LLCs for Foreclosures & Short Sales

 

LLCs for Foreclosures & Short Sales

An LLC(Limited Liability Company) is the recommended entity for the holding of any long term investment, particularly real estate. Through the unique structure of the LLC, most specifically the charging order protection, the investor is not only protected from any potential lawsuit from the tenant but also the property is protected in case the investor would have any unrelated lawsuit. In other words, if the investor would have a lawsuit due to a business failure or a bankruptcy or divorce, any potential judgment could not force liquidation of the property to meet the settlement.

Due to this unique protection of the charging order, many investors who are going through shortsales or foreclosures are utilizing LLCs for the protection of the remainder of their assets. The current law reads that in the case of a foreclosure, the bank has 6 months to go after the first mortgage and upto 6 years to go after the 2nd or 3rd mortgage. The banks are not aggressively pursuing this currently. What is a more likely scenario is that 2 or 3 years down the line, the banks will sell this paper for pennies on the dollar to collection agencies who will go after these deficiency judgments. In the case of a short sale, much of status of these 2nd or 3rd mortgages is up for negotiation based on the specifics of the short sale.

What has been a successful strategy for many is prior to the foreclosure or short sale is to place whatever assets you wish to retain, either additional properties or other more liquid assets into an LLC. By doing this simple procedure, it prevents a collection agency from putting a lien against any remaining assets.

This should be done as early in the process as possible.

If the property owner is buying some additional properties utilizing cash during this process, we recommend the LLC is set up prior to the purchase of the property. In this way, the title is put in the name of the LLC and makes it a seamless transition.

Also please be aware if you are going through a short sale or foreclosure, ensure that your personal bank account is not located in the same bank that is holding your mortgage. There have been instances of banks seizing money from customers who were 60-90 days late on their mortgage without prior notification of the bank customer.

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