By now most investors are aware that Limited Liability Companies (LLCs) are designed to help insulate the owner (member) of the LLC from the liabilities that may arise on an investment property held within the LLC. What has drawn confusion and massive amount of debate is whether or not an investor should create a Series LLC to protect not only the member of the LLC from the harm, but also have the ability to separate each property into its own “cell” so the liability from one property doesn’t affect all of the other investment properties. The concept behind the Series LLC is great but there can be some hidden dangers lurking under the surface for the uniformed.

An LLC is a Bucket

An LLC is really nothing more than a “bucket” that helps prevent the holder of the bucket from being drenched by water splashing around in the bucket. In this case, the water is liability. However, the water in the bucket can become tainted, although it doesn’t directly harm the holder, all of the water inside is now bad. The question often becomes, do if I need a separate LLC for each investment property? My answer to that question is the classic attorney weasel answer of “it depends.” It depends upon the investor’s level of personal risk tolerance. In a perfect world every property would be in its own LLC thereby protecting all of the other investment properties from harm, but as a practical matter, this is often not feasible from an initial and annual cost standpoint. Even though I don’t charge myself to create an LLC, I don’t have an LLC for each property because of the fees associated with each state. One potential avenue that has developed over the last dozen years is what is known as a Series LLC. The principal behind the Series LLC is that it is no longer necessary to form multiple LLCs to hold different investment properties. Instead of having all of the water mixed together in the bucket, the Series LLC bucket holds the water in several “balloons” called cells; if one balloon pops the other balloons remain unharmed.

LLCs Are State Specific

LLC formation and levels of protection are governed under state laws. Each state has its own specific level of protection that it will provide an LLC. Typically, the differences center on the level of protection that assets within an LLC will have if the member of the LLC is sued personally. These protections are found within the State’s statutes or case law. A perfect example of the different levels of protection is found in the states that offer charging order protection versus states that offer judicial foreclosure as a remedy. A court in a state that offers only a remedy of a charging order prevents the member of the LLC from losing the investment assets within the LLC if he or she gets sued personally. A charging order is basically a lien on the member’s interest, if funds are distributed out of the LLC the holder of the charging order is entitled to the distribution. However, the charging order does not allow for the holder to participate in the business or force distribution. A state that provides for judicial foreclosure will allow the courts to have the discretion to pierce into the LLC and attach those investment assets to satisfy a personal judgment against the member. In the majority of states, depending on if they are charging order or judicial foreclosure states, if an injury occurs inside of the LLC, only the LLC assets are at risk and the member of the LLC is not subject to personal liability exposure. However, there are a handful of states that allow the assets inside of the LLC to be protected from each other. These states are: Delaware, Iowa, Illinois, Nevada, Oklahoma, Tennessee, and Utah. Wisconsin has a modified version of the Series LLC law.

The Benefit of the Series LLC

In the states that have Series LLC statutes, the benefit arises in being able to have one LLC that is broken up into different component “cells” to isolate injuries from one property from spreading over to the other properties held within the separate cells. Each cell can have different members so this increases the flexibility by having different ventures with other investors within one Series LLC. Another distinguishing feature is that each cell will have its own name, contracts, accounts, and as of a private letter ruling published by the IRS in 2008, each series can have its own tax status. Thus, the Series LLC gives great flexibility of being able to create one LLC instead of multiple LLCs subject to multiple fees to the state where the Series LLC is created. However, before the investor jumps on the Series LLC bandwagon there is a very important question that needs to be asked.

Where Is the Investment Property?

If an investor has an LLC created in one state but has rental property or is wholesaling in another state, he or she must file their LLC to conduct business in that state. There is no way around it. If you own property and create an LLC, you are doing business in the state where the property is located.

