All Forum Posts by: Don Konipol

Quote from @Zach Howard:

Sorry, I accidentally posted the previous post before adding my question! 

Do you mind sharing some specific examples of what sorts of exchanges some people might do that decreases their net worth to accomplish some other goal? 

“Third example - I’m always willing to entertain a trade of properties, not for 1031 exchange benefits (which I believe is overhyped and over rated), but as a method for adding to my net worth - IF the exchange puts me in a higher wealth position. Surprisingly, people will do exchanges that DECREASE their own net worth IF the trade enables them to accomplish a more important goal. ”

sure - recent example.  An investor I met “online” told me he wanted “out” of a piece of land he owned because he was tired of trying to get building approval, paying property taxes, dealing with city “clean up: citations, etc.  I created a second position note on a property I owned and exchanged the note for the property with the property being exchanged at 75% of liquidation value.  So, the property was valued at $450,000, and we used $337,500 as the exchange value.  The second lien note I created and traded was a 0 Interest 0 payments for 36 months.  Once I had ownership of the property, I traded it for a share of a development being done adjacent and receiving besides a share of the development a first lien on the property I traded.  The development has been approved, and I have been offered $850k for my share, which I may accept.  If I accept I will attempt to by back the second lien note for a significant cash discount. 

Quote from @Daniel M.:

I suppose my question goes deeper than just whether the interest rate is obtainable. With New Silver—and fintech companies like it—not being FDIC insured, how do I determine whether they're legitimate, long-term partners and not just fly-by-night operations? Or even whether they're real partners at all? It's not like I can visit a brick-and-mortar branch locations to get a better sense of who they are.

FDIC insurance refers to deposits in a Federally chartered bank.  Most loans these days are made by non bank lenders.   

First, you need to determine whether the “lender” is actually a mortgage broker, or a direct lender.  Many brokers use various methods to disguise themselves as lenders when in actuality 98% of the time they’re brokers.  

You evaluate a lender/broker as you would due diligence on anything else.  Reputation, referrals, customer reviews, length of time in business, complaints, references, etc. 

Quote from @Ryan Marble:

I've been looking into a company called "Go credit pros". They advertise on social media regarding helping you secure business funding for any kind of business start up or existing. Sounds like it's mainly through zero percent interest business credit cards. 

My thoughts were to use this type of funding for a down payment on a 3rd rental property or STR. My wife and I already have an existing STR in Orlando. We took out a 2nd on our primary property to help us with the down payment. I should at least break even on this property, but we wanted it for personal use anyway and figured we could use it to learn on. We Would like to find a 3rd property, that will definitely cash flow. But as I research, I am realizing that even if I find a great deal, I don't have the funds to buy it at the moment anyway.

Any advice or info on this company "go credit pros", or using this type of funding in general for a purchase or down payment on a purchase would be very helpful. I really want to be more involved in real estate as a profession somehow.

Thanks in advance,

-Ryan

Hi Ryan, you’re right to ask these questions.  So let’s start with basics.

When borrowing money to buy real estate (or any income producing asset), the ROI should exceed the interest paid on the loan by an amount exceeding the RISK.  So, if you’re borrowing at a fixed 12%, and the ROI is 14%, and you require a risk premium of 5%, you have a losing investment over a statistically verifiable number of investments. I’ve seen investors in this scenario pay 12% to purchase a property with an ROI of 8; unless SOMETHING happens they’ve got a GUARANTEED loss.

So, why would a rational investor do it?  It can make sense if (1) they anticipate being able to pay off the debt from another source in the near future or (2) they anticipate being able to refinance the debt at a low interest rate within a reasonable time frame (3) or they anticipate price/value appreciation that drives ROI significantly higher or (4) they anticipate increasing rental income significantly. 

BUT, even if the above are true, the investor needs STAYING POWER.  Other posters in this thread have outlined the possible consequences should the borrower be unable to refi when the interest rates on “teaser” loans go from 0 to 24%.  

I recommend that you read the Creative Real Estate Financing series 1 - 3 by Chuck Sutherland.  If you are an Amazon Prime member the books are available for free in Kindle.While a little dated, many if not most of the techniques and strategies are still valid today. 

Quote from @James McGovern:

Political viewpoints are not a protected class in Connecticut and anecdotal observations suggest that tenants who lean left make up the overwhelming majority of those who are evicted. It is rare to find an evicted republican or libertarian. Does it make sense to screen tenants based on their political philosophy?

I’m more concerned with the laws regarding real estate and judicial action as it relates.  I don’t want the hassle of dealing with laws that punish me for providing housing and reward tenants as if they’re the ones making an investment in the property.  When I lend money there are states I avoid because it can take 10 years to foreclose.  In a nutshell I want to avoid jurisdictions that have little or no respect for private property. 

