I understand that a lot of people prefer to structure their rental entities as LLCs to provide added liability protection. This can be mostly useful in the event of a tenant injuring themselves and trying to sue, as lawsuits related to healthcare can be very expensive.
It also looks like most people investing in paper structure their entities as LLCs. From what I have read, it looks like lawsuits are a part of this business as well, but they are generally comparatively small. It's not like people are going to try to sue you for your entire net worth because you didn't follow the proper foreclosure proceedings (or whatever the lawsuit might be). I am having a tough time thinking about when the liability protection would really come into play in the world of paper investing, so why does everybody form LLCs?
A LLC provides some good basic protection and relatively inexpensive especially if you are going to invest in multiple notes/assets.
@David Piqueira When my sister and her husband won against Wells Fargo I think it cost Wells Fargo about $250,000 in my sister and her husband's legal fees plus the full value of the house.
It is my understanding Wells Fargo also paid their own outside legal council for state and federal cases that lasted about four years total.
Lawsuits can cost a lot. You've got all kinds of regs out there that have to be followed. Each state is different. And to be honest, I don't know many, if any, teachers or coaches that teach the rules of lending and debt collection. And even if the law is on your side, the judges might not be. And the numbers can be scary. I'm actually being sued in Ohio for the loan amount and punitive damages for something the original bank did. Even the original bank didn't do anything wrong, but that doesn't matter. People can sue for anything. I doubt they will win this case, but I'm looking at over a 150k threat. And like I said, it's the judges, not the law, that decides your outcome. And what sucks is that my adversary has a free attorney called Legal Aid.
Having a LLC or other entity also adds a degree of professionalism and distance when dealing with borrowers. I would rather have them google XYZ LLC over stalking David Piquera.
Not only that but it gives you a 3rd party to blame, which is an important negotiating tool. We can't do that because it doesn't meet the company's guidelines. I'll have to ask the manager if we can do this. But if you don't have an entity, the borrowers know you're the decision maker.
I don't know I'm sure you can be wildly successful without but for me it's a no brainer.
@Bob Malecki Specifically, what are you looking to protect against? An example of the types of lawsuits that you are protecting against would be helpful, thanks!
@Account Closed So you mainly have an LLC to protect against lawsuits in the area of lending / debt collection? It's because the regulations that govern those activities are so complicated and vary so much throughout the country its easy to find yourself in a lawsuit because you weren't aware of something? Maybe I don't understand specifically how LLCs protect you, but if your LLC has over 150k in it (say, 4 notes with an UPB of 40k each), and you lose that lawsuit, wouldn't you still have to liquidate and pay the plaintiff the money? That's mainly the part I don't get, it seems like LLCs created for paper investing would typically have enough money in assets to pay out the suits brought against them. So the LLC only protects you if you are being sued for more than the value of the LLC, right?
@David Piqueira The mortgage was not properly done and then was not corrected in a timely manner.
The lawsuit was actually filed because a friend of mine told me Wells Fargo's action were intentional and were a form of predatory lending.
@David Piqueira Buying notes puts you in the business of debt collection and lending. I try and keep notes in my LLC. Assets that become REOs go in another. Cash resides elsewhere. Then I put liens on everything. Nothing is full proof, but it helps complicate things. What you don't want is all your eggs in one basket, and you don't want your basket to be your personal stuff either.
@Adam Adams So to take your real world example, let's say that the person suing you wins the case for 150k (let's hope they don't, but this is hypothetical). I imagine that the suit is against the LLC you created to hold notes. I also imagine that you probably have more than 150k in holdings in that LLC. So would you need to liquidate some assets in order to payout the plaintiff? Are you actually performing damage reduction in this case? Or is that where putting liens on everything comes into play? I'm not sure I understood that part...
I suggest that you speak to an attorney who specializes in asset protection.
@Adam Adams I spoke with an attorney and he said, "that all of the assets in an LLC are subject to creditor claims against that LLC. If each asset is placed in a separate LLC, you have a fighting chance that a court would limit satisfaction of a claim against one LLC to just its assets. Single member LLCs have not been as effective as we would have liked in keeping personal creditors out of the LLC's assets and in some cases have allowed the LLC creditors to pierce the veil of limited liability and reach the assets of the owner. In my opinion it's better than nothing."
This is what I stated before, I don't really understand how an LLC provides you that much asset protection against lawsuits, since all of the assets in the LLC are subject to creditor claims. They would only potentially protect you from lawsuits more than the value of your LLC. This could still lead to pretty significant losses in the event of a lawsuit.
So you put credit claims on your assets first. That way you are first, which is the most important position. The single member LLCs that fail usually fail because of laziness with the books and the monies and they get mingled. If everything is kept separate, then you are better off. Nothing is full proof. It's just armor to make it more complicated. If single member LLCs were paper thin, then there wouldn't be so many of them. If you don't want to get one, then don't. Why do you think it is a good idea to have an LLC with one aspect of the business, but not the other?
Oh, I agree that it is a good idea to form an LLC to hold PN/NPN. I have actually already created one, and plan on being as diligent as possible with book keeping / record keeping / accounting, in order to preserve the veil of limited liability as much as possible.
