Filing Liens On Property To “Protect†(Hide/Mask) Equity
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
I have heard of many investors filing liens on property or on friend’s property in an attempt to fend off legal challenges that would arise from someone identifying this equity. I realize that entities can be used as a form of protection in lieu of doing this, but I was wondering about the legality of this action. It seems quite guruish to me. I am all for it if there are not downside risks to doing it.
It is probable this has been discussed elsewhere, but I couldn’t think of what to search on to find other threads. What are your thoughts on this?
I believe you're talking about "equity stripping". It makes your property look like there's little to no equity in it so a sue-happy lawyer will be less willing to take you to court.
There are legal ways to do this, but definitely consult your attorney first. Basically, you take out a HELOC or secure a 2nd mortgage against most of your equity, if you can nowadays. Then quickly pay off most, but not all, of the loan with the proceeds. As long as there is still a small balance, the lien remains on public records. But remember, only the initial amount of the loan and its date gets recorded, correct?
Now some nosy lawyer will have no idea what the balance owed is, but will assume it's pretty high if the loan is only a few years old. I'm sure he can subpoena records or something to get the details on the loan, but that will require work on his part and probably not something he'll do on contingency. He'll probably demand payment, a large retainer, from his client who is interested in suing you and that, hopefully, will be enough for them to drop the case.
Just don't falsely file a lien using a sham loan. I think that's what most of the warnings above are alluding to.
Hi, Bryan, try searching under "FALSE LIENS", lol. This practice is illegal under many state stutates. There were various old scams where someone would file a lien on a property, for example on a property owned by an elderly person, and upon death the estate would pay off the lien. States adopted false lien statutes to address these issues and attempts to evade creditors.
Now, if a lien is filed, slike a second mortgage, you'll also need a note and likely a past payment history or supporting evidence that the lien is valid if made with an individual or if creditors or suits arise seek assets. It's another example of bad advice from gurus and even attorneys that are sneaky minded, but doing so can be caught. Later...
Unethical as hell.
It's one thing to set up legal corporate veils, it's another to break the law. Don't do it.
Thanks Bill...Do you know how one would go about looking up said statutes without paying an attorney for advice? I agree that it is unethical if the lien is completely false, but I was wondering if private loans that would be made absent collateral could be collateralized and used to mask equity in an ethical manner.
BTW...This is not something that I do, but it is interesting to explore. I certainly want to stay within the law, but it never hurts to have another layer to fend off frivolous suits if it can be done properly.
I have seen this recommended in other threads by some long-time BP members and it seemed unethical to me too if not illegal.
People without professional licensing often recommend things that break the law on forums. Bryan, you and I disagree often on matters of ideology but this is different. Don't do this. Get insurance or a corporate veil. This path is a seductive one but when it does get found out, it pisses judges off. I'll be able to comment more on a pending case that may go federal with a former acquaintance later.
Okie dokie...thanks for the heads up.
We already have entities set up, but it was just a thought to add some moats to the fortress.
I would love to hear about the case when you can share information.
If I recall correctly, if there is no debt, there is no lien. If you're talking about securing previously unsecured debt with collateral, that's different. But to create a fictitious debt, how could this be anything BUT unethical?
Bryan, I think every state has their state stautes on line. I simply search for Texas State Statutes, you'll probably get an index, from there go to the commerce/business sections and search. You can save time on this issue by searching "filing liens real property" or something like that.
You'll likely see encumbrances and perfecting liens read through that and toward the end you'll probably find filing false liens and the penalties.
No, there isn't a way to mask a lien, either it is a true and valid lien or it's not.
At the very least, it's a sham transaction, which may have other ramifications. Say a friend does this for you, it's found due to whatever suit against you. Your friend is asked to produce the documents and supporting evidence of the debt or lien. Then you say it was paid, or forgiven, well that has tax ramifications too, interest, even imputed rates, that were not claimed or if forgiven, was income to you that you failed to claim.
Ever hear the expression "throw the book at him"? Many incidents fall under other issues. Real estate is an area that if there is one violation of law, likely there will be others.
IMO, it's not really an interesting matter as it's illegal and is nothing more than a sham transaction that leads to trouble, so there really isn't anything to explore. Gurus sell books and give bad advice or even illegal strategies to sell books to an unknowing public. I would think that there would be some attorney somewhere who thinks he can wiggle through such things, but he never had a good examiner on his tail either, they are not really so smart. Get this into a bankruptcy case and you'll think trouble...so where ever you heard this, you should probably advise them, if that would work for you etc.
There should be no problem finding these statutes. Also might try perfecting and releasing liens. And Bryan, my comments if sounding stern were simply to be direct for everyone, not directed at you, hope you didn't take it that way.....Good luck
PS. second thought too, might check with your recorder of deeds and filing requirements of any document and filing false documents, claims, and liens.
