Deed type is often a neglected negotiation point in transactional real estate, somewhere far after purchase price and the target closing date, but slightly before whether email notification is acceptable.  But the type of deed you receive from your seller can provide meaningful and long-lasting peace of mind (or angst) about the quality of title that you hold to your property. 

Understanding the Warranties

At their most basic, deed warranties obligate the seller to defend the buyer (read: litigate on the buyer’s behalf) against third party challenges to the use or ownership of the property.  It stands to reason then, that the broader the set of warranties provided, the greater assurance the buyer has that they securely own the property in the condition stated in the deed. 

While the titles of the deeds vary from place to place, some common trends can be drawn regarding the protections each type provides to the buyer.  These descriptions should help guide you to the type of deed you would prefer in light of the type of transaction you are pursuing. 

The most common warranties of title include: (i) the seller actually owns the property; (ii) there are no claims against the property by third parties (except any listed on the deed); and (iii) the seller has the right to convey the property.  Other warranties vary greatly, but may include such items as: (i) the buyer will have the quiet enjoyment of the property without fear of eviction; (ii) the seller will provide such further assurances as may be necessary to make the buyer’s title good; and (iii) after conveyance of the property, the buyer will hold good title and have possession of the property. 

In some cases, the deed will expressly state which warranties are included.  Typically the statement of warranties follows the habendum, the “to have and to hold” clause.  If not expressly stated, state law may define which warranties are included in a particular deed type. 

The Time Factor and Life Without Warranty

Many deeds include the term “warranty” in the title, but the duration of the grantor’s warranty is another major factor in determining which deed type is best for you.  The duration of the warranty is most frequently restricted by the terms “general” or “special” or “limited”.  In a general warranty deed, the seller warrants that no encumbrances arose against the property during the seller’s period of ownership and during the seller’s predecessors’ terms of ownership as well.  In a special or limited warranty deed, any warranties made are limited to the seller’s period of ownership only. 

By comparison, a quitclaim deed carries no warranties of title at all.  By receiving a quitclaim deed, you may be receiving nothing at all.  This is not to say that you should never give or receive a quitclaim deed.  There are many cases where a quitclaim deed is the most appropriate form.  For example, property being transferred between two related entities is often conveyed via quitclaim deed.

General Considerations

The types of deeds available to you will depend first and foremost on the state in which the property is located.  State laws often limit the types of deeds, therefore providing a solid first step in understanding your options.  Most state statutes can be accessed for free via the internet, simply by running a search for “{State name} statutes”.  In the table of contents or index, locate the real property section and search for “deed” or “conveyance”.  Whenever possible, use the statutory form of the deed to ensure that you are receiving the type of title warranties you believe you are.  Other alternatives may include the state real estate commission website or manual; the state’s real estate broker’s manual; or a title company database, such as Stewart Title’s Virtual Underwriter. 

A few final notes regarding deeds:

Don’t let the title of the deed mislead you as to the protection the deed offers.  Many states refer to any type of deed given by a corporation, or other legal entity, as a “corporate deed”. 

If you are purchasing property that is held by a trust, reference to a “trustee’s deed” should not cause alarm.  In such cases, the name refers to the person executing the deed, without indication as to the warranties contained. 

Many states acknowledge a variant of deed referred to as “bargain and sale”.  These unique deeds convey to the buyer not only property the seller owns as of the date of the closing, but any after-acquired property as well. 

In any case, make sure that your purchase agreement language explicitly includes a description of the types of warranties you are seeking.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

What’s in a [Deed] Name? An Exploration of Deeds and Warranties

As with so many of my blog posts, I like sharing some of my actual experiences with you because I believe experience is the best teacher. This one is an important reminder about the fact that note investing requires some serious due diligence before you jump in. Usury Laws! The term just rolls off the tongue right? Well, even though this is not the most glamorous aspect of note investing, it is important for every note investor to be knowledgeable about Usury Laws.

