ASSET PROTECTION PODCAST

ASSET PROTECTION PODCAST

Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes

Hey all..

interested to hear some discussion surrounding the recent BP Podcast on Asset Protection (the "YOU WILL GET SUED" issue)

So far I have 7 rental properties all multi unit having several units each, and they are just all under my name, which according to the attorney in the podcast, should NEVER be done for exposure reasons.

I feel like I've gotten a lot of mixed advice. Insurance Agents tell you insurance is the solution. Attorneys tell you LLC is the solution. My CPA tells me the LLC's are too expensive to operate and set up and that he's never dealt with people having issues not having properties under LLCs.

Wondering what all of you EXPERIENCED investors out there have done for your personal strategies, and do you find the statement true that, "it's not IF, but WHEN you'll be sued"?

My problems are at this point, the due-on-sale clause being possible if I transfer my properties to an LLC, and also, applying for financing. Do you all find issues with applying for financing under Trusts or LLCs?

Thanks

+Seth Mosley

Mosley Properties

3Reply
423 views

Most Popular Reply

Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
11y

@Seth Mosley , I agree with @Bill Gulley who are both experienced guys and didn't keep what they built simply because of entity structures. I'm in the same camp.  It's funny, the question of "to entity or not to entity" is one of the most asked questions on BP and the pro-entity crowd is typically dominated by folks that have bought between 0 and 10 properties in their investing career. The experienced investors are usually the ones saying that entities are most likely unnecessary. Coincidence??

I've made my opinion known many times but I'm happy to chime in again.  Let me begin by saying that I have entities. I don't have entities for asset protection, however. I have them for legitimate business purposes--to segregate groups of investors, varying ownership percentages between myself and my partners, and for branding.

I know that Bill and Jay have been lucky (good?) enough to have not been sued so if you have followed this thread this long you might believe that the "you will get sued" statement is untrue. I'll present the other side of that story. I believe that if you do enough of this for long enough it's most likely a matter of time. You will get sued. SO WHAT?!?!  It's a reality of business.

I've been in this business for 25 years. Bought over 700 properties. Owned over a thousand doors and currently around 500 or so (not counting interior doors, LOL).  So my exposure is high. My personally-owned rentals are just that--owned personally, as in my own name. Remember that my entity owned properties are for a business purpose?  That's why. Not saying that what's right for me is right for you, nor am I saying that it's right for me (I could be wrong) but it's worked out fine.  I have lots of insurance.

I've been sued several times. I can think of seven times off the top of my head. There may be more but I don't remember for sure. Why not?  Because they obviously didn't make a big enough impression on me to even matter. 

Let's talk about those suits. Two were in small claims court by tenant plaintiffs. Both tenants lost. Cost of defense: some wasted time showing up to court.  Another one of the suits was a guy I sold a flip to who claimed that my contractor didn't do something correctly.  It was true, but the homeowner wouldn't allow the contractor back in to fix it--he wanted to shake us down for $5K in small claims court. We offered him $1,500 in lieu of the contractor making the repair but he wouldn't take the money. In court the judge ruled in his favor and awarded him $1,500--so we lost but won.  

Three suits were cases where I bought a house on the courthouse steps at a foreclosure auction and the foreclosed-out homeowner sued their lender for botching the foreclosure and me for quiet title, misrepresentation (for evicting them when I didn't own the home that I paid for), and fraud (for what? Signing over a cashier's check?).  I won all three cases. One cost $30K to defend (settled with the lender rather early-they refunded my money, I gave them the house, and they paid me a bit for my trouble), one cost $20-30K (don't remember exactly but it got thrown out of court before trial) and the third cost over $170K and counting (this one went to trial, I won but now the idiot is taking it to the Court of Appeals so I'll be continuing to pay for who knows how long). In addition to those defense costs I'm out over $100K in holding costs for houses I couldn't sell during the litigation (the third one going on 4-1/2 years).  

The final case is one where I bought a house on the courthouse steps and evicted the occupant. She refused to move her stuff out of the house even after the statutory time in which she was allowed to retrieve it. I was entitled to dispose of it but I couldn't morally do it--her whole life was in this almost 3,000 SQFT house. So, I hired a moving company to move everything to storage units. When she reimbursed me for the moving cost I gave her the keys to the storage units. Three hours after giving her the keys to seven storage lockers I get a call from the police--she claimed we stole a pocket watch and all of this other stuff. How could she know that out of all of that stuff there is a missing pocket watch in only three hours when it took a crew of six guys three days to load it is beyond me. She filed suit for theft of over $1.2 million worth of property!  She produced a list of hundreds of items that we alledgedly "stole", and our private investigator found most of the items in the storage units during discovery (the rest of the items didn't exist)--the whole suit is BS but this woman is a serial plaintiff and hired a lawyer who has a a pending license suspension to represent her (birds of a feather...). This one is going to jury trial.