For those that say it is summarily unethical I tend to disagree IF there is a perfectly valid debt through a private individual that is filed of record as a 1st, 2nd, or nth note to give them additional security interest. That was my thought....to protect equity and add security interest to someone with a valid private loan.
Still unethical? Illegal?
If my Corporation wanted to do a fix and flip, I could 1) put the necessary money in the corp (either as equity or loan) and do the purchase, fix, and sell; or 2) The corporation could purchase and fix the property using financing. Am I doing something wrong if I, personally, loan the money to my corporation using a note and deed of trust, in an amount equal to the actual cash needed to do the transaction?
No Brayn, a valid lien is fine and you already knew that, but that was not what was initially asked or proposed, If you had a valid debt and the debt still existed and later you agreed to give a security interest in property, you can do so, that's a valid lien, if there is no valid debt, one that is only constructed for eye wash, that's a sham transaction and a fraudulent act and it is specifically addressed in statutes with penalties. And yes, Tim is right, it would really tick off any judge and blow any case you did have.
Doing so is not even clever, it's outright lying and should be as clear as the nose on someone's face. There are plenty of ways to add moats. Brayn, your last staement was just saving face, don't need to go there, ya didn't know, ya asked and ya found out. But yes, ya shoulda known better but ya just didn't think it through....it's Okay!
I believe you're talking about "equity stripping". It makes your property look like there's little to no equity in it so a sue-happy lawyer will be less willing to take you to court.
There are legal ways to do this, but definitely consult your attorney first. Basically, you take out a HELOC or secure a 2nd mortgage against most of your equity, if you can nowadays. Then quickly pay off most, but not all, of the loan with the proceeds. As long as there is still a small balance, the lien remains on public records. But remember, only the initial amount of the loan and its date gets recorded, correct?
Now some nosy lawyer will have no idea what the balance owed is, but will assume it's pretty high if the loan is only a few years old. I'm sure he can subpoena records or something to get the details on the loan, but that will require work on his part and probably not something he'll do on contingency. He'll probably demand payment, a large retainer, from his client who is interested in suing you and that, hopefully, will be enough for them to drop the case.
Just don't falsely file a lien using a sham loan. I think that's what most of the warnings above are alluding to.
No...not really Bill. If you look at the title of the post you will see that I always thought this was unethical and haven't ever done it or recommended doing it.
I was just wondering at what point doing something in your own interest becomes unethical. I'm not trying to pick a fight or do something wrong....I really wanted to explore it some.
Great answer Mitch! Thanks for sharing!
I believe you're talking about "equity stripping". It makes your property look like there's little to no equity in it so a sue-happy lawyer will be less willing to take you to court.
There are legal ways to do this, but definitely consult your attorney first. Basically, you take out a HELOC or secure a 2nd mortgage against most of your equity, if you can nowadays. Then quickly pay off most, but not all, of the loan with the proceeds. As long as there is still a small balance, the lien remains on public records. But remember, only the initial amount of the loan and its date gets recorded, correct?
Now some nosy lawyer will have no idea what the balance owed is, but will assume it's pretty high if the loan is only a few years old. I'm sure he can subpoena records or something to get the details on the loan, but that will require work on his part and probably not something he'll do on contingency. He'll probably demand payment, a large retainer, from his client who is interested in suing you and that, hopefully, will be enough for them to drop the case.
Just don't falsely file a lien using a sham loan. I think that's what most of the warnings above are alluding to.
Absolutely Mitch, a HELOC would be a valid lien and the balance will fluctuate, but using this in a manner to hide equity is still equity stripping....but let's say you get sued and notice is given and then you suck the money out after notice, you then provide financial statements and show the debt. The other attorney does a simple audit and they see you created a higher debt after notice. The judge asks where did that money go and show me. Now what? Will you use one lie to cover another quicky sham? This is not a way to protect yourself, you'll end up doing more harm than standing up on your own merit and confronting anyone who seeks an action against you.....if you conduct your business in an honest, above board, ethical manner, that's the widest moat you can possible build for yourself. IMO
Well wouldn't this be as ethical as using irrevocable trusts and other legal mechanisms to keep people from pursuing legal action? You aren't claiming that the lien is at face value doing what Mitch describes....the potential opposing attorney is doing that mental calculation all own their own.
How is it illegal or unethical to protect yourself from frivolous suits? Where does the line end? Surely this is addressed in case and/or statutory law so that is why I asked for specifics if people had them.
I was just wondering at what point doing something in your own interest becomes unethical. I'm not trying to pick a fight or do something wrong....I really wanted to explore it some.