More than anything else, one of my character traits is to drill down to the dirty details as much as possible in order to understand how things work. It's probably the engineering side of my personality. Instead of just accepting conventional wisdom I prefer to ask a bunch of questions until I really understand how things work in the real world. In this case, the conventional wisdom is to hold these assets in an LLC for liability protection, since lawsuits are part and parcel of the note investing business. I trust that this is the correct thing to do, but I feel like the protection offered is overstated, or I don't fully understand how to correctly utilize these entities to maximize protection.
I still don't think I fully understand the best way to protect assets, but i'm fine with that for now. Maybe when I have a larger portfolio I will revisit this topic. And of course I will talk to attorneys along the way to see what nuggets of wisdom they can inculcate.
Thank you for taking the time to answer all of my silly questions @Adam Adams , and happy holidays!
@David Piqueira I'll try to clean this up for someone who wants details. I'm similar in that fashion and I have to force myself not to worry about the details as much. That being said, once I understood the stuff it really hit home how asset protection is helpful.
Lets pretend you have different assets in different baskets. Basket A is your million dollars of cash. Basket B is your non-performing notes, basket C is performing notes, basket D is your personal residence etc. If you happen to be sued due to an improper foreclosure (part of basket C) they have access to all of your baskets of assets (I ought to copywright that for future teachings, ha). Now, if you set up an llc for each of your baskets it limits the possibility of getting to all of your baskets. When set up properly the LLCs can help protect each basket from the other. The suit you're in for an improper foreclosure shouldn't be able to affect the basket of a million dollars because that money was set up to have nothing to do with where this suit is coming from. Same goes for your personal residence. The person filing suit hopefully can't reach into your personal pocket and take your personal residence. That's why talking with an attorney and setting things up correctly is imperative if you're going to go that route.
Spot on summary @Steven J. One good foundational book I recommend is The Tax & Legal Playbook by Mark Kohler, below is a link. He does a very good job explaining things and how to deploy your own asset protection strategies.
Thanks Bob! Glad to know an expert approves of my explanation.
I'd also recommend the Rich Dad Poor Dad series on taxes and asset planning. I think one is called 'Loopholes of the Rich.' I was nervous a lot of it might be thrown out with the new tax plan in place but it doesn't appear to be so because the business related stuff (specifically real estate related) doesn't seem to get impacted by the new plan.
@Steven J. Yeah, I get that aspect, and I think that it is important. You did a good job outlining how dividing your assets into multiple LLCs can help protect lawsuits against one LLC from affecting your larger portfolio. The part that I struggle with is that you only get that protection if the lawsuit is for a larger amount of money than the value of your LLC. So if somebody sues you for improper foreclosure (NPL LLC), they won't be able to touch your million dollars (cash LLC) if the suit is more than the value of NPL LLC. But if the value of the suit is less than NPL LLC, then you don't actually realize the advantages of your asset protection structure.
I guess it's the difference between LLC protection and insurance. It just seems to me like most of the lawsuits would be for less than the value of your LLC. In Adam's case, he was being sued for 150k, but if his NPL LLC holds 200k worth of notes (say, 10 notes each with UPB of 20k, not even a super large portfolio) then he is still screwed if he loses the lawsuit. The resulting lawsuit would essentially wipe out the entire value of that LLC. Unless I am missing something.
Thanks for the input!
I think owner occ notes have more liability than folks realize.. at least all the newbies getting into the space.. with dodd frankenstien.. you have to be pretty careful.
non owner occ or commercial purpose loans are exempt from much of those rules and that is the space we play in.. I want nothing to do with owner occ notes personally..
LLC is fine .. but having used them for 30 plus years if you get sued your going to get named personally.
then you will spend untold thousands trying to claim you should not be sued personally..
but this is a great thread to those that think they can just buy owner occ npn and its a simple and easy thing to deal with.. it is not.. remember the home owner is in the house.. they have not been paying for a long time they feel entitled and there are Lawyers in certain markets that love to bring lender liability claims..
one needs to be fully schooled on this.. when I was doing my HML I had lender liability insurance.. just in case someone took a swing at us.. but in the non owner occ space never had a wiff of it.
Lastly as a beginner and you want NPN I would invest in funds like @Bob Malecki has.. let them take the heavy lifting that would give the investor protection..
I don't quite understand the problem with them suing for a small amount is @David Piqueira . I think it would be great not to have to worry that no one would ever come for every last dime and dollar. Given the litigious nature of the US and the creativity people come up with in order to sue intimidates me and I'd prefer to have at least some protection in place.
In your example above its a sucky day - I'll give you that - but you've still got 50k as well as your personal assets and other assets. Secondly, just had a lightbulb go off, the people filing suit are only allowed to go after the items in that particular LLC. They can't pick and choose where the money comes from as freely so you can keep the strongest and best assets.
I can't continue any further as an expert in asset protection beyond that as I'm just not experienced and well versed enough.
With only slightly more work you can form a Series LLC and put each asset in a separate series. This (theoretically) isolates each asset, so if a lawsuit occurs, and there is no personal negligence on your part, only that one asset is exposed to any judgement.
The more legal barriers you put up, the less attractive you are to plaintiff attorneys and litigants, as long as the barrier is legally defensible.
As an example, consider two possible lawsuits with the same liability risk; one defendant has $2 million in assets owned him personally; the second defendant has $1 million in fully creditor exempt retirement account, $500k in his homestead in a fully exempt homestead state like Texas or Florida, and the balance of his assets in Series LLC. Who is going to be a more attractive lawsuit target? Who is more likely to be able to negotiate a small 'nuisance fee' settlement?