Usury Laws are federal and state laws that spell out how much interest can be charged on loans. There are usury laws that relate to all aspects of lending.

 
With that said, there are many variations and interpretations of the law depending on where you are, but for today here is an excellent starter guide to help you avoid making a costly mistake.

If you are selling properties on financing,  you need to be aware of the usury laws in your state. For example, I was contacted this week by a note holder who wanted to sell me their Michigan land contract note. It carried an interest rate of 14%. The seller was quite proud of the fact that he got the loan signed for 14%.  However, it didn’t take me long to figure out it was a ticking time bomb. Why? The interest rate violated state usury laws for seller financing as it relates to real estate. Michigan (not all states) has a cap of 11% on real estate financed transactions. That means, you as a note originator cannot originate a loan for more than 11%.

Yet, some investors would argue, it’s a contract between a buyer and seller and if the buyer agrees to the terms, the terms are in effect.   That is true until, if, and when the buyer finds out you violated the law. As a “loan shark”, which you would become in the eyes of the courts, you would now face several severe penalties.

Potential Penalties for Being Deemed a “Loan Shark”

• The borrower bringing legal action for money damages for all money previously paid up to two years from the time of action.
• The buyer getting 3 times the interest paid during a one year period.
• The buyer gets all remaining interest due on the loan forfeited, resulting in an interest free loan.

Pretty harsh penalties to say the least, and there’s more . . .  Damages can also include civil and criminal penalties, depending on the case. As with anything, it is best to consult with an attorney or specialist in your state to find out what the usury laws are in your specific area.

Now these guidelines are just as important for the note buyer.  You take on the responsibilities and ownership of the note seller. If you buy a note that violates usury laws, you could be the one facing the penalties and be considered the loan shark!  Therefore, it is important to know these laws as it relates to every aspect of your note investing career.

Usury laws are an important consideration in note investing because there are stiff penalties for those who violate the law…… unless you are a credit card company, but that is another post for another day!

Photo: Allan Lee

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Note Investing & Usury Laws: Don’t Get Bit By A Loan Shark!

Two weeks ago I wrote a blog about the importance of buying title insurance for investment properties. Most people don’t think they’ll ever actually make a claim on a title policy, but the chances may be higher than most people realize. I’ve actually had to file 3 title claims just this year and as a result, have become very vigilant in understanding my liability as well as my protection.

Most investors have heard of or used a Quit Claim Deed as a method of granting title to another person or entity (i.e. LLC, S-Corp, Trust, etc). This method of liability protection is fairly popular because just about all conventional lenders require an investor to guarantee and take title to a property in his or her personal name.  However, once the loan is closed, investors typically use a Quit Claim Deed to move title into an entity with some form of liability protection.

I have to admit that I am not only guilty of doing this on my own properties, but have coached other investors to do the same.  For years, I’ve heard real estate gurus and professionals talk about “Quit Claiming” properties out of your personal name for asset protection. This is why it came as a bit of a shock to me when I was sitting in my attorney’s office this week and he asked me why in the world I was using a Quit Claim Deed to move properties into my LLC. The main problem with using a Quit Claim Deed is that it essentially nullifies the title policy that was obtained when the property was purchased in a personal name. Once title is conveyed to the new entity, the Quit Claim warrants nothing for the new title holder (i.e. your entity!).  If a title issue was to come up after the property had been Quit Claimed to the new entity, it is highly likely that the title policy would not cover the entity’s claim.

The easy solution to this problem is to use a Warranty Deed instead of a Quit Claim Deed. The reason being that a Warranty Deed not only conveys ownership, but warrants that the title is clear of encumbrances. As a result, if an issue with the title arises down the road, the grantee (i.e. your corporate entity) would have legal recourse against the grantor (you) and the title policy would be in effect to cover the claim.

