| An oft promoted "secret" of buying investment real | | | | the loan balance due and payable. Read these clauses |
| estate with the intent of "flipping" the property is, as | | | | carefully. |
| usual, no secret at all. It is however well worth | | | | There is also the issue of entity operating liabilities. |
| reviewing here so you don't end up in a relationship | | | | Simply put, if you buy an operating entity, you will inherit |
| that you don't want. Many real estate investment | | | | all of its operating liabilities. If the entity owes a debt |
| aficionados promote the concept of buying real estate | | | | when you buy it, you owe the debt. That is true even |
| under the name of an organized legal entity instead of | | | | if the debt doesn't pertain directly to the property you |
| their own name. One purpose behind this structure is | | | | want to own. This may be the case for loans like lines |
| to facilitate easy re-selling of the property. This goal is | | | | of credit, credit cards and open accounts with vendors. |
| reportedly accomplished by selling the ownership entity | | | | In most cases it is difficult to learn of all the debts |
| (LLC, Corporation, or Trust) and thus transferring the | | | | owed by an entity, and therefore, if you buy an |
| property it owns as well without the traditional process | | | | operating company, be careful to identify and |
| of title searches, title insurance, filings, etc. It sounds | | | | document all the debts you assume and have the |
| good, but is it really? I understand well the desire to | | | | sellers indemnify you against any others. |
| make life easy for a buyer. However, there are | | | | As with many things in real estate, this concept is |
| elements involved in a typical "entity sale" that may | | | | presented as a safe, secure and easily used tactic to |
| make it problematic at best. | | | | facilitate the business. In the real world, it typically is not. |
| The first issue is the probable sale of the entity. Unless | | | | But, it is used with some degree of frequency. The |
| this is done correctly, the seller may in fact be selling a | | | | reason you don't hear more about it is that the parties |
| security. Securities law is what governs people who | | | | involved usually never get to the point of litigating any |
| sell securities. Stocks, bonds, and shares in a LLC are | | | | of the issues. In most cases things just go along |
| all generally considered securities. In a case like we are | | | | according to Hoyle. If money is made then everybody |
| discussing, the seller must comply with securities law. | | | | is happy. If money is lost then most people take the hit |
| The penalties for breach of these laws are far more | | | | and get on with life. The fact that you may never be |
| punitive than for breaking most real estate laws. In | | | | caught however does not make it all right to use this |
| addition to the securities ramifications, there are liability | | | | concept with impunity. |
| issues. | | | | As with all elements in real estate, you have an |
| For all available real estate ownership benefits to be | | | | obligation to yourself and to those you do business |
| enjoyed by (passed through to) the owners they must | | | | with to be honest, open and upfront. You need to |
| have personal liability for the debt. This means that the | | | | understand everything possible about a transaction and |
| new owners will of necessity need to sign on any | | | | make your decisions wisely. If you're thinking about |
| underlying debt, assuming that the current lenders will | | | | buying or selling an entity, and thereby a property, be |
| allow it, which is no way a given. In addition, it will be | | | | careful. The more you know the better. This tool is not |
| difficult for the sellers to get a release from the | | | | as safe as some would have you believe, for either |
| lenders. It is important to note that this type of a sale | | | | the buyer or seller. If we can help, we'd be glad to. |
| may well still trigger a "due-on-sale" clause in the | | | | Good luck. |
| mortgage. This would allow the lender to call 100% of | | | | |