Now for the meat of my point:  All of the properties associated with these suits except one of the tenant claims were owned in an entity. Will someone from the pro-entity crowd please explain to me how having an entity (actually multiple entities) helped me???!!!  Or prevented this??

The practical risk, in my opinion, is not judgments, it's the cost of defense and having an entity does not eliminate the cost of defending yourself from frivolous lawsuits!  If you want to be in this business, you have to live with the fact that you are a target.  

See this reply in the discussion

130 Replies

Jump to latestLatest
  • Real Estate Investor · Spartanburg, SC · Member since 2009 · 10 posts · 1 vote
    11y

    I was talking about property that you own free and clear, so no due on sale clause, and I didn't mean to imply a false lien. I thought that there were some way to put a legitimate lien on the property to protect your equity. Sorry if I wasn't clear

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Doug Cobb 

    have a LOC with a local bank secured by the asset in question.. don't draw on it.. but it you need to draw on it evergreen it...

  • Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y

    @David J. different strokes at different lenders;

    Mortgage servicing agreements stipulate due diligence and compliance, the servicer may be empowered to act, the trustee may have instruction to act, that may trickle down to a mid level clerk. Tossed over to the legal department, another clerk to an asset manager who may lower the boom.

    Secondary market loans are under servicing restrictions too, transfers will disqualify securitization.

    A portfolio lender, the decision can come from an in-house servicer manager, the loan officer, other senior officers in the lending department, the Board of Directors and the matter is usually addressed in the bank's written lending policy. A decision not to call it may also be allowed, but within the guidance of the loan policy set by the Board of Directors.

    The applicable law mentioned is the St. Germane Act, there are exceptions to the powers granted, transfers to trusts pertaining to estate planning, heirs by operation of law, by court order as with a divorce and liens upon personal property that may attach. 

    Many are under the impression that the bank will lose the interest rate on a performing loan, horsefeathers when the note is sold and the originator retains servicing rights or if it's just sold, they don't get the interest paid. Portfolio loans that loan may be rate sensitive, but if not, it may still violate loan policy and servicing requirements.

    Another issue is convoluted title matters, equitable interests obtain by others can cause foreclosure issues and cause delays in securing collateral, a non-judicial matter can end up in court.

    Some smaller lenders may see no significant issue with transfers and look the other way, some do not, thy will tow the line. There is no way to know except from experience with that bank, that regional bank, servicer and trustee. The Act was originally made with the aspect of interest rate risk exposures allowing low rates to be assumed, that is still an issue and as rates increase they may become more astute in identifying assumption transactions.

    I have had assumptions by an installment contract allowed once I explained the details and that there was third party servicing involved, basically they allowed me to keep things straight and knew I could take them out if necessary, that was key. Not all banks agreed, BoA and Wells Fargo were going to the mat on a few but even at our local branches got a few winks and nods. Loan history also plays on the decision, if there have been past defaults, late pays, that's another consideration.

    There is no crystal ball. Just need to be prepared to meet the demand in the event you're not lucky. :)  

  • Investor · Houston, TX · Member since 2009 · 210 posts · 261 votes
    11y

    @Bill Gulley 

    How about a profile pic that looks more like you?

  • Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes
    11y
    Originally posted by @Tim Priebe:

    @Seth Mosley  I would consult a TN lawyer. There is always devils in the details. Incorporating in one state for one benefit almost always bring one (or more) detriments in the other state.

    @Jeff S.  Not giving legal advice but that approach is sound. But please remember, he is an attorney so threats of litigation are not such a big deal. When I married my wife, I used to tell her ex not to pull any baloney as I heard she was sleeping with her attorney. She never went back to court after we got married.  

    To all: this is a vibrant, educated and opinionated group. I like it.

    Would anyone be interested in a podcast on due-on-sales clauses? This is an area where I see a lot of bad advice and google educated posts.

     i would echo the request for more due-on-sale education

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @David J. 

      that's a view out of Bill's front window there in Springfield IL.. looks like some nice mountains and lakes there in central IL.

  • Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes
    11y
    Originally posted by @Bill Gulley:

    We are getting off topic, equity stripping was what I was addressing above. I'd stay away from such tactics, there can be legitimate liens.

    Lots of gurus talk about there being no due on sale jail, bottom line, it can and is a matter that can really mess up your day, lead to suits and damages and is a concern if you can't meet any demand, if you can meet demands then don't be concerned, if you can't, might think a few times before you ignore the issue.

    We have 3 attorneys commenting in this thread, if each were asked to address all the concerns of the DOS I'd bet we'd have 3 different legal opinions, I'd bet I'd be making some other point and you'd have all kinds of public opinion. Best to address the DOS issue locally and specifically as to a lender and the circumstances as to realistic risks. IMO :)

     In Equity Stripping are you just referring to cash out refi-ing properties when they gain equity?

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Seth Mosley 

      just google it good Wikipedia on the subject.. its generally foreclosure rescue schemes. and buying sub too when someone is in foreclosure if they are not in foreclosure its different.

    ON the west coast CA OR WA have very stringent Equity skimming laws that go beyond federal laws.

  • Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes
    11y
    Originally posted by @Jay Hinrichs:

    @Doug Cobb 

    have a LOC with a local bank secured by the asset in question.. don't draw on it.. but it you need to draw on it evergreen it...

     what do you mean by "Evergreen it"?

  • Encinitas, CA · Member since 2011 · 191 posts · 252 votes
    11y

    Interesting Thread. Agreed that there does seem to be a fear aspect to selling asset protection out there. Tellingly absent from these kinds of approaches is any kind of cost/benefit analysis. I come from a perspective of having both prosecuted and defended debt collection issues over 28 years of practicing law in California.  There is no one correct answer for everyone. From my perspective, a few guiding principals can help one focus on a correct approach:

    1)  Asset planning is best implemented as an adjunct to a larger financial, tax, and estate plan, not as a substitute;

    2)  It is helpful to objectively assess the level of risk in one’s activities. High liability potential activities will necessitate different approaches than lower liability potential activities. As best you can, define what it is you are seeking protection from. Claims of creditors? What kind of creditors? Employees? Partners? Spouses?

    3)  Asset Protection planning works best when implemented before a claim arises, not after;

    4)  When properly implemented, used and maintained, entity vehicles such as corporations, limited liability companies or trusts can be useful vehicles that provide important layers of protection. They should not be the only focus though. Insurance, transactions (e.g. secured debt), and retirement plans should also be considered along with other characteristics specific to your situation.

    5) The principal of Occam's razor theory of economy generally applies to asset protection planning. As between two solutions to a problem, the simplest and least complicated is usually the best. 

  • Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y
    Originally posted by @David J.:

    @Bill Gulley 

    How about a profile pic that looks more like you?

    Can't see me sitting on my cloud? I have a long white beard wearing a long white robe holding a staff in my left hand, everyone else sees me.......LOL

    I'm single, I'd rather not cause a scene turning BP into a dating site!

    If I were more technologically advanced and had a pic, I might do that someday, a coming out party so to speak, but not that type of coming out you understand......not that there is any issue with that among others, ahhh.....trying to be politically correct is a PITA isn't it?

    Thanks for the thought. :)

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Seth Mosley 

    Evergreen is a term commonaly used in commercial banking .. It refers to a borrower who you give say a 250k LOC to or a 500k or whatever.. either secured or not.. and instead of using it when they need it paying it off occasionally or down occasionally through the term of the note... they just pull 100% of the cash out.. and never make principal reductions throughout the course of the year.. in other words they take all the green out of the LOC>

  • Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes
    11y
    Originally posted by @Jay Hinrichs:

    @Seth Mosley 

    Evergreen is a term commonaly used in commercial banking .. It refers to a borrower who you give say a 250k LOC to or a 500k or whatever.. either secured or not.. and instead of using it when they need it paying it off occasionally or down occasionally through the term of the note... they just pull 100% of the cash out.. and never make principal reductions throughout the course of the year.. in other words they take all the green out of the LOC>

     thanks for taking the time to explain

    this makes  a lot more sense than the explanations I've read

  • Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes
    11y
    Originally posted by @Rob K.:

    Interesting Thread. Agreed that there does seem to be a fear aspect to selling asset protection out there. Tellingly absent from these kinds of approaches is any kind of cost/benefit analysis. I come from a perspective of having both prosecuted and defended debt collection issues over 28 years of practicing law in California.  There is no one correct answer for everyone. From my perspective, a few guiding principals can help one focus on a correct approach:

    1)  Asset planning is best implemented as an adjunct to a larger financial, tax, and estate plan, not as a substitute;

    2)  It is helpful to objectively assess the level of risk in one’s activities. High liability potential activities will necessitate different approaches than lower liability potential activities. As best you can, define what it is you are seeking protection from. Claims of creditors? What kind of creditors? Employees? Partners? Spouses?

