Choosing the best entity to help you take the title
Buying at auction can be an excellent way to pick up some exceptional real estate deals, but many investors are unsure how to take the title. As a result, mistakes lead to issues selling the property or potential lawsuits from disgruntled buyers.
Buying in Personal Name with Subsequent Transfer
When you take title to a property in your name, you become at risk for any issues associated with the property. Smart real estate investors will immediately transfer the property out of their name and into a corporation or limited liability company (LLC) depending on the strategy for the property. This second transfer can create other problems for the investor who does not rehab the property but sells to other flippers. The issue is referred to as churning of title. For example, Andy Auction scores a deal on a triplex for $200,000 (deed transfer #1) that he transfers into an LLC after he has the title (deed transfer #2). Ten days later, Andy sells the triplex to Roxy Rehabber from his buyer’s list for $250,000 (deed transfer #3). Roxy rehabs the property and has it under contract in 60 days for $500,000.
Problem 1 – Roxy’s buyer might struggle with her lender to obtain financing. Due to three deed transfers within 100 days, the lender could be concerned title is being churned to inflate the price artificially.
Problem 2 - Andy’s name was on the title. If Andy had decided to keep the property himself or flip it, he would be personally associated with the title, i.e., no anonymity. Why is anonymity important? Review Crampton’s story on wamu.org where the media and attorneys tore into a real estate flipper.
Buying with an Entity
More experienced investors will use a business entity to take title to auction properties. Using a corporation or LLC is preferable from an asset protection perspective. If anything goes wrong, the investor is not liable. For even greater protection, the property can subsequently be transferred to a special purpose LLC depending on the strategy. Although this practice solves the liability issue, it does not provide anonymity, and you will have at least one other deed transfer if moving to a special purpose LLC.
Use Land Trusts When Buying at Auction
The land trust solves all of the issues mentioned above for auction buyers. Savvy investors will attend auctions with several unsigned land trust agreements. If a bid is won, then a trust is immediately set up (typically with the address of the property as its name), and the title is taken in the trust name. The investor’s personal information can remain private by inserting a Wyoming LLC as the trustee. For example, if Andy set up his land trust with Specialized Services, LLC as the trustee of the 421 Ave Trust, nothing related to this purchase would be traceable back to Andy. The trust is not recorded, and the state of Wyoming does not disclose information on the LLC members or managers. Andy will assign the beneficial ownership to a special purpose LLC he sets up to hold the land trust. If Andy desires to flip the property to Roxy, he will assign her the beneficial interest in the trust. No deed is recorded with an assignment of beneficial interest, thereby eliminating churning of title issues.
When it comes to real estate investing, entities should never be viewed as a one–size–fits–all application. Paying attention to asset protection, tax planning, and business planning objectives is important to an investor’s success.