My advice, always consult with an attorney before transferring title to any person or entity. I know from experience that many attorneys will simply file a Quit Claim Deed for you without asking any questions or making recommendations. As investors, it is imperative that we ask the right questions and confirm that any conveyance is done in the right manner and with the proper protections in place.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Be Careful When Using A Quit Claim Deed

Last Summer the Florida Supreme Court created a legal Tsunami that washed over the legal community when it handed down it’s opinion in Olmstead v. FTC.  In that case, the FTC had obtained a judgment for more than $10 million against Olmstead for operating a credit card scam.  The FTC obtained an order requiring the Olmstead to hand over his single member LLC to the FTC (Olmstead’s LLC held several million dollars in cash). 

Understandably, Olmstead was not pleased with this order and hence appealed the decision arguing that the only remedy available against his ownership interest in his single-member LLCs was a charging order per the Florida Statutes which provide: 

On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company membership interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of such interest. This chapter does not deprive any member of the benefit of any exemption laws applicable to the member’s interest. FL Statue 608.433

Based on the Florida Supreme Court’s reading of this statute it found that the charging order was “not the exclusive remedy” available to a creditor holding a judgment against the sole member of a Florida single-member LLC and ordered Olmstead to turn over his LLC and all of its cash to the FTC.  In reaching its conclusion, the Court reasoned that the “Legislature has shown . . . that it knows how to make clear that a charging order remedy is an exclusive remedy”  as it has provided in the Florida Limited Partnership Act; therefore, the absence of exclusivity language in Section 608.433 did not tie the Court’s hands and it was free to make law from the bench.

The Court’s opinion failed to distinguish between single or multiple member LLCs and by so doing created significant confusion. This uncertainty resulted in many Florida LLC holders running for higher ground to convert out of their LLCs into Limited Partnerships or move to other jurisdictions where a charging order was clearly the sole and exclusive remedy e.g., Nevada, Wyoming, Delaware, etc.

It would now appear that much of the uncertainty surrounding Florida LLCs is about to be abated with recent legislation that is awaiting the Governor’s signature.   The bill in front of the Governor will make the charging order the sole and exclusive remedy available to a judgment creditor of a member of a multi-member LLC but not a single member LLC.  So some but not all the protection I would have liked to seen will be made available to Florida LLC members.  Thus, out of state planning remains alive and well and the use of Nevada or Wyoming holding LLCs for Florida investors is, and will remain, an important component.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Florida Brings About (Not Enough) Change to its LLC Statute

Last week’s post focused on Finder Fees as part of an overall wholesaling strategy.  Another component to this strategy involves securing a property under contract then assigning the rights of that contact to another investor.  Sounds simple enough and it is provided you structure it the right way from the outset. 

Assignability.  This is by far one of the most important terms in your contract with the seller.  In the past, most investors would simply put “John Doe and or Assigns” as the purchaser under the contract.  This worked up until 2008 when banks started objecting to this clause in contracts to purchase REO properties.  When dealing with individual homeowners this may not be an issue, however, with the bashing that investors have experienced, such a clause may make a seller uncomfortable.  A solution to the problem posed by “and or Assigns” is to write up your agreement with a trust or LLC as the purchaser.  By utilizing an entity you have the ability to assign “it” to another investor and the contractual rights under the contract run with the entity not the individual. 

• If dealing with a REO all earnest money must come from an account held in the name of the entity and not an individual.

• If the investor is planning on obtaining financing, he should expect to move into the buyer position individually. Banks will typically not lend on residential property held in an entity.

• If you do not use the entity route, you might want to include a specific provision in your contract that clearly explains that you, as the buyer, are a real estate investor and that you intend to assign the contract to a new buyer.  Have the seller initial the provision so you reduce the likelihood of a seller objecting to the new purchaser and attempt to back out of the agreement.

Written Assignment Agreement.  When you assign the contract to an investor or you sell your entity that holds the rights under the contract, ALWAYS use a written assignment agreement.  An Assignment Agreement should contain some of the following:

• The agreement should always refer to the property covered in the contract.

