What Do I DO Now!
Hello
I am going into my first rehab deal and need some very good ****Must Reach Senior Investor status before posting URL's***he property is a 3/1 that needs $10,000 in repairs. It cost $18500 for the purchase and After Repair Value is $65,000.
Question 1: Do I just get financing for the house and then get a line of credit to repair or do I get a loan for the whole amount?
Question 2: How long will I have to wait to sell the property after I fix it up if I sell it to an investor?
Question 3: I know that I shouldnt put the property in my name so what is the best option for me- to incorporate, llc, or just a trust? ( I am going into this deal with a partner 50/50)
I know I need to get some legal advice with some issues but i would like you alls opinions and advice.
Thanks! 
Hello where is everyone?
First, are you completely sure of your numbers? The figures listed would make this a great deal, tho rare, to have a sale price for only 1/3 of the ARV with only $10K in repairs.
Now to the questions.
1) This is something that should be lined up BEFORE making an offer on anything. There are several different methods to finance. Alot would greatly depend on what type of loans you would qualify. Have you spoken with a mortgage broker yet?
2) IF you're planning on selling to another investor (who would likely be paying for it with cash or non-conforming funds), you could sell it the day after you get it. If this is your exit strategy, why spend money to fix it up and then sell to another investor to retail it?
3) There are alot of scare stories about having a property in your own name. Don't worry about it, especially for your first couple of deals. LLC's and Corps are for people doing this fulltime AND have enough personal assets that they would be prime targets for law suits. That doesn't include the majority of people just starting out. Get a good insurance policy, and if you're that concerned about your name being listed on the property, spend the extra $$$ to put it in a land trust.
Roger
Thanks for the reply Rajwarrior.
First, I have had two estimates done. One was for $15k and one for $10k (I have done business w/ person before). So we plan to get atleast $16k for the repairs which still gives us a good profit.
(18.5k for house, 15k repairs, resale to investor quick for $55k with a renter). We have a broker already and qualify for a couple of programs. But it has been hard for us to find someone who just wants to loan on the sale price and then get a line of credit. My broker said we would get a better interest rate by combining the sale and repair for one loan. Oh we are trying to assign the contract now but no one seems to want to do any repairs. Everyone wants a close to perfect house with a renter so that is what we are going to provide and even if it takes sometime we can rent it and make a cute profit while we wait.
So is a land trust good even if you have a partner and how will this affect us at tax time.
Thanks all responses are welcome.
I would form a small partnership and have title vested in that name. You can write the agreement yourself in 10 minutes or follow others as a guideline. My dad and I did a one page agreement.
I would get one loan for the whole deal even if you have to use hard money. At the numbers you are quoting it should be a piece of pie to do.
I drove thru Gboro last week on the way to Wilson. Still beautiful country.
[ Edited by jfmlv1950 on Date 11/13/2003 ]
As far as the partner thing goes, you could write up a joint venture agreement which would be for this one deal. If you're planning on a continuing partnership, forming a business entity in the near future would probably be the best idea in order to keep personal issues at bay.
Concerning the land trust, you'll have to check with your attorney and tax professional with it.
Roger
First and foremost I totally disagree with the comment that people should start out buying property in their own name. This leaves you open to a whole realm of liability which an insurance policy would probably not come close to covering. Do it right the first time...visit an attorney and accountant and discuss your possibilities. It costs at most $500 to set up a separate entity and can save your a$$ if needed.
Next...for your situation I would recomend an s-corp. Flipping properties is considered an active trade or business by the IRS and thus would be subject to self employment tax (15.3%) if you are to hold title in your own name (sole proprieter) or a single member LLC.
The only disadvantage is that if someone you, the judge can award your stock shares of your s-corp. They could then effectivly vote themselves in as officers and do whatever they want. However, I take this risk because the turnover time of a property is quick compared to the courts and it shouldn't be a problem.
GOOD LUCK
[ Edited by jfmlv1950 on Date 11/13/2003 ]
Thanks you guys!