Blindsided by Fees

This is known as a foreign filing. If the investor does not foreign file the LLC, the state could impose penalties and the LLC will not be able to avail itself to the protections of that state’s legal system. In several states, including California, it can be a very expensive process to either create the LLC or foreign file LLC to do business in that state. On the surface, Series LLCs seem very attractive to those investors who live in states like California where it costs $800 per year per LLC for the privilege of doing business in California. If an investor has 5 properties in California and he or she wants to create 5 LLCs, the annual fee for California will be $4,000. Unfortunately, the investor is often duped into believing that by creating a Series LLC in a state such as Nevada or Delaware they can avoid this $4,000 annual fee to California because the $800 fee will only be charged once. This is not the case. The California Franchise Tax Board has specifically stated that each series in the LLC will have to pay the $800 fee. Now the investor is worse off financially because not only does the investor have to pay California $4,000, but he or she has to pay Nevada or Delaware it’s fees, the fees to the resident agent, and the fees to maintain the necessary business presence in the state of origin.

Will it be Respected in the Morning?

Remember, LLCs are governed by State law, therein lies all of the conversation about Series LLCs. If the investor creates a Series LLC, will the separate distinct cells and added protection be respected in the state where the property is located when that state doesn’t have statutes allowing for Series LLCs? The problem is we just don’t know. There hasn’t been any case law on whether or not a state like California will offer the protections of the Series LLC. So the investor is taking a big gamble on whether or not the Series LLC is actually going to provide the protections promised. A lot of the internal protections may come down to notice: Was the party that was dealing with the LLC put on notice that he or she were dealing with a separate series and only the assets within that particular cell would be attachable? This potential lack of respect should definitely cause the investor to pause before going with the Series LLC.

Lack of Formality

Each cell within the Series LLC is treated as a separate business. That means that each cell within the LLC has to be treated as a separate business. Each cell has its own distinct name, its own distinct bank account, its own distinct book keeping and accounting requirements, and from a transaction standpoint, it needs its own contracts, letter head, business cards, etc. Therefore, even in the states that allow Series LLCs, if the investor fails to follow these formalities the separate cells may not be protected from an injury arising on one of the investment properties.

Look Before You Leap

The idea behind the Series LLCs is a great one: Consolidate all activities in one LLC to cut down on costs of forming multiple LLCs to protect the different investment assets. Unfortunately, it is currently uncertain whether this benefit will be realized in the states that do not recognize Series LLCs. It is important that the potential pitfalls of additional fees, lack of respect and formality requirement are properly weighed against the promised benefit when determining whether or not to create the Series LLC. Until there is some definitive law in the other states, I’m going to let the uninformed test the waters for me.

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Tags: asset protection, Corporation, LLC, real estate investing, real estate llc, series LLC

I live about 15 miles outside of Washington, DC which means I was trapped in my house all day Tuesday. There was no way I was leaving my house because of the inauguration traffic and all of the road closures. Anyway, most people know that I read one book per week and I just finished reading “Seven Years to Seven Figures” by Michael Masterson. Anytime I read a book I fold a piece of paper in half to take notes, and also to use as my bookmark. One of the notes that I took was a question you’re supposed to ask yourself if you want to be a successful business person. You want to know what that question is don’t you? Fine. I will be nice and tell you. The question you should always ask yourself is “What will make me the most money?”

Ok, What Will Make Me The Most Money?

Yes, the question seems obvious but I think very few people actually take the time to answer it. Other books I have read in the past have mentioned this same question, but in various ways, which is why I ask myself the question every time I make an important decision. Unfortunately, most people just go through the motions and get in their routines. You need to stop that now!

For example, let’s say you’re doing a rehab. You should constantly be asking yourself what repairs/improvements will give you the biggest return on your investment. Or, let’s say you’re negotiating a subject-to….if you’re going after a non-motivated seller you could be wasting time on a deal that’s not going to close, while you should be chasing other deals. Or, and here’s a big one….let’s say you’ve had a rental property that’s been vacant for a while. And you get someone who shows up with the cash to move in; however they have terrible credit and no income. Now, the rookie investor is going to take the cash and lose money in the long run when they have to spend months to evict someone. The seasoned investor will be patient and realize they will make a lot more money in the long run by getting a qualified individual in the property.