• A clause stating that the Assignor has made no representations and/or warranties regarding the Agreement and/or the Property and Assignee has decided to enter into this Assignment after independent investigation regarding both the Agreement and the Property.

• A clause stating that Assignee agrees to hold Assignor harmless, defend and indemnify Assignor from and against any and all claims, liabilities, losses, costs, damages and/or expenses associated with the Agreement and/or the Property incurred after the Effective Date.

• The agreement contain a separate Acceptance Provision that states something similar to the following:
  

       Investor, as Assignee, hereby accepts the above and foregoing Assignment of Contract dated XXXX, XX, 20XX by and between Assignor and ____________________ (seller) and agrees to assume all of the obligations and perform all of the duties of Assignor under the Contract. 

• The agreement should contain language that deals with earnest money i.e., the Assignee will reimburse you for the money you paid up front.  You do not want the Assignee to breach the agreement, which would result in you losing your earnest money.  This should be due to Assignor upon acceptance by Assignee of the contract.

• The agreement should deal with when you are entitled to your assignment fee.  Do not have the fee paid out of escrow because lenders will typically object to this fee.  If the Assignee is reluctant to pay your fee upon acceptance then have the fee paid into escrow.  Careful wording is important here to ensure that you will receive your fee if the deal falls apart because of Assignee’s actions or inability to close.   Also, take into account seller’s breach of the contract.  If Assignee brings an action to enforce performance upon filing, your fee should be considered earned.

• Do not structure the agreement as a “Finder’s Fee”.  As I stated last week, a finder fee agreement is very different from an assignment.

• Include a provision that Seller will be notified of the assignment.

Notify Seller.  Provide the notice of assignment to all parties involved so everyone communicates with the Assignee henceforth. 

These are some of the more important provisions I believe should be included in any assignment.  As with any contract, you never know how good it is until you are forced to test it in court.  My advice as always is to avoid forms you purchase over the internet or from seminars and have an attorney draft you an initial contract that you can use for future dealings.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Important Considerations for Real Estate Contract Assignments

In the mid 90′s there was a lot of talk about a popular book called “Men are from Mars, Women are from Venus”, and it was the topic of many talk shows and conversations. Today, we’re talking about MARS again bit in a different context. Regardless of what planet you’re from, when it comes to negotiating short sales, referring your seller to a negotiator, or utilizing a negotiator for your short sale investment, you better be sure you are MARS compliant.

MARS stands for Mortgage Assistance Relief Services, and is a new FTC (Federal Trade Commission) ruling to protect distressed homeowners from mortgage relief scams. Explaining the ruling, FTC Chairman Jon Leibowitz said, “At a time when many Americans are struggling to pay their mortgages, peddlers of so-called mortgage relief services have taken hundreds of millions of dollars from hundreds of thousands of homeowners without ever delivering results. By banning providers of these services from collecting fees until the customer is satisfied with the results, this rule will protect consumers from being victimized by these scams.”

This ruling not only applies to loan modifications, but also to short sales. Fines of $11,000 per occurrence and $11,000 per day may be incurred for violations, so it is important that you understand the new regulations and are compliant. If you provide, or arrange for someone else to provide, short sale services, you need to be sure that all documents, correspondence and advertising are in compliance.

Highlights of the Mortgage Assistance Relief Services ruling include:

• Advance fees are outlawed. You may not collect a fee until the homeowner has an offer in writing that they agree to accept.
• Homeowner has the right to reject an offer, and no fees would be charged
• Various disclosures must be included in the initial contact and throughout the process. They need to be in writing. These disclosures are designed to protect the homeowner from being mislead, and help them make better informed decisions. These disclosures include stating you are not associated with the government, and your service has not been approved by the government or their lender.
• Homeowner has the right to stop doing business with the provider at any time, and no fee is involved.
• False or misleading claims are prohibited in advertising or communication about services or performance.
• If you tell the homeowner to stop paying their mortgage, you must also make them aware that they may damage their credit rating, and could lose their home.