    3)  Asset Protection planning works best when implemented before a claim arises, not after;

    4)  When properly implemented, used and maintained, entity vehicles such as corporations, limited liability companies or trusts can be useful vehicles that provide important layers of protection. They should not be the only focus though. Insurance, transactions (e.g. secured debt), and retirement plans should also be considered along with other characteristics specific to your situation.

    5) The principal of Occam's razor theory of economy generally applies to asset protection planning. As between two solutions to a problem, the simplest and least complicated is usually the best. 

     Rob, glad to hear from you as an experienced attorney on this issue.

    This makes perfect sense that there really is not a one-size-fits-all solution and answer to this question.

  • Investor · Colorado Springs, CO · Member since 2015 · 40 posts · 40 votes
    11y

    @Janet R.  I represented an estate in California back in 2007/2008, Peter Jackalus. You assisted the estate selling a condo in HI. You did a great job. Really thought about convincing the estate to fly me to HI to make sure the faucet was not dripping or the door left unlocked.  

  • Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    11y

    @Seth Mosley don't know for sure what his rationale is but would surmise that he wants to be totally above board with his lenders and not violate a due on sale clause; also think he feels pretty confident in his abilities to maintain a safe living structure and in his ability to follow the tenant/ landlord laws and not be sued. Ever try to sue a lawyer? Beside that there is some question about how credible a single member self-managed LLC is. At the end of the day he puts on his overhauls and gets in his truck and works on his houses.

    For his partnerships the reasons are pretty obvious. When there are other members in an LLC you have a more complicated structure that has more moving parts. It is harder to get to the individual owners and you have partners that you need to deal with. The operating agreement spells out the parties roles which makes the whole thing more believable as being a separate entity, and is more formal like a company is.

  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    11y

    @Seth Mosley , I agree with @Bill Gulley who are both experienced guys and didn't keep what they built simply because of entity structures. I'm in the same camp.  It's funny, the question of "to entity or not to entity" is one of the most asked questions on BP and the pro-entity crowd is typically dominated by folks that have bought between 0 and 10 properties in their investing career. The experienced investors are usually the ones saying that entities are most likely unnecessary. Coincidence??

    I've made my opinion known many times but I'm happy to chime in again.  Let me begin by saying that I have entities. I don't have entities for asset protection, however. I have them for legitimate business purposes--to segregate groups of investors, varying ownership percentages between myself and my partners, and for branding.

    I know that Bill and Jay have been lucky (good?) enough to have not been sued so if you have followed this thread this long you might believe that the "you will get sued" statement is untrue. I'll present the other side of that story. I believe that if you do enough of this for long enough it's most likely a matter of time. You will get sued. SO WHAT?!?!  It's a reality of business.

    I've been in this business for 25 years. Bought over 700 properties. Owned over a thousand doors and currently around 500 or so (not counting interior doors, LOL).  So my exposure is high. My personally-owned rentals are just that--owned personally, as in my own name. Remember that my entity owned properties are for a business purpose?  That's why. Not saying that what's right for me is right for you, nor am I saying that it's right for me (I could be wrong) but it's worked out fine.  I have lots of insurance.

    I've been sued several times. I can think of seven times off the top of my head. There may be more but I don't remember for sure. Why not?  Because they obviously didn't make a big enough impression on me to even matter. 

    Let's talk about those suits. Two were in small claims court by tenant plaintiffs. Both tenants lost. Cost of defense: some wasted time showing up to court.  Another one of the suits was a guy I sold a flip to who claimed that my contractor didn't do something correctly.  It was true, but the homeowner wouldn't allow the contractor back in to fix it--he wanted to shake us down for $5K in small claims court. We offered him $1,500 in lieu of the contractor making the repair but he wouldn't take the money. In court the judge ruled in his favor and awarded him $1,500--so we lost but won.  

