All Forum Posts by: Dion DePaoli

Dave Van Horn and K. Marie Poe, I looked it up. No redemption right in non-judicial proceeding. Redemption rights are granted if the foreclosure is judicial. (only to the borrower)

Your wife's lack of credit can be addressed by adding her to your already active accounts. You are married, so this should not be a big deal. She will then enjoy the same credit line reporting that comes from the accounts currently in your name. In some cases, her credit will show up within 30 to 60 days of adding her to your credit.

If for some reason that is not desired, then help her go establish credit.

Qualifying for an investment property is different than for a primary residence. If she is the primary borrower for the investment property, she must qualify in full. This means her income will have to cover the debts she has as well as the debt of the new loan.

It seems you may be a little confused about the future property and the vesting in order to qualify for a loan. In that confusion I would say, do not consider the two of you as separate people, you are married and essentially more like one entity. Your marital debts will be factored in for both of you in individual loan scenarios. This can include the mortgage on a Primary Residence, even in the event she is not on the mortgage. In most underwriting cases, this would not happen if the property was an investment property in your name. In that case, that debt may be exempt from her qualification.

In general, you don't get to simply swap names to continue qualify for loans. There is a bit more to it then that.

You have some time to work through this, you do not have the first one done yet. I would venture to say, there is no real benefit to not put her on your primary residence loan. It will only help her credit. So build her credit and get her on that loan. In most cases, she will be charged with covering the debt on it anyway. And without really knowing what the income and asset situation looks like much of the advice will be speculation.

For the future properties, Fannie/Freddie loans guidelines allow for more than 4 but some lenders do not grant the same rule. This is their prerogative. That said, a local bank or portfolio lender (one who does not plan to sell the loan to Fannie/Freddie) may allow for more properties. Local banks can be a good resource for this.

Dave Van Horn is a seasoned second lien investor. He may be able to shed some light on your questions.

Dave, in this situation, does a right of redemption get created because the second lien holder now has an interest in title?

And, I am curious, would both parties then have a right of redemption, the borrower and the second lien holder (now as an owner in part with the borrower)?

I thought California had some tricky regulations around this situation creating fractured interests and redemption rights, etc.

In the state of Alabama, the redemption period is post foreclosure sale for 1 year. For the record, Florida's redemption period is prior to sale, it is not non-existent. It is different in each state.

Alabama has rules protecting the purchaser of a foreclosed property and the investment they made allowing for the following:

1. The purchase price paid at foreclosure sale, plus interest (at the rate allowed to be charged on money judgments, which is currently 12%);
2. Permanent improvements to the real property;[11]
3. Taxes paid or assessed;
4. All insurance premiums paid or owned by the purchaser;
5. Any other valid lien paid or owned by the purchaser, or if the redeeming party is a judgment creditor or junior mortgagee (or any transferee thereof), then all recorded judgments, recorded mortgages and recorded liens having a higher priority in existence at the time of sale which are revived;
6. If the redemption is made from a person who, at the time of redemption, owned the debt for which the property was sold, the redemptioner must also pay the balance due on the debt, with interest; and,
7. All mortgages made on the real property by the purchaser to the extent of the purchase price paid at foreclosure sale

So in short, you will not loose your money and could make a couple bucks on the interest. The risk would be if you improve the property and then take out a loan exceeding your total investment. The redeemer would not have to pay for that.

One other side note, the parties that can redeem are not limited to the borrower who was foreclosed. Junior lien holders have an established interest in the property and have a right of redemption as well.

The best answer is usually the truthful one.

Let's clear some things up.

(1) The term "Security": means any note, stock, treasury
stock, security future, security-based swap, bond, debenture,
evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, traddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

(2) The term ‘‘Person’’ means an individual, a corporation,
a partnership, an association, a joint-stock company, a trust,
any unincorporated organization, or a government or political
subdivision thereof. As used in this paragraph the term ‘‘trust’’
shall include only a trust where the interest or interests of the
beneficiary or beneficiaries are evidenced by a security

In order to see if the proposed LLC is viewed as a security there are one to two tests, depending on the state of filing. In S.E.C. v. W.J. Howey, 328 U.S. 293 (1946), a set of test questions were created to give guidance on the understanding if a structure was a security or not:

1. An investment of money
2. In a common enterprise
3. With an expectation of profits
4. To come solely from the efforts of others

An additional test is also used in some states known as "Risk Capital" test set forth by the California Supreme Court in Silver Hills Country Club vs. Sobieski, 361 P.2d 906 (Cal. 1961). This test asks if the money being put to work in a given venture will be used to develop or acquire the business or enterprise in which the interest is being offered.

