All Forum Posts by: Quincy Mingo

@Quincy Mingo you should disregard advice from out of state folks about not using an attorney. An attorney will do something like this for $600-700 and will make sure you do this right. This is not a state where the title agent will do this for free.... because the attoreneys are the title agents. 

You got a lot of advice from @Zack Karp who is a lender you can trust in Chicago. Zack and I have done deals together, and he is a strong, creative lender who knows investing. 

My only high-level criticism here is that you are wanting to buy the partner out for what is owed. Why wouldn't the partner want to go to market and make money on this deal? It seems you all have done well here in terms of a smart investment that has appreciated. 

Lastly, as an agent you 100% don't need an agent if you are doing an internal buy out in a partnership. We agents often times add a lot of value and earn our keep by helping you maximize the sales process, but what you are doing is something that needs an attorney. If you need a good, affordable attorney I can PM you one that I use regularly. 

@Quincy Mingo if you are not on title now, then you could add yourself to title, then wait 6 months and then do a cash out refi. This would save you a lot of money in closing costs compared to a purchase, plus you would not need to come up with the down payment. (The City of Chicago transfer tax alone on $400K is $3,000 just for the buyer side, plus another $1,200 for the seller.)

If you purchase, then you wouldn't be buying from the LLC, since the property was never deeded to the LLC. The LLC doesn't own it. Your partner is on title individually, so he is the owner and would be the seller. Yes you could do a Conventional 5% down loan as a primary residence. Keep in mind this way you will need funds for the down payment, and to buy your partner out.

You need to get the LLC out of your head. You established a LLC with your partner, but it doesn't even own the property. It's pointless. Just dissolve it. Totally unnecessary. You cannot buy the property with the LLC, having a property in a LLC doesn't mesh with Conventional financing, and it's just an added cost of filing taxes and annual filing that you can do the same thing on your personal return. If you are leasing units from the LLC to tenants, then your leases are illegal, as the LLC is not the owner of the property. And again if you want the LLC for "protection", instead just get an umbrella policy on your homeowners insurance once you buy it.

The issue of purchase vs. refi isn't so much about who's name the loan is in. What is the ownership on the deed recorded at the county? Is it the LLC or is it in your partner's name?

One person can get a loan but title of the property is owned by an LLC and that's the issue on how to go about transferring ownership. The tax implications of your partner's shares are determined by his percentage of ownership of the property.

If the property is deeded 100% in his name,  You have a couple of options.

1. have your name added to the title/deed at the county and perform a refinance or a 2nd position private note as previously discussed

2. Do a full on purchase at a discounted value based on your retained equity.  You don't need a Real Estate pro to do that.  You just need a purchase agreement between the two of you with clear terms that either an attorney can draft or you may be able to find an off the shelf generic one (I never recommend these as they are too generic and don't protect either party), or you can ask a broker to prepare one for a flat fee.  

Google says…

“Is Illinois a title or attorney state?" When it comes to buying and selling property, Illinois is considered an "attorney state." Lawyers participate in the real estate sale process as a matter of custom and practice. But there are no laws or ordinances that require a buyer or seller to use one.”

I’ve never purchased in an attorney state but it seems like something you could handle yourself or with minimal help as you know each other. 

Your partner owes capital gains tax because he has made a capital gain. Whether that is the house going up in value or he sells 1/2 the LLC for $300k that he only paid $200k for. Unless he's willing to give you 100% of the gain for free (nice guy) he has a taxable gain. And you don't want to pay him the gain "under the table" again because besides being illegal, you now have an artificially low cost basis and personally owe all the capital gains tax.

Ps. If you plan to move in and owner occupy you'd rather move it in to your name so you can claim 100% sec-121 tax free treatment which you can not do if the LLC owns it and it was a rental first. Which means you'd only get pro-rated tax free treatment.

As a former lender, I'm curious why you are "purchasing" the property from him?  

I'd discuss the ramifications of the LLC formation with his CPA and the tax implications of a buy out. If the LLC owns the property already and the loan is in the name of the LLC, I'd leave it sit and buy him out of the LLC.

What are your terms of ownership?  What's your buyout clause say?  What % do you each own?

Based on the limited info you provided, it looks like there is roughly $180k in Gain.  If you're 50/50, then you'd have $90,000 + 1/2 of the original investment owed to him.  That'd put you around $510kish for your buyout.  

Does he need the cash or can you do a contract/mortgage (owner finance - no bank.  set up payments in escrow to him) in 2nd position behind the first to pay him over time leaving the underlying note in place with better terms?  Figure out your equity and make payments.  Put a "Call/balloon" on the 2nd so you need to pay it off in "x" number of years (3-5) with a 30 year Amortization or an interest only payment.  

When you refinance it at the bank, you won't need to worry about bringing money to the table because you're already in title.  You should be able to roll the closing costs and 2nd into the new refinance mortgage after rates drop a bit.  I'd target early next year sometime.  Spring or early summer.  Rates should be coming down at that point (mid 5 - mid 6's is my educated guess for next year).  

The way you're describing sounds difficult and is hard to follow.  

IMHO:

You’re going to need a new loan.

Your partner is going to owe capital gains if there is a gain. (You didn't' say what you paid.) You don't want to buy at the amount owed from the LLC. I don't know if it's legal or if it's tax evasion. But you'd also lower your basis for depreciation and cause yourself to personally owe all the capital gains tax your partner should be paying half of. (Assuming you are 50/50 partners.)

Here's how I'd work in it in your position. In a title state (not an attorney state.). I'd write up a contract for 4% less than either an appraised value or an agreed upon value with the partner. (Assuming you'd have to pay at least 4% to sell to a stranger.). Then you get a new loan for enough to pay off the partner's mortgage and their half of the equity. Hopefully you can make this work because you plan to live in it. Otherwise you'd probably have to bring money to the table. You still might want to if you have it to avoid PMI. You'd have to talk to a CPA to see if you qualify for 100% sec-121 when you sell or if you'd get stuck with pro-rated because you owned it when it was a rental. (You might get away with it because it shouldn't have been a disregarded entity.)

Good luck and let us know how it turns out m