    Three suits were cases where I bought a house on the courthouse steps at a foreclosure auction and the foreclosed-out homeowner sued their lender for botching the foreclosure and me for quiet title, misrepresentation (for evicting them when I didn't own the home that I paid for), and fraud (for what? Signing over a cashier's check?).  I won all three cases. One cost $30K to defend (settled with the lender rather early-they refunded my money, I gave them the house, and they paid me a bit for my trouble), one cost $20-30K (don't remember exactly but it got thrown out of court before trial) and the third cost over $170K and counting (this one went to trial, I won but now the idiot is taking it to the Court of Appeals so I'll be continuing to pay for who knows how long). In addition to those defense costs I'm out over $100K in holding costs for houses I couldn't sell during the litigation (the third one going on 4-1/2 years).  

    The final case is one where I bought a house on the courthouse steps and evicted the occupant. She refused to move her stuff out of the house even after the statutory time in which she was allowed to retrieve it. I was entitled to dispose of it but I couldn't morally do it--her whole life was in this almost 3,000 SQFT house. So, I hired a moving company to move everything to storage units. When she reimbursed me for the moving cost I gave her the keys to the storage units. Three hours after giving her the keys to seven storage lockers I get a call from the police--she claimed we stole a pocket watch and all of this other stuff. How could she know that out of all of that stuff there is a missing pocket watch in only three hours when it took a crew of six guys three days to load it is beyond me. She filed suit for theft of over $1.2 million worth of property!  She produced a list of hundreds of items that we alledgedly "stole", and our private investigator found most of the items in the storage units during discovery (the rest of the items didn't exist)--the whole suit is BS but this woman is a serial plaintiff and hired a lawyer who has a a pending license suspension to represent her (birds of a feather...). This one is going to jury trial.

    Now for the meat of my point:  All of the properties associated with these suits except one of the tenant claims were owned in an entity. Will someone from the pro-entity crowd please explain to me how having an entity (actually multiple entities) helped me???!!!  Or prevented this??

    The practical risk, in my opinion, is not judgments, it's the cost of defense and having an entity does not eliminate the cost of defending yourself from frivolous lawsuits!  If you want to be in this business, you have to live with the fact that you are a target.  

  • Real Estate Investor · Spartanburg, SC · Member since 2009 · 10 posts · 1 vote
    11y
    Originally posted by @Brian Burke:

    @Seth Mosley , I agree with @Bill Gulley who are both experienced guys and didn't keep what they built simply because of entity structures. I'm in the same camp.  It's funny, the question of "to entity or not to entity" is one of the most asked questions on BP and the pro-entity crowd is typically dominated by folks that have bought between 0 and 10 properties in their investing career. The experienced investors are usually the ones saying that entities are most likely unnecessary. Coincidence??

    I've made my opinion known many times but I'm happy to chime in again.  Let me begin by saying that I have entities. I don't have entities for asset protection, however. I have them for legitimate business purposes--to segregate groups of investors, varying ownership percentages between myself and my partners, and for branding.

    I know that Bill and Jay have been lucky (good?) enough to have not been sued so if you have followed this thread this long you might believe that the "you will get sued" statement is untrue. I'll present the other side of that story. I believe that if you do enough of this for long enough it's most likely a matter of time. You will get sued. SO WHAT?!?!  It's a reality of business.

    I've been in this business for 25 years. Bought over 700 properties. Owned over a thousand doors and currently around 500 or so (not counting interior doors, LOL).  So my exposure is high. My personally-owned rentals are just that--owned personally, as in my own name. Remember that my entity owned properties are for a business purpose?  That's why. Not saying that what's right for me is right for you, nor am I saying that it's right for me (I could be wrong) but it's worked out fine.  I have lots of insurance.

    I've been sued several times. I can think of seven times off the top of my head. There may be more but I don't remember for sure. Why not?  Because they obviously didn't make a big enough impression on me to even matter. 

    Let's talk about those suits. Two were in small claims court by tenant plaintiffs. Both tenants lost. Cost of defense: some wasted time showing up to court.  Another one of the suits was a guy I sold a flip to who claimed that my contractor didn't do something correctly.  It was true, but the homeowner wouldn't allow the contractor back in to fix it--he wanted to shake us down for $5K in small claims court. We offered him $1,500 in lieu of the contractor making the repair but he wouldn't take the money. In court the judge ruled in his favor and awarded him $1,500--so we lost but won.  