I really hope you will do this. Just do it for one week. For an entire week, anytime you have a business decision to make ask yourself what will produce the most money. Actually, you should ask yourself this question about everything, even if it has nothing to do with real estate. Also, go buy the book that I mentioned in the beginning of this post because it discusses the importance of real estate in every persons portfolio.

Okay. One more quick thing. If you aren’t spending two hours per week driving for dollars then you might also want to ask yourself this question: “How come I’m not willing to take the necessary action that will help me quit my job in 2009?”

Tags: business, money, productivity, Real Estate Investing, Rehabbing, time, time management

There are four ways to make money from subject-to’s. But, before I tell you one of those ways, let me quickly tell you about my search for a new home. I met with the seller last week and negotiations went nowhere so I left. Basically, the guy was not motivated enough, so I’m going to start sending out letters and continue my quest. I’m not going to update you every week (because I don’t feel like it), but instead once I buy my place I’m going to write a long post and give you the exact details about how everything went down.

Learning “They Pay You” Subject-To

Alright, how many of you know what the “they pay you” subject-to is? Probably not enough. Here’s how it works: When you purchase a property subject-to, you know that the property must cash flow typically around $200 a month at minimum. However, in this market a lot of calls that I get are sellers who want me to take over their payments ASAP, but when I do my research the property doesn’t cash flow.

Let’s use a scenario to show you how I solve this problem. I get a call from a seller and he wants me to take over his payments of $1,500 a month. I run my numbers and market rent is $1,300. I also know that I want positive cash flow of $200 a month, which means I need my payment on this house to be $1,100 a month. So, I call the seller and using my scripts I let him know that I can assist him. I tell him that I can take over his payments, however since our company doesn’t take on negative cash flow he will have to write me a check for $400 a month. I do this for a five year term, and you’d be pleasantly surprised that a lot of sellers are willing to do this. Think about it this way: Instead of having to pay $1,100 per month, he now only pays $400.

And, for you negative people out there who say this doesn’t work (it works, I do it) let me show you how you minimize your risks. You have iron clad paperwork which states that if the sellers do not make the payments to you, that you will stop making their mortgage payment and the property will be foreclosed on and their credit ruined. Only once, have I had a seller “test” me on this. He stopped making the payments, so I stopped making mine and right before the house was to go to foreclosure he brought his payments current (you only do this technique on straight rentals because of the risk, not on properties you sell via lease option).

Anyway, this may have been a little confusing which is why I recorded my latest “pitch” to a seller where he would have to pay $600 a month. Enjoy!

Tags: cre, creative financing, creative real estate, real estate investing, subject to

I hate running (unless someone is chasing me). I haven’t run in probably four years. Elevators and escalators are my best friends…but through a series of events which I don’t feel like explaining, I am now training for a marathon because of a promise that I made to someone. When you give someone your word, you honor that word no matter what. I started training last week and hated every minute of it. Starting out running three miles a day might not sound like a lot, but go out and try it, I dare you! I will keep you posted on my marathon training; however, I am pretty sure that you will see the same information from me every week: That running still sucks!

Anyway, now to give you a deal closing technique that will put more money in your pocket this week. A few weeks ago I talked about the “yes or yes” close (if you didn’t learn that closing technique, search my post two weeks ago.) This week I am going to tell you about the “puppy dog” close.

Here is what I want you to imagine: It’s a beautiful Saturday afternoon. You and your son or daughter are at the mall. You pass a pet shop and see the cutest little puppy staring at you through the glass. Your child begs to see the dog, and you say “yes, but only a quick look, then we have to leave.” The salesman comes over and hands your child the puppy. As the time approaches to leave the store, your child throws a fit that they want the puppy. The salesman calmly says to you “why don’t you just take the puppy home for a night and if you really don’t like him, bring him back tomorrow.” Now, we all know the rest of the story…the puppy is never going back to the pet store and you are now the proud owner of a new dog.

