Should I create an LLC to handle my seller finance deals?

Question

I wanted to get the opinion of some of my BP family. I currently have a portfolio of rental properties and I have negotiated the sale of one using owner financing. I currently hold these homes under an LLC. Since I am creating a note and becoming the bank should I create a separate LLC for that side of my investing? And should the first company own the second?

I have a call into my attorney and accountant.....just wanted to see what you all thought or how you structure your deals. Thanks all and ABC (always be closing) - Brendan

Bill Gulley · Answer

@Brendan Murphy

IMO, there are attorneys out there that may not have made it as ambulance chasers or trip and fall types who became real estate gurus, and the advice they give isn't much different than from other gurus, other than they sell products using their assumed expertise in law which is often incorrect for the masses. Remember too, you are not their client, they are not your attorney, they simply sell you stuff with a marketing angle they obtained from law school.   Get a second opinion if you think you're learning something.

There is no difference between a cash funded loan, such as a purchase money loan and a loan funded by equity as to any loan origination or compliance exemptions, both are mortgage loans. The difference is that a loan funded by equity is an installment loan, based on contract performance and an agreed sale price, this brings other differences into play on foreclosure proceedings, taxes, accounting and title transfers that are different than with a cash funded mortgage.

It doesn't matter where the note is held, it can be assigned to any entity or trust after it is made, it can go to another LLC, your Trust or granny's shoe box, it matters not and that next entity is not the lender, it will be the note holder and servicer if you collect payments. A note holder assumes many of the liabilities of the lender by assignment.

Only the owner of the property can provide seller financing and that entity is always responsible for its origination and settlement, the underwriting of a borrower.

Thinking you're going to "hide out" with a Trust as a servicer is rather silly, since there are servicing requirements as to disclosures, contact information, tax reporting and other administrative requirements.  You may not be using your name, there may be an asset protection angle, but there is no servicing benefit and the man behind the curtain can be found easily by a court order or regulatory inquiry.

As Dion pointed out, any assignment to another entity can have that entity be recognized as a lender, accounting for the asset transfer is consideration from the entity receiving the note at or even near the time of settlement. They look to the source of funding or consideration given as to who may be acting as a lender.

You are not a "private lender" when you are in the business of lending, any business entity acting as a lender will be an issue as to "being in the business of" an activity, that also backfires if you advertise publicly, or offer an extension of credit.

This is all assuming you are financing to an owner occupant that is a covered consumer financing transaction under Dodd-Frank and the SAFE Act. There are also prohibited transactions, self dealing issues of a loan originator or an RMLO financing their own property, it's rather hard to show you have no vested interest in extending that credit, so compliance becomes more critical. Not mentioning appraisal requirements, or, Regulation Z and C as amended, Consumer Protection Act, Equal Credit Act, loan servicing notices if the loan is transferred and tax reporting requirements.

Much of this goes out the window if you're financing to an investor on a commercial basis, even the licensing requirements selling off corporate assets to another business, but consumers, that is another ball game. Becoming a lender, that will cost you more than your property is worth, I'd bet on it!

Last bit of advice, don't get specialized financing advice from a general real estate attorney, acting as a lender or a broker requires special attention by those familiar with regulatory financing requirements. Good luck :)

Dion DePaoli · Answer

With the LLC holding the property the loans made are in equity. This 'may' provide for 'some' exemptions to state and federal license laws.

Loans made in equity are not the same as loans made with capital.

When you create a separate LLC:

If that LLC is fully owned by the parent LLC which owned the real property, you likely didn't add much of a liability protection above that which you already had. Additionally, that LLC may be subject to different licensing requirements since loans made from this LLC are capitalized loans or table funded. Not loans in equity. This will eliminate any of the 'possible' exemptions you 'may' have had for needing a license.

A loan violation in most cases would be able to go after all parties involved. Ergo, both or any LLC. The mere sale of the loan will also disqualify you from any potential Safe Harbor meaning the Borrower can raise a defense of Ability to Repay along with Predatory Practices.

If that LLC is a separate stand alone. It will enjoy no exemptions and will be considered a lender by definition. If you are selling and loaning to primary residence users - you will be required to have a license.

While there is a good sized body of folks who hope that exemptions will be granted in the event a licensed RMLO is used to originate the loan - the exemptions that may be available may not protect you or may not be the only violations you are committing.

The easiest example is what is found in most (pretty sure all) Lender License requirements - "Holding yourself out to the public to make loans." In other words, having a RMLO sign for the loan is one thing. Advertising that loan in public domain is a whole other thing. With no license, you may not do so or you are in violation.

It wasn't clear where any, all or some of the properties were located, as far as the state goes. Each state may allow for an exemption but if the state finds you are acting like a dealer - which is essentially what you are describing - you WILL be required to obtain a license. Not doing so would subject you to fines and other enforcement actions.

Just stay away from the land trust idea in a Mortgagee setting. That's more for holding title not mortgages.

@Bill Gulley may have some thoughts.

Brendan Murphy · Answer

You all are GREAT!!! I can't begin to tell you how much I appreciate all the feedback.

Brian Gibbons · Answer

@Brendan Murphy

Asset protection is primary

http://www.biggerpockets.com/files/user/biggerpo/2...

Taxation to me is secondary

http://www.biggerpockets.com/search?utf8=%E2%9C%93...

Darren Eady · Answer

I'm curious about the terms you are providing for this potential buyer since you are still holding the risk on these homes.  Typically you will not want to enter into a seller financed deal unless there is significant skin in the game from the buyer (down payment they won't want to walk away from) and a decent rate of interest that you'll create for yourself.

Starting a new LLC for this separate business is easy.  Figuring out if you should remain on title or transfer title while you hold the risk on these properties is going to be the tough question!

Brendan Murphy · Answer

@BobMalecki

Bob, Thanks for the info I will definitely check this out. Its great to know you have learned from Bill Bronchick and now I plan to also. Learning new avenues in REI truly excites me! :)

Bob Malecki · Answer

Hi Brendan,

Well that would be a good idea to hold the notes in a different entity than that which has title to your rentals. Instead you may want to use a Personal Property Trust to hold/own the note with your LLC as the Beneficiary. A trust is private, unrecorded and a good way to add a layer of ambiguous protection to your loan.

Search google for the word "trust" and "bronchick" to see Bill Bronchick's video on how using trusts in real estate works. NOTE I am not promoting Mr. Bronchicks products and only recommend this since I've learned much from his materials.

Bob

Should I create an LLC to handle my seller finance deals?

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