All Forum Posts by: Account Closed

Seems reasonable that 'fair market value' would be purchase price + rehab, therefore no net gain to report on the sale when transferring from s-corp to LLC?

@Larry Turowski 

That may be what it turns out to be.  The only down side I can see, apart from multiple entity cost and adminstration, is that title seasoning is extended by the amount of time help in the s-corp if you want to get a loan for the hold.

What is the best entity structure for a business that buys then sometimes holds and sometimes flips?  It's not always easy to know ahead of time if you are going to keep or flip.  So it would be nice to just have both flips and holds in the same entity.  I don't object to owning in my personal name but this is a partnership and it's best I think to have a more formal structure.

The conventional wisdom is to flip in a S-Corp and hold in a LLC, but it's a pain to have two entities, especially in CA.

It's not talked about much but I'm thinking of a LP (Limited Partnership). What's neat about that is that it avoids the gross revenue tax that is imposed on CA LLC's (even if you lose money on a flip you pay taxes on the gross revenues from the sale). I'm just not sure it' wise to flip and hold in the same entity.

I will eventually talk with a legal/tax pro so don't worry about giving advice.  I'm just trying to get ideas.

I pretty much agree with everything you said.  If you find where to invest let us know.  I totally agree risk/reward ratio is getting too high.  Maybe it is time to find another investment class, if such a thing exists.

This reminds me of some flippers I was working with a while back.  They were having a hard time getting their offers accepted so their solution was to raise the offer price, well, no, when the margins get too thin the solution is to find another business.  We may be getting to that point.

Maybe the answer is to get more hands on.  There are flippers out there still that are getting it done but they want good terms and fast action.  They are successful and have cash and are willing to do low ltv high quality loans.  It's just a matter of finding that individual and creating that relationship.

Good question whether that scenario would be considered a consumer loan or not.  I don't know for sure.  I would think the part about grandma moving in would cause it to be considered a consumer loan.  Now if you as borrower signed an affidavit to the effect that you were going to use the proceeds strictly for business purposes (which you will find in most business loan docs) and later used it for consumer purpose (grandma moving in) you lied under oath and I'm not sure lender could be help responsible for that.  This kind of uncertainty can be avoided when lender *knows* exactly what borrower is up to, that's why relationships are so important in this business and that, among other reasons, is why lenders like to only lend to borrowers with a track record.

You can look up each of those regulations mentioned to see the consequences of non-compliance.

Let me try saying it a different way, Rob Cee.

If the loan origination complies with RESPA, TILA, DF, SAFE, CFPB, et al, the money can be used for personal, family or household purposes, and is called a consumer loan; If the loan origination does not comply with these regulations, the money cannot be used for personal, family or household purposes and is called a business purpose loan.

If a loan originator when originating a loan does not comply with said regulations (a business purpose loan) and the money is used for personal, family or household use, lender and originator potentially have big problems.  Thus originator and lender bend over backwards (or should) to ensure proper use of the funds.  That's why you see so much talk about only lending to entities, and only lending for flips or rentals ... it's all about keeping the loan purpose in the business domain.

What's sad, imo, is that hml's/pml's and other experts propagate the notion that if the property is NOO, it's a business purpose loan and everything is hunky dory, this is wrong! I think this misconception is at the root of the confusion here. And this is why trust deed investors need to understand and review loan docs and not depend on their hml broker ... brokers often times don't get it themselves.

Anybody that knows different is free to chime in!

I'm not an attorney and this is not legal advice.  Seriously, this is not a simple subject and one should consult with a knowledgeable attorney before engaging in loan origination, it is after all real money with real consequences.

@Rob Cee 

I don't completely follow your example, but if I did the answer would likely be that WF originates only consumer loans ... RESPA, TILA, DF etc compliant and with NMLS licensing.

@Rob Cee 

I guess it is a nuanced point.  I had to have a discussion with my mortgage attorney before I understood, or at least I believe I now understand.  Talking with the right attorney is important in this business not only on this point but many others as well.

They key to understanding is to first clear your mind of any preconceived notions you have on the subject and concentrate on the words 'personal, family or household use'.

What if borrower received more than 100% of purchase price on a purchase money loan ... money for Hawaii.  What if it's a gap funding for rehab and money doesn't go through funds control ... money for Hawaii.  If it's a purchase money loan for less than purchase price or more than purchase price with funds control, then there is probably no Hawaii money.

What if borrower doesn't move in but a family member does ... family use thus a consumer loan.

Just because the borrower checks a box saying HE doesn't INTEND to move in falls way short of guaranteeing a business loan.

Great start to a long lasting lender/borrower relationship .... not. 

@Rob Cee 

As @Rob K. alluded to, if the loan proceeds are used for personal, family or household use it's a consumer loan, if not, it's a business loan. Nowhere in the immediately preceding sentence did I say anything about occupancy, there is a reason for that, it's because it's irrelevant.

If you lend a flipper money to do work on his rehab, secured by the rehab property, but he uses the money to take his family on vacation to Hawaii instead, you have a consumer loan, even thought he doesn't occupy the rehab.

If you lend a flipper money to do work on his rehab, secured by his personal residence, and the money is used to do work on his rehab, it's a business loan.

Starting to see?