In the OP, the desire is to form a 20 member LLC. Where the OP is a Manager. (unknown how many others are Managers) The LLC intends to purchase real property for the purpose of profit.

A correction to the OP, the investors will not own an interest in the real property in your design, they will own shares of the LLC. The property is owned by the LLC. Per the OP, the investors are pro-rata into the LLC according to their equity investment.

So let's apply the test and stop speculating:

1. Is there an investment of money?
Answer: Yes.

2. Is it a common enterprise?

Common Enterprise Test:

i. Horizontal Approach - Defined as 'pooling' of investors' funds as a result of which the individual investors share all the risks and benefits of the business enterprise.
Answer: Yes.

ii. Narrow Vertical Approach - Defined as the 'fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment.
Answer: Yes.

iii. Broad Vertical Approach - Defined as the broad vertical approach finds a common enterprise if the success of an investor depends on a promoter's expertise.
Answer: Unclear from OP

Answer (Common Enterprise): Yes.

3. Is there an expectation of profit?
Answer: Yes.

4. Are the profits based solely on the efforts of others?

This is a little complicated due to the lack of detail in the OP. However, it is practical to assume if 20 members are found and all 20 members invest, it is not likely they will ALL have equal managing interests or managerial input.

Could they? I suppose, you could form some system of voting where all have equal say in accordance to their equitable share. That said, you would also have to pass and prescribe the duties of someone in an administrative role. The first time you make a decision without the blessing of all the other members, their profit is based on your efforts.

Further, it has been found in some cases, where parties join in an LLC as all Managing Members, that the expertise by one Managing Member is required in order for the venture to be profitable, thus regardless of LLC title a dependency is still present. For instance, if none of the investors have real estate experience, then the they all rely on the expertise of the member who does.

Risk Capital Test:

1. Is the money being used to develop or acquire the business or enterprise?
Answer: Yes

[b]OP Main Question: Is this a security?

ANSWER: YES[/b]

The next question, is this security exempt from registration?

In SOME states, not all, if the sale is to an Accredited Investor, the security can qualify as exempt.

Accredited Investor is defined as:

1. a bank, insurance company, registered investment company, business development company, or small business investment company;

2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;

3. a charitable organization, corporation, or partnership with assets exceeding $5 million;

4. a director, executive officer, or general partner of the company selling the securities;

5. a business in which all the equity owners are accredited investors;

6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;

7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Footnote to this concept, provided you find people who qualify for #6 and #7, you must document this assessment and there is a period of time before you may make a solicitation. I believe it is 30 days.

Further, the interest sold to the investor may not be sold or transferred and should remain RESTRICTED FROM SALE. There was a comment above that stated otherwise and it is false. True, as the investor it is your property, but the sale provides for public distribution and the control of the promoter of an accredited investor is lost. So the promoter should restrict all other sales except those from the promoter as forbidden and restricted.

Can the promoter solicit to non-accredited investors? Yes.

This is super dangerous if your a newbie. The promoter will have duties in reporting for audited financial statements. Full disclosure or capital loss risk. And even still, if you take grandma's last couple dollars and loose it, you can still be liable.

You can enlist the assistance of a licensed investment advisory that represents this person. This will give some level of protection but it is still complicated. Additionally, provided this is a prudent professional, they will want proper disclosures and actions.

In the OP, degrees do not count for sophistication definitions.

There is much more to this, as it is not understood from the OP how you know or will get to know the 20 people. So the method by which you solicit will have implications.

You are taking on a good sized capital raise simply by the number of investors you are seeking. While this might be scaled down by smaller injections of capital, the administration here and risk is elevated by the volume.

Legally, pay for this to be done right. There is no shortcut for you. The formation of this structure will cost a decent penny including the Operating Agreement and the Investor Disclosures and all Subscription Documents. I personally would not be surprised if potential legal bills on this exceed $50k. For the right and proper setup of this, its probably double that amount.

Good Luck.

William Hall, Wow, terrible and unfortunate series of events. And may I also say, Thank You for your service and sacrifice.