In theory your thesis sounds like to might have some validity, BUT, in my 45 + years in real estate I have found little or no correlation that I can see.  Of course, most people (at least until recently) weren’t very vocal about where they stood politically.  If I had a tenant applicant who during the tenant interview shouted “down with capitalism” and volunteered that he was working to confiscate private property I wouldn’t rent to him. 

Quote from @Stuart Udis:

@Don Konipol You raise good points but want to focus on your comment about selecting an approach "begins with analyzing exactly what assets the subject is trying to protect and what type of liability are thy trying to protect against". Unfortunately that's not part of the process and instead most get caught up spending money based on fear mongering scare tactics.

 Rarely can those who sign up for what I deem the "overkill" systems able to articulate what they are trying to protect and how the asset protection system will actually protect them and those selling the services don't care to provide those explanations because very few will follow through with the services. Fortunatley for the service providers very few stop to ask.  

Can’t argue with that - there’s a LOT of BS being sold - either unneeded, unworkable, or just plain garbage.  About 20 -25 years ago a law firm was going around giving seminars on “asset protection” and their “product” was a foreign asset protection trust set up in Nevis and administered by a Lichtenstein Anstalt to hold ownership of a “family limited partnership” which itself would hold two other LLCs established in Wyoming with one holding the hard assets of a business and the other the intellectual property.  One of the first guys who tried this was successfully sued for a fraudulent transfer when trying to put assets beyond the reach of his soon to be ex wife.  The judge told him to bring his assets back to the US where the court could distribute the share the court determined to go to his wife to her.  He smiled and informed the court that he wished he could - but since he was only the trust “protector” and the trustee wouldn’t distribute assets when he determined the request has been made “under duress”, there just wasn’t a darn thing he could do.  The judge cited him for contempt, and placed him in jail until he brought home the assets.  This nut spent the next 2 and 1/2 years in jail before reaching an agreement with his ex and bringing assets home.  

Quote from @Jay Hinrichs:

Quote from @Chris Seveney:

Quote from @Bruce Lynn:

Quote from @Chris Seveney:

Quote from @Russell Brazil:

Depends on the price. Ill gladly pay $1 for.

No to a $150K condo for $75K. It probably needs total rehab at this point, so you're going to have all the HOA dues and taxes and rehab costs. I wonder if they've been paying the HOA dues? That just sounds like a headache to me. If it is $150K condo, I'll guess the building also has a ton of deferred maintenance too. That's one for the guys who can get in there after work and weekends and rehab themselves for just material costs and no labor costs.

It it in hawaii..... Which I believe is a super lien state where some of the HOA takes priority....

We have seen this in Maine (bought one and got it worked out and sold it) and have had others as well that after looking back on - not worth the fight.

if its hawaii I wonder if its a leasehold estate. 

80% chance, especially at that price point 

Quote from @Stuart Udis:

Before you are lured into spending thousands on anonymity through Wyoming LLC's, Management LLC's or whatever the flavor of the week happens to be believing that will protect you from lawsuits ask yourself why individuals with real assets don't use the same strategies?

Here’s the difference…. you can walk around this mix-use complex without spotting premises liability traps, I’m confident everyone who performs services is licensed and insured and the building ownership is listed as additional insured with sound contract management.  That’s how you prevent liability,  not hiding in the cloaks of secrecy.

I think your criticism is aimed at those who advocate a “one size fits all” approach to asset protection.  A GOOD asset protection program begins with analyzing exactly what assets the subject is trying to g to “protect”, and what type of liability are they trying to protect against.  Then we need to ask out of what activity would such liability arise. 

Placing individual assets in their own LLC will often limit liability concerning a single asset from attaching to other assets. The downside had always been the complications, costs, and hassle. With the now court tested SERIES LLC, much of the downside has been negated. At relatively little cost an investor with say 5 rental properties can place each property in a separate series of the same LLC and at the cost of organizing/maintaining a single LLC can provide SPV asset protection for each of the five. If the LLC is a single member then it's a pass thru entity and the tax filing is the same as if each property is owned individually. If it's a multi member then the tax filing is a SINGLE LLC. So where's the downside?