    Three suits were cases where I bought a house on the courthouse steps at a foreclosure auction and the foreclosed-out homeowner sued their lender for botching the foreclosure and me for quiet title, misrepresentation (for evicting them when I didn't own the home that I paid for), and fraud (for what? Signing over a cashier's check?).  I won all three cases. One cost $30K to defend (settled with the lender rather early-they refunded my money, I gave them the house, and they paid me a bit for my trouble), one cost $20-30K (don't remember exactly but it got thrown out of court before trial) and the third cost over $170K and counting (this one went to trial, I won but now the idiot is taking it to the Court of Appeals so I'll be continuing to pay for who knows how long). In addition to those defense costs I'm out over $100K in holding costs for houses I couldn't sell during the litigation (the third one going on 4-1/2 years).  

    The final case is one where I bought a house on the courthouse steps and evicted the occupant. She refused to move her stuff out of the house even after the statutory time in which she was allowed to retrieve it. I was entitled to dispose of it but I couldn't morally do it--her whole life was in this almost 3,000 SQFT house. So, I hired a moving company to move everything to storage units. When she reimbursed me for the moving cost I gave her the keys to the storage units. Three hours after giving her the keys to seven storage lockers I get a call from the police--she claimed we stole a pocket watch and all of this other stuff. How could she know that out of all of that stuff there is a missing pocket watch in only three hours when it took a crew of six guys three days to load it is beyond me. She filed suit for theft of over $1.2 million worth of property!  She produced a list of hundreds of items that we alledgedly "stole", and our private investigator found most of the items in the storage units during discovery (the rest of the items didn't exist)--the whole suit is BS but this woman is a serial plaintiff and hired a lawyer who has a a pending license suspension to represent her (birds of a feather...). This one is going to jury trial.

    Now for the meat of my point:  All of the properties associated with these suits except one of the tenant claims were owned in an entity. Will someone from the pro-entity crowd please explain to me how having an entity (actually multiple entities) helped me???!!!  Or prevented this??

    The practical risk, in my opinion, is not judgments, it's the cost of defense and having an entity does not eliminate the cost of defending yourself from frivolous lawsuits!  If you want to be in this business, you have to live with the fact that you are a target.  

     Brian

    I appreciate those "real world" examples and look forward to hearing the responses.

  • Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes
    11y
    Originally posted by @Brian Burke:

    @Seth Mosley , I agree with @Bill Gulley who are both experienced guys and didn't keep what they built simply because of entity structures. I'm in the same camp.  It's funny, the question of "to entity or not to entity" is one of the most asked questions on BP and the pro-entity crowd is typically dominated by folks that have bought between 0 and 10 properties in their investing career. The experienced investors are usually the ones saying that entities are most likely unnecessary. Coincidence??

    I've made my opinion known many times but I'm happy to chime in again.  Let me begin by saying that I have entities. I don't have entities for asset protection, however. I have them for legitimate business purposes--to segregate groups of investors, varying ownership percentages between myself and my partners, and for branding.

    I know that Bill and Jay have been lucky (good?) enough to have not been sued so if you have followed this thread this long you might believe that the "you will get sued" statement is untrue. I'll present the other side of that story. I believe that if you do enough of this for long enough it's most likely a matter of time. You will get sued. SO WHAT?!?!  It's a reality of business.

    I've been in this business for 25 years. Bought over 700 properties. Owned over a thousand doors and currently around 500 or so (not counting interior doors, LOL).  So my exposure is high. My personally-owned rentals are just that--owned personally, as in my own name. Remember that my entity owned properties are for a business purpose?  That's why. Not saying that what's right for me is right for you, nor am I saying that it's right for me (I could be wrong) but it's worked out fine.  I have lots of insurance.

    I've been sued several times. I can think of seven times off the top of my head. There may be more but I don't remember for sure. Why not?  Because they obviously didn't make a big enough impression on me to even matter. 

    Let's talk about those suits. Two were in small claims court by tenant plaintiffs. Both tenants lost. Cost of defense: some wasted time showing up to court.  Another one of the suits was a guy I sold a flip to who claimed that my contractor didn't do something correctly.  It was true, but the homeowner wouldn't allow the contractor back in to fix it--he wanted to shake us down for $5K in small claims court. We offered him $1,500 in lieu of the contractor making the repair but he wouldn't take the money. In court the judge ruled in his favor and awarded him $1,500--so we lost but won.  

    Three suits were cases where I bought a house on the courthouse steps at a foreclosure auction and the foreclosed-out homeowner sued their lender for botching the foreclosure and me for quiet title, misrepresentation (for evicting them when I didn't own the home that I paid for), and fraud (for what? Signing over a cashier's check?).  I won all three cases. One cost $30K to defend (settled with the lender rather early-they refunded my money, I gave them the house, and they paid me a bit for my trouble), one cost $20-30K (don't remember exactly but it got thrown out of court before trial) and the third cost over $170K and counting (this one went to trial, I won but now the idiot is taking it to the Court of Appeals so I'll be continuing to pay for who knows how long). In addition to those defense costs I'm out over $100K in holding costs for houses I couldn't sell during the litigation (the third one going on 4-1/2 years).  