As far as the attorney is concerned, you can pursue a judgement of malpractice. This can be a little costly and only certain attorneys specialize in this, as they are the ones who go after their peers, so not too many turn to this in their practice. However the State Bar might take this on for you depending on the details.

We need to get some more details on this, it would appear you might have some options; from what I gathered initially:

1. Judgement Entered
2. Judgement Set Aside
3. New Judgement & Agreement for Damages
4. Defendant was to make payments on the damages and you were given a security instrument in one of the Defendant's properties as security.
5. Some payments were made, not all payments were distributed to you.
6. The collateral was subjected to a foreclosure action
7. Your attorney lost his license
8. Presume you now get no payments and feel like you have no recourse on either party

The court ordered, after you and the defendant agreed to the terms, for the periodic payments on the judgement. By law, the defendant needs to follow the order. Failure to do so is both a criminal and civil offense. The criminal offense is not following the court order. The civil offense is your loss of the money.

Please answer these question to fill out the story:

1. The security instrument which you were granted into the property, was this a first lien? (if not, what position and in general how much equity was left in the home, if you know)

2. Was your attorney the entity who handled the preparation and filing of the DOT for you? If not, who handled this?

3. Was the Trustee for the Deed of Trust a different entity than the attorney you hired?

4. Was a copy of the security instrument after it was recorded given to you or is there a copy in the file you obtained? Or have you ever verified it was created and at least executed by the Defendant?

5. When the lien was put into place, was it recommended to you to obtain title insurance, protecting your security instrument place in line? If it was obtained, do you have a copy of the Title Policy in the file you obtained from your attorney?

6. When the Subject Property had a foreclosure action start, were you notified in any manner from or by your Trustee?

I don't want to comment to much further until we understand those concepts.

I will watch for your response.

I am not familiar with LLC structure in Minnesota. In some states, ownership of the LLC is found within the Operating Agreement, such as Delaware. The others have Articles of Incorporation which name the members. I still do not see the relevance of the contract which the LLC operates as it relates to new ownership of the real property.

I don't think you have anything to fear by supplying the OA. Nor do I do think the think the title is clouded without cure, as you can convey a SWD or the title insurance company can simply create an exception to the owners policy.

If the LLC was setup with Articles of Incorporation but it took additional time to draft and agree to the Operating Agreement, that is not all that unusual as to some extent the members entered into the LLC with some form of operating idea. If that was a verbal agreement that was then memorialized in writing later should not be an issue, IMO. In that case, the title doesn't have a cloud as the owner existed in time to own the property.

In the spirit of not fighting to get the deal done by not supplying what is asked for, I would send the Operating Agreement with an executed Corporate Resolution signed by the members of the LLC. In any case, it will likely be requested to close any way. Your attorney can create one, they are fairly simple one page agreements.

WOW! If I am reading this right, this is a big time issue.

If you mean, there is no title agent and title insurance company in the mix right now, you need to SERIOUSLY consider walking away from this before it bites you in the behind.

How do you know the proposed Seller is the actual owner of the real property?

How do you know that the title to the real property is clean and marketable and that no other party can step forward with a claim to the real property?

It is unclear what "Due" means. Is that some form of Home Owners Association Due?

It is pretty risky to purchase an investment property, that is winterized, which usually means it was an REO, site unseen. There can be all sorts of internal damage. Also, most owners do not winterize their home, banks do when they take back REO, which seems to point to this guy is about to rip you off.

"Trust me...send me the money, I will take care of everything"
"We don't need a title company, I will take it to the courthouse myself to help keep the costs low, etc"

If it sounds remotely like the above, run, the guy sounds like he is about to fraud you. That is not how a legitimate real estate transaction goes down.

Are you selling the property to the buyer or the LLC itself?

If your selling the property, who is currently on title, natural persons or the LLC?

If you are selling the property, I do not see the relevance to conduct due diligence on the Operating Agreement. It does not apply and if there is any concern of power, the closing/title agent should ask for a corporate resolution to effect the sale.

If you are selling the LLC, then the OA is relevant.

Is it possible that you are miss using the term operating agreement and you really mean the Articles of Incorporation?

Frankly, that would make more sense. If that were true, the concern would be, can the LLC, prior to its inception warrant title to the real property. Which is a good and prudent question. If that is the bottom line topic, the title insurance company will give direction on the matter to limit the liability on the matter. I would think in some fashion it may be as simple as conveying title with a special warranty deed, carving out the time the LLC didn't exist.