attorney and more $ (don't want to do it this way). My only other concern is if you make An offer as an LLC might lower your chances of acquiring the property vs other individuals (for example if It's an estate sale and they would prefer the home not be demolished etc). Look forward to hearing the best way to approach this. Thank you!

Saran Mandhadapu · Answer

You can have the purchase agreement include a statement that the buyer reserves the right to buy in personal name or in the name of an entity that the buyer owns.Then once your offer is accepted and agreement is fully executed, you can form the LLC, get EIN and put an addendum to change the name of the buyer to LLC name. Your realtor does this, it is just a piece of paper that the buyer and seller signs.****Please note that you cannot use a conventional loan to buy a property in LLC name, you would have to go for commercial loan to have the title in the name of an LLC.****Thanks...Saran

Jessica Zolotorofe · Answer

You can keep reusing the same LLC as long as you only have one property going at a time. So buy and sell and then buy another in the same name and you should be ok. You only really need asset specific LLCs if you are running a few projects at once and want to protect yourself personally, and also the other properties if god forbid something happens at one property.

Jessica Zolotorofe · Answer

I also 100% disagree with the concept of not using an LLC or quitclaiming the property. Neither are good ways to avoid major exposure. Not only does transferring title typically trigger a due on sale clause and potentially prepayment penalties in connection with any financing, but can also trigger significant controlling interest transfer tax in many states, including NJ, plus it requires change in insurance policy and causes title insurance issues. Not a great plan. And not having an LLC if you have multiple investments and just purchasing insurance is highly risky. There are tons of threads about why that's an accident waiting to happen. A few are actually active right now, if you do a quick search, but insurance has deductibles, coverage limits, is easy voidable, has notice requirements, and doesn't cover a whole bunch of knew or should've knowns, as well as a plethora of other exclusions. NJ LLCs are inexpensive, quick (literally takes a few minutes max), and they are worth every penny 100x over. Other states have major annual fees or, like NY for example, are very costly to form and have publication requirements that take weeks. NJ is easy. You don't want to waste the few hundred before you have a closing in near sight, but once you do, I can't advise strongly enough against having many investments going at once in your personal name with all of your personal and business bank accounts, cars, homes, and all other personal and business assets subject to levy and seizure if something goes wrong at any one of those properties. A contractor or a tenant sues you...I have seen horrible outcomes too many times and by the time those cases get to my office, it's too late for us to help. Always so important not to be penny wise and pound foolish when your whole life's earnings and all of your family's assets are on the line...in my opinion, it's never worth the associated risk. Real estate is an amazing investment, but there is a good reason all the bigger developers and flippers have property specific LLCs...

Jessica Zolotorofe · Answer

I would go under contract in your name or the name of a general LLC you form that will be the sole member of all of the number-street name-LLCs. So, Investor LLC would be the sole member of all of uour property owner LLCs, which is actually beneficial for a number of other reasons, but the property specific LLCs will be considered disregarded entities for tax purposes, so you still only have one taxpayer to worry about. You have to make sure the contract contains a provision that allows you to assign. Your attorney should take care of that as part of the attorney review addendum. If the seller is strongly opposed to a general assignment clause, they should always be ok with no assignment except to an entity of which the original contract purchaser is the controlling or majority member. I would then form the property specific LLC right before you close, or at least after all of your contingencies are satisfied and then take title in the name of that LLC.

Ben C. · Answer

@Jessica Zolotorofe What are your thoughts on forming an LLC vs an LLC (Electing to be taxed as an S-Corp) for flipping? Also, do you perform closings in Northern NJ? Thanks!

Ben C. · Answer

Jessica Zolotorofe flipping. Holding properties on average for 12-13 months.

Jessica Zolotorofe · Answer

It shouldn't. Not if they have an attorney. Are you planning on holding these properties long term or flipping them?

Ben C. · Answer

Jessica Zolotorofe *assignment clause Sorry for typo

Ben C. · Answer

Jessica Zolotorofe sounds like the provision clause will scare off your average novice seller. Maybe best thing is to make a generic LLC and use that for deal and then dissolve after you sell property and make a new generic LLC and repeat?

Jessica Zolotorofe · Answer

The standard realtor's contracts in NJ have a no assignment clause, I'm pretty sure. Sellers get weird sometimes when they don't know who the end buyer is and think you're wholesaling and profitting off their property without taking title. Makes them think they can get a better price if you can flip it for more before you even close, so i like to get the assignment provision in before attorney review ends just in case. You can technically wait until the day before you're closing to form the LLC and assign the contract but you'll need property and liability insurance ready to be bound and a title commitment in the LLC name before you close, so realistically, you should do it at least a couple of days in advance. The seller's attorney also needs the right entity name to prepare the deed and transfer documents for recording. But I'm not kidding when I say it takes a credit card and about 5 minutes online to form a NJ LLC, so waiting until your inspections are all completed and you are only a few days out from closing is totally fine.