Will buying in a company name trigger anti-flipping problems?

Question

I'm exploring my options to reduce my tax burden and my CPA is recommending that I create an S-Corp to maximize the tax benefits. That sounds good to me but I'm concerned that when I'm buying properties I might run into some push-back from sellers with the anti-flipping mindset. I've had very good success buying houses as an individual in competitive situations so I want to make sure I'm not making a bad move that will put me at a disadvantage. Anyone have an opinion about which is better?

Will Barnard · Answer

If you are running a business and this is just not a hobby, you should be flipping from an entity. In addition, if you have any considerable assets, you need to protect them not only with insurance but with another layer of protection via the entity.The S Corp (generally speaking, not always) is a good entity to flip from. You can also go the LLC route with S Corp tax election and accomplish the same thing.

Elizabeth Wilson · Answer

@Michael Woodward - Sellers won't care as long you maintain that personal relationship. In fact some sellers my take your offer more seriously because you are now part of a company rather than just a guy.Definitely listen to your CPA and reduce those taxes!

Michael Woodward · Answer

@Peter Moser. That's a great strategy. I think your letter to the seller probably did have an significant impact on your successful offer. There's nothing wrong (certainly not illegal) for you to ask the agent to forward your letter to their seller. That (almost always) only works when the house is being sold by an individual though.... not when a company or govt agency is involved. In my situation, nearly all of the houses that fit my purchase criteria end up being foreclosures (REO) that are being sold by HUD, a bank, or some other third-party processor. There's no way to reach the person handling the file so there's no way for me to build a relationship. I'm glad your offers worked out for you!

Lisa Thoele · Answer

@Michael Woodward I think you should talk to your CPA or attorney about this but one option depending on how you fund your deals might be to purchase in your sole proprietor name and transfer title to your entity? I am guessing that there woumd be some way to make this be workable for lessening your tax burden but might not hold up in protecting you legally (piercing the corporate veil). I am just mentioning it as an option because I bought a short sale that way once - it was a unique circumstance and it did make a difference in me getting the deal.

Michael Woodward · Answer

Thanks @Elizabeth Wilson! Thanks @Will Barnard! I've been operating for a long time (since 1999) as a sole proprietor but have really ramped the business up in the past several years. I would have saved over $7500 last year if I had been operating as an S-Corp and this year is shaping up to be at least twice that. That's a lot of money to give away..... but..... if sellers prefer selling to individuals instead of companies (the anti-flipping crowd) then I could miss out on some deals. Missing just one property during the year would be worse than giving the extra $7500 (or even $14k) to the IRS. What makes it nearly impossible to figure out the solution is that I usually don't know why I missed out on a competitive bid because of confidentiality of the buyer. Usually it's obvious that I was out-bid but not always. I bought a house last year and was told by the listing agent after we closed that someone else offered $30k more than my offer.... but they still gave it to me!? That still blows my mind that I got it.... but it happened.... so I'll always wonder why. Maybe it was because I was buying as an individual but maybe not. What does your gut tell you about what I'm describing?

Michael Woodward · Answer

Thanks @Will Barnard!

Will Barnard · Answer

I have never heard of losing a deal because the seller did not like that I was buying in an entity. Secondly, when dealing with the agents on MLS deals. Having an entity and all the assocuated docs makes you look like what you are - a business and thatvis a good thing, not a bad one.Writing a cover letter to the seller and the agent is also a very good idea.

Peter M. · Answer

@Michael Woodward Both times my wife and I bought personal homes we wrote letters to the seller. They were true but maybe a little sappy to speak to the sellers emotions more than their money-centered brains. These were both done through agents and we got the house both times. I really don't know if the letters affected their decision or if they even got them but you are saying there are laws that do not allow that? Can you elaborate? Are you saying that our agents advised us to do something illegal because I have never heard of it being illegal but maybe that is because it was being bought as a primary residence?

Michael Woodward · Answer

Thanks @Peter Moser. Unfortunately there's no way to build a rapport with sellers because everything is at arms length between the listing agent and buyer's agent. Even though I have a real estate license and I buy houses under that license, I still don't have direct access to the seller. All of the offers are submitted in bulk (paper or electronic) and the seller picks the one they like so there's just no opportunity to explain my situation or try to sway them in any way. Laws are set up to prevent direct contact between the partys to keep the bidding process honest and above board. Thanks @Teri S.. Those are all the same questions I have that will unfortunately be unanswerable. Thanks @Lisa Thoele. That's a good idea. My CPA came up with an unexpected solution that I like but it requires a couple more accounting steps to keep up with. He said that I can continue buying and selling in my name but I can "hire" my S-Corp to do all of the renovations. As he described it, that will give me maximum tax benefit while leaving everything else as-is which would remove the need to transfer the deed. I'm waiting for them to share the details of how it works to make a decision but so far it sounds good.

Teri Feeney Styers · Answer

@Michael Woodward I have never received push back due to my S-corp identity. If your offer is competitive and clean then they don't care. As far as the $30K "other bidder" you don't know the details of that offer - maybe you had cash and they were offering an owner carry with nothing down... or needed 6 months to sell their house... I'm sure it wasn't a case of you being "good guy Mike" and them being "bad guy corporation"...