Real Estate Investor · Lafayette, CA · Member since 2010 · 179 posts · 71 votes
Hi everyone,
I have seen lots of posts about LLCs, and other disregarded entities for asset protection, in addition posts on Insurance policies etc. But how about NOTES for protection?
If the corporate veil is pierced and the insurance doesn't hold up, this could be one more strategy to protecting your ASSets.
Simple to do -lots of us make notes every day.
cost effective -just recording costs and notary cost
Wanted to share a strategy and see what your thoughts are.
California is litigious. We all know this. What if we were to trade "notes". You make one on my property. I make one on yours. The effect is a zero sum gain.
example you own a free and clear 100k property. i own one too. You put on note on mine. I put one on yours.
The idea is that if there is no equity in the property, then it is not worth pursuing (for litigation purposes)
1) a deterrent for litigation.(no equity = no value to pursue)
2) strategically in court must be paid off if property needed to be liquidated; note holder made whole,
The strategy is to trade notes on free and clear properties with like minded owners. What are your thoughts?
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
Michael,
As you may know equity stripping using notes is not new. However I like you twist on it, trading notes. However I do see a problem with this, the mortgages need to be perfected - money must actually change hands.
Also a court may see it as "You conspired to strip equity or fraudulently protect assets" Would a court or plaintiff even discover this? Who knows. Whether a court would care might depend on how liberal a state you are in. Maryland courts have stretched the law pretty far to protect the little guy.
I'd be interested in what any attorneys out there think.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
Michael,
As you may know equity stripping using notes is not new. However I like you twist on it, trading notes. However I do see a problem with this, the mortgages need to be perfected - money must actually change hands.
Also a court may see it as "You conspired to strip equity or fraudulently protect assets" Would a court or plaintiff even discover this? Who knows. Whether a court would care might depend on how liberal a state you are in. Maryland courts have stretched the law pretty far to protect the little guy.
I'd be interested in what any attorneys out there think.
Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
13y
I was talking with a few people about this last night, and someone suggested a line of credit from a peer. No money really has to change hands then, since it's an unused line of credit, even though it still shows as a lien on the property. Discuss....
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Oh gosh, here comes Bill....
Some considerations, let's see, equity stripping, filing false liens, sham transaction, mortgage fraud, what about tax issues with interest, trading notes....is that conspirecy? So, you take that to court and defend your sham transaction, false testimony, contempt of court, fraud, if in bankruptcy of either trading partner you have filing false statements, bkrcy fraud, if you used the mail, mailing back the deed of trust from the recorder's office you have mail fraud, if the amounts are over ten thousand you can look to money laundering issues, even if cash did not change hands, as with future advance notes you have no encumbrance without claiming a balace owing.
I suggest you stick to conventional methods of asset protection. :)
Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
13y
geez bill..i hoped if i stayed away for a few months, you'd go find another website where you could hound people :) seriously though, i don't see the tax implications of an untapped line of credit..there simply is no interest to pay if you don't draw on the line...and i don't see how it's fraudelent or a sham either, if the money is truly available...now a 40k swap for a 40k swap between pals is one thing..but having a buddy set up a line of credit for you, and you setting one up for Tom, who had one set up for John, who sets one up for Ann, etc...
Real Estate Investor · Lafayette, CA · Member since 2010 · 179 posts · 71 votes
13y
Bryan A., i like your thinking, however to have this hold up in court money actually has to transfer. Ned Carey stated above, "the mortgages need to be perfected - money must actually change hands."
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
We have missed you.
Perhaps my comments weren't just addressing your suggestion alone. If a note is made, is there interest on the note (?) I realize you aren't really making payments (which is a good way to catch your sham transaction) but the note holder has interest earned, was that accrued income claimed, are you on a cash or accrual accounting system? Did you list these loans on the books of your company or did you omit these false liabilities and assets, or is there any company involved at all?
Look up "sham transation" if there is intent to profit or advance some economic benefit based on a false claims it opens the door to acting fradulently.
Just how far are you willing to carry a lie, especially in court?
I agree with Steve, if you want to load up do so with a legitimate loan and then, knowing you are about to be sued, run to that lender and get your advance. Spend it fast because now you have cash to go after.
There is not only a lack of knowledge concerning basic business law but also accounting functions here. A HELOC type loan is a contingent laibility, one that is not realized until executed and it is not offset by an asset until they money is taken, then the note has vaue. The lien filed against the property has no value unless money and the obligation are exchanged. Having a ten million dollar lien filed does nothing unless it is funded.
Any attorney, even one fresh out of school and minutes ago passing the Bar, will see the note filed, it will say HELOC or Future Advance even on a title search, which means the face amount is not necessarily the true balance owing at the time. It does nothing in reality to deter anyone seeking your assets. If you believe that the attorney representing his client is the dumbest person to every get a law degree, more power to you.