    The final case is one where I bought a house on the courthouse steps and evicted the occupant. She refused to move her stuff out of the house even after the statutory time in which she was allowed to retrieve it. I was entitled to dispose of it but I couldn't morally do it--her whole life was in this almost 3,000 SQFT house. So, I hired a moving company to move everything to storage units. When she reimbursed me for the moving cost I gave her the keys to the storage units. Three hours after giving her the keys to seven storage lockers I get a call from the police--she claimed we stole a pocket watch and all of this other stuff. How could she know that out of all of that stuff there is a missing pocket watch in only three hours when it took a crew of six guys three days to load it is beyond me. She filed suit for theft of over $1.2 million worth of property!  She produced a list of hundreds of items that we alledgedly "stole", and our private investigator found most of the items in the storage units during discovery (the rest of the items didn't exist)--the whole suit is BS but this woman is a serial plaintiff and hired a lawyer who has a a pending license suspension to represent her (birds of a feather...). This one is going to jury trial.

    Now for the meat of my point:  All of the properties associated with these suits except one of the tenant claims were owned in an entity. Will someone from the pro-entity crowd please explain to me how having an entity (actually multiple entities) helped me???!!!  Or prevented this??

    The practical risk, in my opinion, is not judgments, it's the cost of defense and having an entity does not eliminate the cost of defending yourself from frivolous lawsuits!  If you want to be in this business, you have to live with the fact that you are a target.  

     Brian - amazing post. Very enlightening to me personally.. Thanks for taking the time 

  • Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y

    Never threaten a law suit that you don't follow through with, let your attorney rattle the sabers. When others threatened me I let them know that I would counter and seek damages saying "better make sure you can win". After that I'd try to "talk them down" and solve the problem and I've made some concessions to make someone happier. Reasoning and a bit of empathy with some goes a long way. I don't roll over but I'm fair.

    A tenant's perception of you in the beginning goes a long way in forming your relationship.

    The likelihood of frivolous suits is rather low here, even the ambulance chaser types don't go to court and I don't know of an attorney in RE matters that works on a contingency basis, money up front takes an effect on revenge. I can see in more populated areas you can have that minority of professional litigants. Your attorney, accountant and insurance agent will know what the risks may be as Rob K. mentioned and you need to assess the risks of your activities.

    Brian's theft claim might have been nipped in the bud at the police investigation level, it's good to know law enforcement where you can vigorously state the facts and defend claims as they can squeeze the one making a complaint as to making false complaints, may not be so much the case with Brian's example as it sounds like an attorney was in cahoots as well, filing the next day. Sorry to hear it Brain.    :)

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Brian Burke 

      these are great points and look at the theme... your litigation has stemmed around buying an disposing of hold over tenants possessions or minor construction defects. Not tenant slip fall or other issues.

    And the majority of the folks here are seeking asset protection for buy and holds at least that is the flavor of the threads.. And like you I have owned 100's of rentals and have yet to be sued by a tenant much less taken to court etc... I don't see tenant exposure as some great risk to the general buy and hold investors.

    As our business paths are quite aligned over the last 30 years or so.. I have also had the same issues with buying foreclosures. I Had one that actually was a suit and that was by Wells fargo that claimed their Junior was reconveyed by accident and when we bough the first we really bought a second.. So they did sue.. We all settled and I am sure it cost me 10k or so in attorney fee's I did not even think to turn it over to my carrier.

    Other litigation or threats of have been either bad partnerships, Like you small construction defect claims, but none involving a tenant in all these years.

    I totally agree with you our exposures being fully immersed and doing millions of dollars of transactions a year is so far greater than the average buy and hold investor.

    Plus I am not a paranoid type of guy. Some people are and want privacy and all of that. But when your dealing with investors and Banks and you want to do deals privacy kind of goes out the window to be successful at what we do we need to have Transparency in what we do not convoluted asset protection vehicles that are all put in place to only our benefits.

    Then you get into estate planning and these are ligit methods of asset protection and tax planning for our heirs.. the by product of good estate planning is Asset protection.