Here is how this technique should be used when it comes to our real estate investing businesses.
Imagine you are sitting at a seller’s kitchen table. The sellers are motivated, you have handled all of their objections and questions, and all they need to do is sign the purchase agreement (always an agreement, never a contract.) They pick up the pen, but do not sign. They stare at the agreement for what seems to be an eternity, then they tell you they are not sure they are ready to go forward. You should immediately say, “Mr. Seller, I understand that you are nervous. This is an important decision. Why don’t we go ahead and sign the agreement now, and if you are still unsure tomorrow about going forward, give me a call and I will shred the agreement……because we certainly don’t want you to sell to us if you are not 100% comfortable with the solution.”

Many people will sign the agreement and very few will call you and change their minds the next day. This technique takes “courage” that many folks don’t have. Most people will just let the sellers not sign and will leave the house. Remember, the most important part of this business is closing the deal…as Zig Ziglar says, “Timid salespeople have skinny kids.”

So on your next meeting with a seller (which should be this week) let them take the puppy dog
home (the agreement) and they can always call you the next day if they change their minds.

Tags: real estate, real estate investing, real estate investor, real estate marketing, real estate sales, sales

Deal of the Century?
I guess home builders have decided enough is enough. In a sign of the times, the Los Angeles Times is reporting that Michael Crews Development out of San Diego is offering a buy-one-get-one free deal on homes that they have developed in Escondido.

The company came up with this idea as a way to help move inventory:

“Michael Crews Development is offering new, 2000-square foot cityscape row-homes worth $400,000 in Escondido for free — if you buy one Royal View Estate home in San Pasqual Valley starting at $1.6 million. ‘You know it’s a straight-up legit deal; no prices have been increased, there are no hidden costs. Michael is just giving away a free home for people that buy at Royal View,’ said Berry.”

First came the free big screen TVs. Now, buyers can get a free house of lesser value with the purchase of a home.

What’s next?

Any theories?

Tags: Economy, housing, michael crews development, real estate developer, real estate news

The Settlement Statement, often referred to as the “HUD-1”, is a document that contains a detailed breakdown of the closing costs apportioned between the buyer and seller of property.

Typically, the closing agent (often a representative from the title company), gathers the pertinent information, completes the Settlement Statement and disperses the required funds once the buyer and seller have certified the accuracy of the statement by signing it.

The first page of the Settlement Sheet is broken down into a summary of the borrower’s (buyer) transaction on the left side and a summary of the seller’s transaction on the right. The second page is divided into those costs that are “paid from borrower’s funds at settlement” and those costs that are “paid from seller’s funds at settlement”. If buyer, seller and title agent agree that the statement is true and accurate, all parties sign and date the sheet toward the bottom of page two.

The following key sections of the HUD-1 should be thoroughly reviewed in any transaction:

Borrower’s Transaction:

Line 101 - Lists the contract price as stated in the Agreement of Sale

Line 103 - Total settlement charges to the borrower; this is obtained from adding up all of the costs on the second page and is also referenced in Line 1400.

Line 120 - This is the total amount due from the borrower inclusive of the contract price, costs listed on page two of the sheet and adjustments for taxes and other items paid by seller in advance.

Line 220 - States the total amount paid by or for borrower including deposit monies, principal loan(s) and Sellers Assist.

Line 303 - The figure here is the total amount of funds (in cash or certified check) that borrower needs to bring to settlement in order to close.

Lines 801-811- All of the costs associated with the loan such as origination fees, appraisal fee, credit report fee, processing fee, administration fee and flood certification fee are listed. If any of the fees are “lender retained”, which is indicated by the abbreviation LR, then this amount was subtracted from the amount of funds actually wired by the lender to the title company.

Lines 901-905 - Any amounts that are required by the lender to be paid in advance, such as daily interest, is set forth here. For example, if Buyer settles on May 20, 2008, the lender will likely require that the Buyer pay in advance daily interest on the loan through June 1, 2008.

Lines 1001-1009 - All reserves that the lender requires to be set aside in an escrow account such as hazard insurance, county taxes, and school taxes are set forth.

Lines 1101-1113 - Includes all charges associated with the Buyer’s title insurance such as the insurance premium, search fee, examination fee, endorsements, closing service letter and overnight wire fee.

