Information to Consider When Buying or Investing in Foreclosed Properties

Should I use an LLC

As an active Staten Island real estate attorney I am seeing a sharp increase in clients looking to purchase foreclosed properties.  While price and location are always important variables, a savvy investor must also look at tax and insurance implications before deciding to purchase.  While holding title in your individual name can save you some start up costs using a corporation or LLC can minimize potential liability issues. SO before starting your investment search be sure to talk to your attorney and accountant about your investment goals and timeframes.

What is an REO PROPERTY (REAL ESTATE OWNED) – When a bank gets a property from foreclosing on a mortgage it is characterized as an REO (real estate owned).  Normally the bank would place its REO property with a realtor who appraises the value of the property and looks to sell it quickly in AS IS condition.  As the number of REO properties skyrockets, prices have fallen and many wise investors see them as a solid way to make money.  Before investing in an REO a buyer must look at her investment goals as tax and liability concerns will determine the type of entity an investor should use.  Taking title in your name or setting using a corporation usually depends on whether the property is acquired as a long term rental property or a quick fix up and resell (fix and flip) opportunity.

WHY ARE SOME PROPERTIES REO GOOD DEALS? –  Since lenders traditionally do not want to hold onto REO property they will often tell their realtors to aggressively price their foreclosures to insure a quick sale.  Getting the foreclosure off their books quickly and without having to invest to fix up and store the REO is their primary goals.  Discounts of 20% and higher are not uncommon especially on distressed properties in need of major repairs or having violations.

WHAT ARE THE PITFALLS OF BUYING AN REO? – Lenders will sell AS IS and demand a quick closing in return for REO savings.  A buyer must be sure of the condition and repairs she will need before putting in her bid.  Financing is also sometimes tricky as many conventional lenders will not give mortgages on property that is not in working order (utilities on, appliances installed, no major repairs) or does not have clear title (no violations) so distressed properties become difficult sales.

WHY WOULD I USE AN LLC (LIMITED LIABILITY COMPANY)? – An LLC is a vehicle which tries to do exactly what its name implies- limit liability.  When set up correctly an LLC would limit its owners (members) liability to the amount of their investment in the company.  This can be an important thing if the company runs into financial difficulties or gets sued as the LLC’s members personal assets should be protected from (beyond the reach of) the LLC’s creditors.  The drawback to using an LLC is its initial start up costs and that many lenders will not lend to an LLC unless its members personally guarantee the loan.  While the start up cost may seem a bit high, when measured against the protection offered it may be quite reasonable.  When seeking purchase financing while some lenders are not willing to lend to a new LLC it is sometimes possible to acquire the property individually and then put it into an LLC after the closing.  Your attorney should be able to quickly show you the benefits of an LLC and after a brief discussion with your accountant whether or not to use an LLC should be clear.
CONCLUSION – REO properties can be great investments for smart buyers and using an LLC can protect your assets if problems set in.  Buyers who do their homework can make low offers confident that the current economic challenges put them in a good position to buy low.  Banks holding REO properties take into account the small pool of potential buyers and their cost to continue to hold REO in their portfolios.  These factors lead to many banks agreeing to accept low offers to dump problem properties.  But no matter how good a deal you may get before investing you must speak to your attorney about your goals.  Your attorney can help you decide before you make an offer whether a Limited Liability Corporation (LLC) is a suitable entity.