As always, the best advice is to have a qualified Real Estate attorney review your documents and marketing, and make sure it complies with the new MARS regulations.

To read the entire ruling go to: http://www.ftc.gov/os/fedreg/2010/december/R911003mars.pdf or view the FTC’s November MARS press release: FTC Issues Final Rule to Protect Struggling Homeowners from Mortgage Relief Scams
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This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

FTC’s Mortgage Assistance Relief Services: MARS Rule & Short Sales

“How do I know if the contracts I bought from (insert guru’s name here) are legal in my state?”

The above question is one I get often and in my opinion it’s an extremely important one to answer. You see, there are many places you can skimp and be cheap in life and business. For example, if you’ve got a lot of free time in the beginning of your real estate career, go ahead and save money and paint a few bedrooms in one of your rental properties.

If you want to buy the cheapest bandit signs you can find, and they still work great, then go ahead and do that too. However, when it comes to your contracts I would be careful not to be lazy or cheap. But I’m still going to show you how to save some money.

The first thing you can do…

Is befriend a successful old-time investor at one of your REIA meetings and see if he’ll let you see his contracts. He may or may not be willing to do this, but you never know if you don’t ask. Or perhaps you could offer to pay him a small amount for them. (My contracts cost about $1,200 apiece, so they’re not cheap to get done by a lawyer from scratch.)

If you can’t get an investor at a REIA meeting to help you out, the next best thing to do is go to a Realtor. Get the Realtors contract for your state and go through that. Most contracts are the same in any state, however, you have to be careful for the few clauses that are specific to each state.

If for some reason you can’t find a Realtor or an investor to help you out, then go to your local office supply store, or go online and buy a generic contract for $20 or so. Then, take that contract to a lawyer and tell him to add in the necessary clauses for the state.

Before you do this though…

It is extremely important you negotiate a fixed fee for the lawyer. Do not pay on an hourly basis. And make sure the lawyer knows you just want him to add a clause or two and that he’s not to rewrite the entire thing and start from scratch.

You’ll probably have to tell them the above information twice — I’m not kidding. If you don’t, you’ll end up with a contract that looks nothing like the one you turned over to him and he’ll want $2,000 for his time.

Whatever you do, please don’t simply buy a generic contract and then not take it to someone to add in the state specific clauses you need. I’ve spent a small fortune on all types of contracts and I know it’s one of the best investments I’ve ever made, because if I ever have to take legal action based on them, I know they’re iron clad and will hold up in court.

So even if you’re short on funds right now and can’t go get contracts drafted from scratch by the best lawyer in your town, the above 3 ways can help you get a solid contract at an affordable price.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

How Can I Make Sure my Real Estate Contract is Legal?

This week I received an inquiry from a real estate investor so fresh from an investment seminar that I could feel the weight of the credit card debt he racked during the event. The investor, like a gladiator looking to win his freedom with one last fight, was ready to tackle wholesaling property and make his fortune. As with many newly anointed investors looking to dip their toe into the property pool, he was short on cash but long on enthusiasm. A good thing provided his enthusiasm does not eclipse caution. Caution prevailed and the investor sought out my advice on the legality of finder’s fees before entering the arena.

Contrary to what I have read on many investor websites, paying a finder’s fee may not be illegal, but as with everything, the devil is in the details. Wholesaling transactions primarily fall into two categories:

• Finder’s Fee Agreement; or
• Assignment of contract.

This first is the simplest form of wholesaling but elicits the greatest confusion. To begin with, in most if not all states, a licensed realtor cannot pay a non-licensed realtor a finder’s fee. Google “finder fee” and “real estate” and you will find ample information on this topic. As a new investor reading up on this strategy you might think half of your armament has been taking from you before battle. However, so long as you are not tangling with real estate agents this is not a concern.