I'll buy that, sorry....but really, is there anything one might do that might even be questionable that they would do if it were not in their best interest? People usually break laws because the act is in their best interest.....I don't run red lights for the fun of it, I might because I'm really in a hurry! And I don't run red lights...LOL! :roll:
Well that is why there are laws Bill and I agree...but this isn't as cut and dried as you originally made it...is it? There are gray areas and that is why there are laws, courts, etc.
If anyone can point out specific laws or court cases I would love to see them. What Mitch proposed seems reasonable to me as does filing private 2nd liens to choke off access to equity provided they aren't truly sham transactions. I would love to see what the courts think though.
It's too bad you see this as a gray area, it's not at all, not from the beginning nor to the end. Trusts, LLCs, etc are legal and accepted ways that have been established with rules and laws established. There is a problem when people think they are just so damn smart and make arguments to do unethical things and try to spin a position to circumvent the accepted and expected way to conduct business within those accepted bounds.
Read my last post carefully, there is nothing wrong with having a valid lien...and reporting it as it truly exists in the future as may be required. If you do anything to increase that debt for the purpose of evading or manipulating your true financial position, it's a sham transaction, it's still equity stripping and if the money was borrowed to increase your debt to evade a creditor or suit, it's flat out fraud. If you need to argue that point any further Bryan, I just feel sorry for you as I thought you were more ethical than that and would see the point. Has anyone agreed with you? I don't want to argue either or even feel like such comments are warranted, but going on defending this just won't serve any good purpose, IMO. Be good, happy trails and enjoy the holidays, wish you a good one! Later...
I am quite certain others will disagree with you Bill...you have made your point...please allow others to participate without berating them.
If others have opinions please share them. There are definitely some strong OPINIONS here like there were with an issue about non-recourse loans earlier and I think perfectly reasonable people can disagree on this and not be labeled as villains trying to skirt the law.
If after "equity stripping", you still get sued, then the equity stripping has failed it's mission, IMHO.
And Bill is correct. If you draw out all of your HELOC after getting served papers, the court will make you answer for that money. Hopefully, you didn't blow it all on an amazing week in Vegas!
BTW, is disguising your equity any more unethical than an attorney who searches for equity before deciding a case is worth pursuing?
Well you can make up all sorts of cases that were not part of what was asked. That isn't the point...The point is to explore what is and isn't ethical and what is and isn't okay per the law.
I sent an email to one of the best real estate experts in the country for some comments about this...I am hoping he has some material in one of his books that discusses the law and his point of view on the ethics.
OK, I can play along now that I guess we have that straight, at least my thoughts. I don't mijnd running this to 101 posts, LOL.
We can certainly see how people think and where their ethics stand....
But real estate expert? And in his books? Another guru? Seems none ever really want to talk to me in these forums, I would welcome the opportunity to discuss the matter with any "expert" in the country, hopefully we will get an attorney on here, any time, except tomorrow, I'll be running around too much, gotta get ready for that bid day ya know....
Well is is completely impossible for someone to have written books that aren't guru material...right Bill!
This guy has been writing in real estate matters for over 40 years and has over 20 titles that rival anything in the industry. I have absolutely no idea what he is going to say so I am not emailing him to support my "case"...I am emailing him to get his OPINION and some pertinent law on the subject.
Once we have this we can certainly have a more fruitful discussion and hopefully can keep from getting at each other's throats so close to the holidays. Cool?
Yep, that's cool! And that's great if he has been writing real estate text books for college and professional referrence, I like that, it's just that I know you read some guru stuff and maybe even admire some, that's cool, but as they say, an expert is anyone more than 50 miles away from home! I'm not making any judgment here, I would welcome anyone.....and ya know, I'm still learning too, it never stops.
So let's go into this without any more anamosity, sarcasitic comments or snide remarks, we don't need to go there. We can approach this as gentlemen....LOL!
I called my attorney on a separate matter and he wasn't really much help. He did point me to some good resources, but it would require me to have LexisNexis or WestLaw access...ugh! The good news is that we are having a beer after the new year ;-)
There seems to be agreement that intent and timing play a key role. If things are done after a judgment it is clearly trying to defraud creditors. Filing false liens fits here clearly too IMO. The same would apply leading up to a potential suit.
If private 2nds were collateralized in an attempt to protect equity before a cause of action took place it is arguably okay from my point of view.
The HELOC case Mitch mentioned is in the middle IMO and I don't know what a court would say. I would guess a lot would depend on how quickly the HELOC was paid down and what the intent of the borrower was or what someone could prove.
I am going to keep looking....surely there are some knowledgeable board members out there that have articles, statutes, or case law to point to. Please share!