Lines 1201-1203 - Details the recording fees charged by the county to record the deed and mortgage and sets forth the proportionate share of the real estate transfer taxes for Buyer and Seller.

Seller’s Transaction:

Lines 406-412 - Adjustments are made for items, such as taxes, that Seller has already paid in advance of settlement. For example, if settlement takes place on June 1, 2008 and Seller has already paid county taxes through the end of 2008, then Seller must be reimbursed from the date of closing (June 1, 2008) through the end of the year.

Lines 501-509 - Itemizes all reductions in the amount that Seller would otherwise walk away with from the settlement table, such as existing mortgages that must be paid off and Seller’s settlement charges (as listed on Line 1400 on page 2).

Line 603 - This is the total amount of funds that Seller nets on the transaction, which is typically dispersed by way of a check from the title agent.

Lines 701-702 - Sets forth the total commission that Seller must pay to the real estate agents involve in the transaction. This is typically the Seller’s single largest cost at settlement.

Lines 1201-1203 - The Seller is also responsible for a share of the real estate transfer taxes. In many jurisdictions, the transfer taxes are based on a percentage of the contract price and are split equally between Buyer and Seller.

It is always good practice to request that the title company (or closing agent) furnish a preliminary HUD-1 a day or two before closing so that there are no surprise costs at the last minute. Make sure to review the preliminary HUD-1 with your attorney or real estate agent and bring it with you to settlement. You should compare this draft with the final HUD-1 to insure accuracy of all costs to Buyer and Seller.

Tags: HUD, HUD-1, real estate, real estate investing, real-estate-deals, settlement statement

I have approximately ten serious buyers who have a home to sell in another state before they can buy. I talked to the relocation person at Gulfstream here in Savannah and she said many of her new hires have homes to sell before they can buy. If you take my situation and consider all the agents in Savannah who are working with buyers who have homes to sell, the numbers add up.

To me this presents an investment opportunity — a risky investment opportunity — one that would require building a trusted network of agents and property managers. It would also require understanding other markets and being able to trust that information.

We all know by now that certain areas are being hit by the national slowdown in home sales. A willing investor could mine this situation for good investments and help break off a little piece of the log jam.

I’ve talked with a local investor and we’ve identified several good investments that will help him, the buyer/seller, me and the listing agent on the other, and perhaps a listing agent on this end. What the investor will need to do is contact local real estate agents with productive businesses and ask them how many out of town buyers they are working with who have homes to sell in other areas before they are able to buy. If the agents are willing to work with the investor, the investor then begins to gather information and perform research on each market where the ready and willing, but not yet able, buyers have homes sitting on the market.

If the home can be bought at a reduced price and rented out until the market changes in that particular location, then the investor identifies a trusted property manager for that area and determines the viability of the rental market. Then it’s a matter of crunching numbers, tax considerations and getting the best financing. This strategy would require a lot of research but it can be done long distance once the right local players are identified.

In a way it would be an exciting, interesting investment strategy because it would entail working with professionals and markets in different locations across the country. In a way, also, it’s risky and contrary to the advice to stick with markets you know — being an out-of-town landlord can have its drawbacks, trust and lack of hands-on management being two. The key would be developing a trusted network without having to physically go to each location.

Many agents now have created internet networks and can be helpful in connecting the investor with this network to get good information and recommendations of local professionals who can be trusted. With technology being what it is, boundaries are quickly being eradicated and long-distance investing is becoming more of a practical reality.

This strategy is not for an investor with a weak stomach and a distrust of long-distance relationships, but I can see it working for an investor who creates and trusts a network of professionals who have been vetted and proven competent and trustworthy.

I now know real estate professionals across the country whom I trust as much as anyone local. There are deals all over the country — with the right system, and with good solid information that can be trusted, this strategy might uncover more good deals that an investor can handle.

It’s just an idea. I will keep you all informed how it works with the investor I’m working with — and maybe someone is already doing this who can advise us on how it’s working.

Tags: investing in down market, investor, landlord, long distance landlords, real estate, real estate investing