WHEN BUSINESS BUYS REAL ESTATE
Many of our subscribers are real estate agents, managers, brokers, investors, or flippers – or those who want to be. So we get asked one question more than any other…
“Is it possible to purchase real estate in the business name?”
The answer is a resounding “Yes, you can!” Not only can buying real estate in your business name shield personal assets, it is generally easier if you know what to expect and can prepare in advance.
Purchasing real estate may also help increase the assets and credit rating for your business while reducing the debt being carried by your personal credit. You will typically also find more real estate funding deals will come along with less and less effort as your business grows. The key to success is getting your business in the best possible position before you actually need the capital to invest.
These six steps will help you build a stronger foundation.
1. Your Business Creditworthiness Get your business credit file ready to carry new debt by proving it responsibly manages existing debt. Even if the initial loan is in the business name and collateralized by the property, you will eventually want to convert it to corporate responsibility and grow future endeavors based off its history. When making that purchase in the business name, you need to have a good business credit file to back up your request.
2. Locate the Right Property Find the property you want to purchase by using online services to find real estate for sale that meets your specific goals. The type of loan you are seeking will depend on the future use of that property, whether for new construction, business use, resale, or rental income. There are a variety of funding options, but each will be dependent on the future potential use of the property, not just where it is at time of purchase. You will need to outline the property’s potential, as well as your future plans and goals so you can present them to the lender later.
3. Making Contact Contact the real estate agent or owner who has offered a property for sale that you want to buy. Most sellers of real estate will list a phone number, email address or website that you can use to communicate your interest in the property. Make sure the seller understands this is a business purchase, rather than a personal purchase, which may communicate a higher level of interest in finalizing the purchase in a shorter timeframe.
4. Get the Documents in Place Submit a contract to purchase the real estate using your corporate name. Where indicated, the corporation will be listed as the purchaser of the property. An earnest money deposit should come from the corporate bank account, so you will want to have that in place ahead of time. If you are working with a mortgage broker, they may be able to start the process without requiring earnest investment.
5. Apply for the Mortgage Loan Get a mortgage loan for your corporation, whether through your own resources or by working with a real estate mortgage broker. Submit a loan application and include your articles of incorporation, business license, tax identification number, business credit report, bank statements and tax returns for the previous year. You may also want to have a brief but conclusive business plan for the property.
6. Finalize the Purchase Endorse the closing documents. An authorized signor for the corporation will be needed to execute the closing documents. Present the tax identification number for your corporation to the closing agent to ensure that the property is deeded and taxed accordingly.
Purchases made in the business name are the responsibility of the business. A principal in the business will need to endorse the documents and their personal credit file may be reviewed to verify identity and determine interest rates. This also means the endorser will be responsible for the debt if the company does not pay on time.
While most principals would rather not act as a guarantor on the purchase, many lenders see this reluctance as a deterrent, especially on first transactions with that particular lender. It is common knowledge — if you are not willing to stand behind your purchase, why should they?
But you should also understand that the requirement of a principal in acting as a guarantor does not impact the personal credit file for that individual unless – of course – the business defaults on the loan.
LESSON: The real estate is your collateral, but that does not mean the bank wants to own that collateral if you default. They would rather the business make its payments and pay off the debt, thus ensuring a long and prosperous relationship for all parties.