Why? Because areal estate licensing board cannot regulate non-licensed individuals entering into private agreements for finding real estate opportunities provided the agreement does not cross the line into brokerage services. Whew – I worked up a sweat writing that sentence. The distinction is a simple one and it was aptly discussed in a case I read last year. In Futersak v. Pearl (27 Misc 3d 897 New York Appellate 2nd Division) the Defendant sought to avoid paying a finder’s fee to Plaintiff on the purchase of property brought to the Defendant by Plaintiff. Defendant argued that Plaintiff was not a real estate agent therefore he was not entitled to receive the fee. The court disagreed and upheld the parties’ written agreement. In reaching its conclusion (by the way the court did so without any apparent struggle with the law) the court stated the following:

“The written agreement between the parties, and drafted by Defendant, explicitly refers to Plaintiff being compensated in the role of a finder. There is nothing in the agreement explicit or implied that Futersak was an agent of Defendants in the actual or functional meaning of that term and relationship. Futersak had no explicit or implied power to bind Defendants. He did not have the power to negotiate the transaction. Futersak did not have the power to do anything except find and introduce prospects.”

Lessons to be learned from this case:

Always have a written agreement between yourself and the cash investor you are working with.

• The agreement should not contain any language that might imply a brokerage arrangement. The agreement should be simple and to the point and contain language that as the finder you will be compensated for finding prospective business opportunities, researching an area, finding a willing seller, performing due diligence, researching market conditions, etc..
• Your agreement should state that you will not negotiate with the seller or any party on behalf of the cash investor, you do not have the ability to bind the cash investor, nor will you serve in a fiduciary capacity to the cash investor.
• You might also possibly consider becoming a partner with the cash investor. In the finder’s fee agreement it might state that the Finder is entitled to an ownership interest of X% in any opportunity introduced to cash investor by Finder. Further this ownership interest should be convertible to cash at the election of cash investor or within X months after closing on the investment.

Now I have to put on my C.M.A. hat and state that you should run any purported finder’s transaction by a licensed attorney to ensure you are compliant with state law.

Next week in part 2 of this post I will discuss assignment of contracts.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Finder’s Fee in Real Estate Investing – Is it Legal?

I have gathered from several responses to my prior post on “C” corporations versus “S” corporations that many active real estate investors prefer the “S” status.  The reasons cited for “S” status are flow through tax treatment, i.e., you do not have a separate taxable entity to contend with, and employment tax minimization.

For many business owners, it is the second reason that piques their interest.  The allure of escaping 13.3% additional tax on the first $106,800 in earnings is a tempting treat that is difficult to ignore when it feels like every governmental body is out for a piece of your earnings. (Note. Any wages above 106k are subject to 2.9% Medicare tax.)  This is exactly what inspired Mr. Watson in 2002 and 2003 to keep his salary at $24,000 and take distributions of $175,000 annually.

As with most strategies, everything works out until it is challenged and its constitution is tested.  The IRS recently challenged Mr. Watson and a district court concluded that Mr. Watson’s salary was unreasonably low, and allowed IRS to reclassify over $134,000 as salary.  This cost Mr. Watson over $48,000 in taxes, penalties and interest.

As a real estate investor, you might be wondering how do you determine a reasonable salary?  Obviously, each situation will be different so the IRS issued Fact Sheet 2008-25, that lists some factors that courts have considered in determining reasonable compensation:

• training and experience;
• duties and responsibilities;
• time and effort devoted to the business;
• dividend history;
• payments to non-shareholder employees;
• timing and manner of paying bonuses to key people;
• what comparable businesses pay for similar services;
• compensation agreements; and
• use of a formula to determine compensation.