And Bryan, I see you still are lacking maturity and common sence opting for confrontational interaction while exposing your lack of integrity and knowledge of the real world. Still looking for ways to out smart others and not having a clue. :)
Real Estate Investor · Riverview, FL · Member since 2011 · 100 posts · 33 votes
13y
Michael Galloway / This is a very interesting concept. As an RE investor, and deal in the HML business a bit, I am in progress of placing "Liens" on paid-up properties held in an LLC at 90% LTV. I have a functioning Canadian corporation that will hold the Promissory Notes and act as the 'off-shore' lender. It's easy since the money to buy came from there in the first place, (the loan was perfected). The note just translates the capitalization of a US C-corp into a debt that never really gets paid out. At the time of sale, the payout is acknowledged without exchange of funds...just an accounting item and taxes paid. This provides the added layer of protection from loss due to litigation.
To do as you suggest is simple in theory, but you are exchanging actual notes here. Something that can be acted upon! I know I am putting up a property as collateral and I am acknowledging the note against me, (debt to me), but I am also originating a note, (no money from me), on a property I do not own.
How do you undo this? What happens when the other person sells their property first?? I have no real payout on my note and no collateral left. But, I have an outstanding Promissory Note against me and a paid-up property on the table up for grabs.
You best know the person on the other side of this trade very well, (or at least be married to them).
Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
13y
You can have your equity in the property or you can have it in cash. Either one is at risk. If you borrow against a property to the point of no equity and spend all your cash, now you have financial risk even if you don't have (as much) lawsuit risk. I don't think you can hide your equity as when you push it down in one place, it pops up in another place.
The best way to protect your assets will be to obey the law, be insured and seek professional legal guidance when needed.
I have also heard a trust is a good investment protection entity.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
Originally posted by Michael Power:
...
How do you undo this? What happens when the other person sells their property first?? I have no real payout on my note and no collateral left. But, I have an outstanding Promissory Note against me and a paid-up property on the table up for grabs.
...
That snippet is the real problem with the OP's proposed concept, even assuming that it would not be judged a sham.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Originally posted by Steve Babiak:
Originally posted by Michael Power:
...
How do you undo this? What happens when the other person sells their property first?? I have no real payout on my note and no collateral left. But, I have an outstanding Promissory Note against me and a paid-up property on the table up for grabs.
...
That snippet is the real problem with the OP's proposed concept, even assuming that it would not be judged a sham.
Yes, I'd have to wonder a little about the "other guy" who I exchanged sham notes with, is he really an etical above board operator? I wonder if he would have his property damaged, decide to walk away, since he has no problem filing false liens he probably doesn't give much thought to filing other documents. So he fills out a quit claim deed to the other note holder, puts deed-in-lieu of- foreclosure on it, files it and has it sent to another friend's address. 6 months later he forecloses on you for your property.....oh geeez, now what, pay him, call your note due (hahaha), see if you can talk your way out of that one..... :)
Point is, filing false liens is illegal. Equity stripping is illegal in many states by itself. Sham transactions with a benefit can lead to fraud. There is no good reasone to do things that are obviously wrong or illegal to try to protect yourself.
Use insurance, an LLC, a Trust, obtain real loans and leverage the money, you don't accomplish much pulling shenanigans that can put you at further risk.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
13y
This topic has been discussed and debated ad nauseam on BP. Maybe Steve can find the old topic where Bill and I debated this until we were blue in the fingers ;-)
Landlord · San Diego, CA · Member since 2012 · 129 posts · 49 votes
13y
There's a variety of justifications for piecing the corporate veil. Among them are fraud and undercapitalization. So if you intentionally undercapitalize the company - by removing all the equity for example - then you run the risk of piercing the LLC protection altogether. Of course if you do so in a fraudulent manner, then just double kiss it goodbye with possible sanctions and punitive damages. Yeah, you might get away with it, but if you don't, it could be pretty expensive "gotcha!"
Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
13y
Take my advice with a grain of salt as I am an insurance guy, but I have clients with thousands of units worth hundreds of millions that do not go to these elaborate efforts. Form a separate LLC for each significant property or group of SFR's and buy the proper insurance with a limit you are comfortable with. If there is a $2m umbrella sitting out there and an attorney can make a quick $600k... Do you really think they are going to spend countless hours and delay their payday by a year or more trying to pierce your corporate veil and attack your $100k in equity to make an additional $30k? A $1M umbrella costs $300-500 per year, that is a lot cheaper, easier and more proven than elaborate equity stripping schemes that will probably not pass the smell test if dissected by a court. Judges are not stupid and jury's hate liars and frauds. You do not want to be on the stand explaining why you made these decisions.
Contrary to what everybody thinks... PI attorneys don't make money by taking bad cases. The look for negligence and deep pockets. If you are a good operator that is not negligent and your entity has deep pockets (high insurance limits) and unlimited defense cost (paid by the insurance company) then you are in good shape.
Commercial Landlord · Oshkosh, WI · Member since 2013 · 299 posts · 88 votes
13y
I like what Joe says here an umbrella policy will probably go a long ways to protect you as long as your not a criminally negligent landlord that knowingly does something really bad.