So do you get the loan in the business name or is that possible? If so how do you deal with that if one person doesnt have good credit but has solid income for over 2 years? Or do you just get the loan in the persons name with the good credit, then how do you claim partnership to the deal?
I would appreciate if someone could enlighten me on the above questions.
Thanks!
Getting a loan in the s-corps name will be contingent on the s-corps credit history. Since it is a new enity with no credit history the chances of getting a loan in its name will be zero.
One or both of you will be asked to personally back the loan, so your names will end up on it.
The best way around this would be to take out a home equity loan in your name and put the money into the corporation as a loan from you to it, then the corporation could buy the property.
However, you are probably way ahead of yourself even trying to form a corporation with another person. Is this a one time deal or do you plan on working with this person as a partner in your corporation?
A one time deal would best be done through a joint venture agreement. You could form your own LLC or s-corp and the joint venture would consist of your friend and your company.
To be honest, I would be very wary of doing any type of business arrangement with another person if they have a history of not paying anyone (bad credit history) I would make extra sure I was totally protected and put more of the liabilty to prove they were going to up hold their end of the deal. Bad credit usually equates to financial immaturity, not someone I would want to be responsible for being tied to them legally in a business.
Before you go on, I would really like for you to let us know exactly how you came up with your after repaired value of $65k. It is really, really easy to over value a properties exit price before you purchase it.
Is this your first rehab? If so, most experts in the field (not me) recommend that you double your highest estimate. They say that there will always be something not originally found that needs to be fixed.
Secondly, I don't know of too many investors who will buy a property at 85% of the FMV, especially since it is only $10,000 below FMV.
It sounds like you might not have enough room to flip it to me (assuming $30,000 in repairs leaves you at a cost of $48,500). you will have be at 75% of FMV...sounds scary if it does cost more than you think.
If it truly only costs $10,000 in the end, then it should be a no-brainer. Good Deal.
Be careful if its your first time though.
Good Luck,
Brandon
Thanks for responding. I am not sure how many times me and my partner are going to do this, that will be based on how things go this time. The business entity I am looking for just needs to not give me double taxes on capital gains and protect my property from someone trying to sue us and taking it (if that was to ever happen).
Trust would probably be feasible for what we are trying to do. As far as the repairs needed the house is only 800 sqft if it takes $30k to fix I would be better off knocking it down and starting over. I had 3 people do an estimate and I was told no higher than $15k but I am giving myself a little leg room to work with.
Someone stated that a bank doesnt want to loan in a business name if it doesnt have credit. I had someone buy a house from me before that set up his and his partner a llc while they were in the process of getting the house. They got an all interest loan to buy and fix up the house. How is that possible if banks wont loan unless the business has credit?[ Edited by NChotdeals on Date 11/16/2003 ]
just needs to not give me double taxes on capital gains - LLC or S-corp will do that, not a c-corp.
protect my property from someone trying to sue us and taking it - if you are buying, fixing and selling there won't be any property to take, it will be gone and the only thing left will be the money you made to take.
I had 3 people do an estimate and I was told no higher than $15k - that's good, you should be in the ball park, as long as they were contractors and not drinking buddies.
I had someone buy a house from me before that set up his and his partner a llc while they were in the process of getting the house. They got an all interest loan to buy and fix up the house. How is that possible if banks wont loan unless the business has credit?
- was it an LLC or an LLP? the answer most likely is the bank didn't loan the business entity money, but was secured by the members of the entity personally. Also a hard money loan could have been used, which once again would have been secured personally.
I would still like to know how you came up with the 65K after fix up value?
NC,
You definitely need some sort of written agreement between you and your partner. Answers as to whether you need to form a business entity or not will all be opinions here, whether from experienced investors, newbies, or professionals in the business.
If you really want an answer, speak with your own attorney and tax professional about the pros and cons of forming a business. Their answers may surprise you.
As stated earlier, you really don't yet know IF you're continue to do REI, IF you're any good at it, or even IF you like it yet. Why spend the money to form a business that may never be used (or used little)?