Many of the items on this list center around the amount of time and effort you devote to your business.  If you are the sole employee in your real estate corporation then it is reasonable to conclude that your salary will be on the higher end of the spectrum.  A rule of thumb that I tell my clients is at a minimum, factor on a 50/50 match on the first 110k in revenue.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

The IRS Has its Eye on “S” Corporations

Your tenant has quit paying rent so you serve him a 3-day notice to “Quit or Pay Rent”. Low and behold he does you a favor by abandoning the property. You are ecstatic. What you thought might turn into 2 months or more of lost rental income has suddenly worked out in your favor. You plan to have your unit turned around and ready for rent by months end. As you enter the former tenant’s apartment you notice he left behind a lot of junk. You expect this, right? When a tenant behind on his rent decides to leave in a hurry, it is highly doubtful he will take the time to clean the place.

What do you do? When I was younger my father’s answer was simple. He would tell my brother and I to clean everything out, i.e., take it to the dumpster, then prep the place for painting. A simple solution to a common occurrence that we practiced routinely. That is, until the tenants learned how to bilk the system courtesy of public interest lawyers who fight for the rights and interest of those less fortunate. Ugh!

The unfortunate fact of the matter is, if a tenant abandons your property the law imposes upon you, the landlord, a duty to serve as the custodian of the tenant’s property. As custodian you are responsible for the safe keeping of the items the tenant left behind. This is referred to as bailment, which is defined as the process of placing personal property or goods in the temporary custody or control of another.

I know this is aggravating, but the law imposes upon the landlord a duty to care for the property and return it to the abandoning tenant. Failure to do so will result in the landlord owing the tenant for the value of the items left behind. I can tell you from first-hand experience that when this type of claim is brought, the tenant always left behind a 60 inch Plasma television, leather sofas, high end stereo systems, etc. – you should be catching my point that if you can’t prove what was abandoned, the tenant will stretch the truth to earn some quick cash from the unsuspecting and uninformed landlord.

How to Protect Yourself

Each state imposes by law a bailment that is set for a fixed term (usually 15 to 20 days). As the landlord, you must hold the abandoned tenant’s property for this fixed term in a reasonably secure area. If the abandoned tenant fails to return and reclaim his property by the end of the term you are free to dispose of it as you wish.

Here is a list of the general guidelines a landlord must follow with dealing with an abandoned tenant’s property:

• Give the former tenant notice that states what the property is, where it can be claimed, how long they have to claim it, what will happen if it’s not claimed and how much it’ll cost for you to store it (you can be paid for your storage costs before the tenant can obtain his property).
• When you enter the premises bring another person with you who can verify the property abandoned by the tenant. In some situations videoing the contents could prove useful if the former tenant later resurfaces and alleges you stole his valuables.
• Hand deliver the notice to the tenant or mail it to his last known address.
• If the property goes unclaimed and it is worth more than $300 you may have to sell the property at a public sale with competitive bidding (this requires publishing notice of the sale in a local newspaper). If it’s worth less than that amount, you can keep it or dispose of it in any way you like (throw it away).
• If you sell the property at a public sale, the sale proceeds less your cost must be given to the treasurer of the county where the sale took place, and if it goes unclaimed for at least one year, you can claim that money.

As a landlord you will find that the law appears to favor tenants. This fact may be irksome to you, but it comes with the territory. If you are unsure of your legal obligations check with a local attorney and ask him what is required of you in a bailment situation and whether or not you can demand back rent in addition to costs before turning over the property should the tenant return.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Not Holding on to a Tenant’s Abandoned Property Could Cost You!

“It is natural to indulge in the illusions of hope. We are apt to shut our eyes to that siren until she allures us to our death.” – Gertrude Stein.

For many real estate investors, the thought of raising capital to increase their purchasing power is an irresistible allure.  However, how one goes about this business can have serious long-term ramifications for the uninformed. 

When you’re dealing with other people’s money, you need to make sure you are setup correctly. In the post Madoff climate, we now find ourselves with state and federal agencies that are pursuing a take no prisoners attitude when it comes to investors who raise money.   Failure to comply with the securities laws increases an investor’s risk of lawsuits by other investors – and can even lead to criminal prosecution.  Remember, ignorance of the law is no excuse and even an innocent mistake can lead to court and likely jail. 