Regarding equity stripping, I am not sure what the big deal is just to do a conventional refinance and pull off 75% of the equity and put it somewhere safe? There is no law against protecting capital.
As long as you can make pmts and manage the property why does it matter if you pull off 75% of your equity off? Engaging in schemes to place liens on your property to put creditors in 2nd place is just nonsense and going to get you in trouble like Bill says.
How ever if your equity you pull off, there is no law on the book saying you cant have a cigar box full of 100's buried in your back yard or in my opinion a metal box full of silver and gold bars. Please dont take that last sentence as advise its more just an example of legal money movement. LOL
People take equity off the table all the time and its perfectly legal to do so if you dont try to scam the system. You have to refinance and go through the process. That is why when you take debt off the property just make sure the debt buys assets that cash flow eventually you will have enough assets to support yourself.
Until your rich you should not leave money sitting around anyways it needs to be put to work in other assets to generate enough money to make you rich. Right? Isnt that what this is about? would the house thats free and clear be better suited to use to gain more assets with a potential refinance?
LLC will help you seperate and diversify your risk then the blanket policy will cover all your llc's if you do it right. Then you can move equity using the legal means of doing so. Refinance buy new property separate llc for each property. Legally there is always some risk of attack but the insurance really does help.
I heard of a story a while back about someone doing this equity strip via liens they created from thin air.... and they had a problem with title company later could not verify the pay off letter when they tried to sell property and they lost a potential buyer trying to iron out deal. The buyer decided to buy some one else's property. Of course I must say I am not that close to this guy and know for a fact he isnt the most moral of characters. I used to be in a group of weekend snowmobilers and I told a broker friend of mine not to invite me out with this guy if our wives came along because I just didnt feel like exposing her to his negative character. you have to be real careful who you get info from they dont lead you down the wrong path morally.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
13y
Originally posted by Bryan Hancock:
This topic has been discussed and debated ad nauseam on BP. Maybe Steve can find the old topic where Bill and I debated this until we were blue in the fingers ;-)
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
13y
Thanks Jeff S
I read that thread again and it makes me smile thinking about how far we have come since the constant bickering
Vikram's comment about it not being scalable is spot-on. I still think there are probably some lawful ways to do it ethically for simple transactions though.
Real Estate Investor · Lafayette, CA · Member since 2010 · 179 posts · 71 votes
13y
Guys,
i think Joe Bertolino put the nail in this coffin. When he stated:
If there is a $2m umbrella sitting out there and an attorney can make a quick $600k... Do you really think they are going to spend countless hours and delay their payday by a year or more trying to pierce your corporate veil and attack your $100k in equity to make an additional $30k? A $1M umbrella costs $300-500 per year, that is a lot cheaper, easier and more proven than elaborate equity stripping schemes that will probably not pass the smell test if dissected by a court. Judges are not stupid and jury's hate liars and frauds. You do not want to be on the stand explaining why you made these decisions.
Equity stripping although interesting in theory, can get you into a heap of trouble if the notes/liens are not legitimate. In addition it is much more cost effective to pay $500 for the 1 million insurance umbrella, than to go through all the shenanigans and accounting nightmare.
In closing, i found another thread that i wanted to add here by BP member,attorney @Clint Coons, that gives more specifics on the legality aspect.
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
13y
I’ve been following this thread and have held off from commenting for a while – can’t help myself any more :).
The basic premise behind this argument is that if there is no equity to be had, most law suites should be deterred. This is only partially true – an attorney working on an hourly pay won’t care, he’ll still sue because he’ll still get paid.
Having said this, though, it is very true that big equity attracts law suites, period. Therefore, it seems prudent to not be in a large equity position. The implication of achieving this illegally I will not even discuss – it’s illegal. It is not worth going to jail over something that can be accomplished legally.
This is one of the reasons why I am such a fan of 100% financing. Not only does it force us to look for better deals to be able to cash flow with 100% financing; not only does it afford astronomically higher cash on cash return; but, having no or very little equity on the way in does provide for some level of deterrence that we’ve all been talking about in this post.
Furthermore, as years go by and equity position does improve, I bridge it or leverage in some other way to acquire CF. Isn’t that the point – CF?
Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes
13y
I like Steve B.'s answer best, utilizing equity lines (HELOCS) for asset protection & LIQUIDITY along with an umbrella, which everyone should probably have as well, are what makes the most sense to me. The bigger issue here is people not working their equity. You can lose millions by not working your equity, which has truly been the biggest wealth building strategy for me.( Try reading "Missed Fortune 101" by Doug Andrew) Most seasoned investors should be able to find investments that pay more than the cost of a HELOC.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Dave, I agree, leaving equity to lay in the walls at the rate of inflation basically, it's another issue.
Dave, why don't you start a new thread on the topic, getting off topic and following the concepts of equity utilization will be hardly seen by any search about equity stripping.....it would be a good one! :)