Again, you're only likely to be sued for a couple of reasons. One is that you have, or appear to have plenty of income/wealth where a greedy attorney will gladly help sue you pro bono. Two is that you were grossly negilent in some aspect that resulted in enough injury/damage to warrant a lawsuit regardless of your financial situation.
If you fall into one of these categories, it may be in your best interest to incorp from the start. However, if you're in the latter of these two, remember that you're in the South and stand a much better chance of being shot than sued if you intentially trying to cause harm.
Roger
As far as the after repair value, I pulled comps for houses that sold in the area not including the house that is selling around the corner for $94500 and the 200k houses at the end of the street only seperated by a fence. In the future I believe they will probably take these houses and build more of the expensive houses so the land is even valuable here.
As far as me being interested in REI, I have been in REI for almost four years. I've rented houses and bought a house that we renovated but rented it. Now I wholesale mostly but my goal is to be in the rental (long run) business. This house is to get me some capital to buy a piece of property I want. I said that I didnt know if I would partner with this person again depending on how this turns out. If it turns out decent, I find houses at this price alot so we can do as many as we are able.
I will go see an attorney and I appreciate the advice.
What is the difference between a llc and a llp? Which would be good in this situation?
anyone have any opinions or experiences that can help
LLP - Unlike a general partnership, in which individual partners are liable for the partnership's debts and obligations, an LLP provides each of its individual partners protection against personal liability for certain partnership liabilities.
However, there is a key difference between an LLP and a limited partnership. In a limited partnership, only the general partners can manage the limited partnership. This makes partnerships inappropriate as a form of business organization if all partners wish to engage in the management decision making of the limited partnership’s business. LLPs, on the other hand, can be formed so that all partners can participate in the management process.
With a few exceptions, unless an LLP elects to be taxed as a corporation, its income is not taxed to the LLP, but is instead “passed-through” to the partners and taxed to them at their individual tax rates in the same manner as the income of a general partnership is taxed.
S-corp - an S corporation is a corporation that elects to receive special tax treatment. Because it is a corporation, the shareholders of an S corporation have limited liability protection. What really makes the S corporation form of organization popular, however is that is not subject to the corporate “double-tax.” Instead, an S corporation is treated for tax purposes more like a partnership, but with many important differences. Unfortunately, there are many rules and tax “traps” surrounding the structuring of S corporations that often limit their usefulness. One advantage of the LLP’s is that they are not subject to these restrictive rules. For example, the number and type of investors who can become shareholders in an S corporation is very restricted. An S corporation can have no more than 75 shareholders. Shareholders in an S corporation cannot be partnerships, other corporations, (unless the other corporation owns at least 100% of the stock of the S corporation, and the S corporation elects to be a qualified subchapter S subsidiary), most types of trusts, or non U.S. residents. LLPs are not subject to these limitations. Also, the shareholders of an S corporation cannot create different “classes” of ownership interests. LLP partners, however can vary allocations of ownership, profit sharing, voting rights, etc. in ways that allow for great flexibility. There are also a number of technical tax advantages which members of an LLP can enjoy when the LLP is taxed like a partnership which cannot be enjoyed by shareholders of an S corporation. Whether a business should be conducted as an LLP or as an S corporation requires the consideration of many factors that are often technical.
Therefore, the decision is usually best made after consultation with an attorney and accountant.
Keep in mind that this forum and the Internet in general is a great place for free advice which can be good or bad advice but still free.
A 30 minute consultation with a CPA in your state will be worth more to you than 50 hours of reading here. The information will be accurate and relevant to you, your goals and your states regulations.
[addsig]
One more point. There have been several posts recommending a written joint venture agreement. Unless the agreement is included as part of an LLC, LLP, or corporation, it will by default be a General Partnership which is the worst possible entity. Because, not only are you and all of your assets at risk for your actions, but they are also at risk for the actions of your partner(s). This should be avoided at all cost. Do yourself a favor, and spend the money to do it right the first time.