If you are not deterred by these warnings . . .

Here are a few things to consider if you plan on raising money for your real estate investments:

• If you plan on raising money with an LLC, start by registering your LLC in the state where you will be working.  A mistake made by many investors is raising money through a Nevada entity without proper registration. This is a path to jail where you will not pass “go” if things turn south for your investors.

• Draft an operating agreement that details how the funds will be invested, distributed, managed and any fees paid for management.  This is a crucial step for any investor because the operating agreement puts everyone on notice as to how the funds will be handled i.e., it’s a point of agreement between you and your investors about how the LLC will operate.

Many real estate investors will not proceed past this point in their fund raising activities.  In other words, I have my LLC so let’s start making money.  Unfortunately, to stay completely legal (out of jail) you must also be mindful of state and federal securities laws. 

When one or more people buy into your LLC, you are selling what the government calls "securities" and there is an extremely complicated set of laws that govern this activity.  For example, most real estate investors are not aware that borrowing money from outside investors can be construed as a security.  It’s sad but true and I have read of a few situations where the SEC put promoters in orange jump suits for their borrowing activities.

It sounds scary, but if you follow the rules from the beginning, it’s not that bad. Generally, when raising money your fund will fall under "Regulation D," which gives several exemptions. Here are some general guidelines, but as I tell everyone with this idea – CONSULT A SECURITIES  ATTORNEY IN YOUR STATE: 

• Try to Partner only with Accredited Investors who meet one of the following criteria:
  • An individual with annual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income.
  • An individual who has a net worth exceeding $1 million, either individually or jointly with his or her spouse excluding the personal residence.
  • An individual who is a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.
• Keep your offering private, never blatantly advertising to the public.  On the other hand, you can provide general information about what activities and why you need money.
• Raise no more than $5 million
• Require your investors to sign a Subscription Agreement
• Do not guarantee a rate of return or refer to performance of past offerings

These are just some of the concerns you should address prior to raising money for your investing. Remember, it is better to spend a few thousand with an attorney on the front end of your business rather than tens of thousands if things go wrong.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Raising Money for Your Real Estate Investing in 2011

What do motorcycles and real estate have in common?  Nothing, but when it comes to buying and selling – everything.  I used to watch a “reality show” called American Choppers.  For those of you unfamiliar with the show it involves a custom designed motorcycle shop and the daily tensions that arise between the father, the founder, and his son, the primary builder and designer of the bikes.  It turns out that the corporation that owns the shop was established with the son as a 20% owner with the father. 

A few years back the tension on the show became too much for the father-son bond to endure and the father fired his son on the air.  The network that owned the contractual rights to the production was upset and threatened to shut down production i.e., the father and son were about to lose a lot of money, so to keep the show on the air, father and son signed a letter agreement giving the father an option to purchase all of [the son's] shares in [the corporation] for fair market value as determined by a procedure to be agreed to by the parties as soon as practicable.

Within a few months, the father attempted to exercise the option.  In its recent opinion in  Teutul v. Teutul, 2010 NY Slip Op 09248 (2d Dept Dec. 14, 2010) the NY Court of Appeals held that the fair market value of the corporation was sufficiently definite and hence, threw out the agreement as an agreement to agree. 

So how does this relate to real estate?

 
When drafting a contract for the sale of anything, draftsmanship is important if you want an enforceable agreement.  When new investors contact me about asset protection a fair percentage are using a form document they found on the internet or received from a seminar.  These documents are typically sufficient until one party decides they want to change the deal and that is where the fun begins.  Lawsuits as everyone knows are time consuming and expensive.  You are far better off spending several hundred dollars before you begin investing to have an attorney draft you some agreements that will stand up to scrutiny rather than spending many thousands to find out what you have done wrong.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

What do Motorcycles and Real Estate Investing Have in Common?