  • Raleigh, NC · Member since 2014 · 125 posts · 37 votes
    11y

    Great topic Seth. Thanks for posting it, and thanks Tim for providing the attorney's perspective.  First of all, I'm sorry this post is so long, but the topic is important and hopefully I can offer my personal experience without putting readers to sleep.

    I can provide the business owner's perspective. I've had 4, all structured differently. It doesn't matter what type of business. ie: Inc., Partnership LLC, single owner LLC or sole proprietor. To me the tax filing is a key to how I've filed.

    As a business owner, no one is an island.  Myself, I hire professionals with my business, ie: financial, legal, advertising, marketing, tax pro, etc. I know if people see money they'll try to sue to get it.  Perceived liability and guilt don't matter. I can't find an attorney who will be willing to sue a guilty homeless guy over an innocent millionaire.  Its just the nature of the business, Extortion comes to mind, but in my opinion, the IRS is the best at it. Its just the way it is. I look out for #1.

    So in the eyes of an attorney, appear worthless.  Any potential extortionist will have a harder time getting an attorney to represent them. If a rehab worker saws off his finger at one of my investment houses, he can get legal representation for "$0 down" but may very well cost me 6 figures to defend...when it wasn't even my fault.  He might even end up with the property. Note: make sure everybody working for you has their own insurance and a waiver of liability signed with copies in your file.

    I put everything into a trust or LLC, registered in NV. Me personally, I'm working on putting everything I own of value is in some other entity. Personally I might have a couple of grand in my checking account, not even enough for an attorney' s fees. I prefer to look 'homeless'.

    As far as getting a loan I don't use my personal financial statement to qualify. Sure banks want their loan applicant to put up his personal assets, I don't blame them. Business credit with a Dunn & Bradstreet (D&B) score of 80 will get the best rates, like a personal FICO score of 720. Personal credit notwithstanding. Once business assets are substantial enough to use as collateral the owner's over the hump. Just put yourself in the bank's position. an 'empty shell' LLC is pretty hollow and can close up shop in a day.

    I feel its just not sound business practice to put a person's personal assets on the line to support the business.  Its not fair to their family.  Taking it to an extreme, anybody on this forum think Bill Gates or Warren Buffett need to put up their personal assets to secure financing for Microsoft or BH?

    Maybe an attorney can weigh in on why not just sue the (NV) LLC...or where ever the money is? I'm always looking for opposing views. Cheers. :o)

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Brian Burke 

    I wanted to make one more point.... I think one is an absolute fool to get into a tussle with a tenant.. that nips any potential litigation in the bud right there.. even if your right and they are wrong... just pay them or let them out of the lease and or don't be a slum lord and you will 99% of the time never have an issue...

    Its the bonehead stubborn investor who holds to principal and small dollar principals that end up spending  time and money on deals that would just go away with a few bucks...

    Much like Cash for keys with tenants or holdover foreclosure owners... Much cheaper to buy yourself out then to be right?

  • Investor · New York, NY · Member since 2015 · 43 posts · 29 votes
    11y

    @Tim Priebe 

    Tim I disagree with the notion that insurance companies are not named as defendants in lawsuits against the insured.  I also disagree with the notion that LLCs do not come into play when they are also named as defendants.

    Plantiffs name the insurance companies just to get them negotiating quicker.  Once the insurance company has been served the defendant doesn't even need to file a claim because the lawyers are already preparing a defense.  The plantiff is basically saying "You can either show up in court and get yourself removed from the lawsuit (which will result in delays, money, and uncertainty for everyone) or you can bring a settlement to the table and start moving things along quickly. 

    Additionally, the defendant is always named personally even though the LLC is in place. All of the other LLCs are named as well. The defendant will spend countless amounts of time, money, and sanity just trying to convince a judge that he or she cannot be named personally. By the time that a judge has sorted out who is the plantiff and who is the defendant the LLCs may or may not stand. But as the defendant you have already cut a check for $5k to set up a bunch of LLCs, $10k retainer, $30k in fees, and your lawyer stops taking your calls because you want to know how much this trial is going to cost. And $50k to $100k later if you are lucky you might eventually get the case dismissed. And you have won! But your net worth has been wiped out in attorney fees.

    A $2 MM umbrella can be purchased or $400 per year.  And it's tax deductible!

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @James Kendrick 

    exactly... just because your usuing an LLC if you get sued .. your going to get named personally if your the one doing the transaction.. that is a certainty. And it goes exactly as you stated above...

Join the conversationCreate a free account to reply, vote on answers and follow this thread.