A more complete “asset protection” program requires having assets to protect.  If your only asset is a house mortgaged to 90% of its value, asset protection will have no current value to you.  Further some of the best asset protections require years to accomplish.  I’ll offer my own as an example. Years ago I engaged an asset protection attorney to both educate myself and help to develop an asset protection strategy.  We decided that the optimum strategy for myself was to shift my assets from personal ownership into a self directed qualified retirement plan, then transfer to a self directed 401k.  Residing in Texas I was in a state that fully exempts 401k and IRAs from creditor attachment and or BK filing.  Being 50 years old at the time I was able to place up to $400k annually of income in a defined benefit retirement plan.  6 years later I transferred the proceeds into a self directed 401k, and over the next 4years turned to 401k into a Roth.  Any judgement, lawsuit etc, arising against me personally will not attach to the 401k.  Further, each investment in the 401k is held in a separate series of a series LLC of which the 401k is the sole member.  So any liability arising from a single asset would not reach any other asset, the 401k, or myself. 

So, back to the main question.  If the investor has little to protect, should they still have a property in an LLC?  Well, if they do accumulate other assets, it could be importantly.  In my mind just “having” liability insurance is not enough.  What if your insurance coverage tops at $1 million, and you’re sued for $3 million?  The cost of creating an LLC or series LLC in Texas is $350.  As mentioned if a single member LLC it’s a pass through entity so no additional cost for tax, accounting, etc.  what’s the downside? 

Quote from @Chris Seveney:

We recently came across a non-performing note that really made us pause.

It’s secured by a property in a lengthy foreclosure state (you know the ones), and the borrower hasn’t made a payment in 15 years. That’s not a typo—fifteen.

In years past, we might have jumped at this kind of asset. The payoff potential is obviously huge if you can bring it to resolution. But lately, we’ve become a lot more discerning (maybe “battle-hardened” is a better word?) when it comes to reviewing these types of loans.

Because here’s the thing:

After 15 years of non-payment, this borrower is either:

At the end of the road and out of maneuvers...

or

seasoned expert in dragging things out, filing appeals, loss mitigation requests, BK filings—you name it.

So here’s the question:
Would YOU buy this note? Why or why not? What would be your main considerations?

The legal costs are around the same whether it’s a $200,000 property or a $2,000,000 property.  If legal fees are $50k that’s 25% of property value of the lower priced property, yet only 2.5% of value for the higher priced property.  Conversely if the profit potential is say 30%, that’s $60k vs $600K.  Which is why we deal with properties that have a liquidation value of $1 million plus EXCEPT in some unusual profit situations.  

The property owner who is able to game the law in those states where laws are ridiculously “socialistic” are similar to NYC and Berkeley (and now SF) where people paying almost nothing for apt rent covered under old rent control or now rent stabilization can’t be removed until they die.  The buyer needs to analyze life expectancy, health, etc.  

Quote from @Tim Kirkland:

So i built a DADU and have gone through the process of Condo-izing the property to sell each house separately.  Next i was going to reconvey or recast the note to split the debt between both houses.  This was in case one house sold and the other sat for a while on the market.  Or i might hang on to one rental.  But my lender has refused to recast the note.   

If I sell, am i forced to sell both at the same time, due to the note being called due?  Do i have to pay for a refinance just to split the note, to sell individually?  The note is tied to house A.

Numbers:

House A: $400k

House B: $525k

Debt: $450K

Let me know what you think.

If the lender won’t accept a partial payoff to release collateral (one house) then you’ll have to payoff the entire balance at the time of sale.  you can simultaneously refinance the property you’re holding on to.  

Quote from @Scott Johnson:

@Don Konipol Ooooooooooo! That's a VERY good question. Its my opinion that until the courts have decided and the Real Estste Commissions have made rules around it, I don't necessarily believe the broker would be punished because how would they have known? I don't believe the questions of title are taught at length in our real estate licensure courses, so I don't feel like they'd be punished outright. A slap on the wrist, possibly.

Well, the broker would have known by asking.  Proof, as such would be construction contract, payment receipts, cancelled checks, etc.  If the answer is the investor has done nothing or almost nothing of benefit for the seller, than the broker would need to decide (1) if fraud had been committed (I’m NOT saying it was, I’m just reiterating what seems to be the direction of state laws and regulations in many jurisdictions) and (2) would the broker be considered a “willful” participant in the fraud?  If the property owner ends up finding an attorney who will sue (on a contingency basis), you can be 100% certain the broker will be named as a defendant in the lawsuit. Again, I’m not rendering an opinion as to the broker’s liability, just describing the nature of our judicial system.  

And, all situations are NOT the same; for example, a situation where an individual seeking to engage a broker to represent them in the sale of a property produces a power of attorney signed by the property owner differs considerably from the same individual producing a contract for purchase as the basis of their "ownership" stake. In many states the person with a contract to purchase does NOT have the right to market the property per se; only the right to market the CONTRACT. So does listing the PROPERTY run afoul of real estate commission regulations, state laws, or MLS listing criteria in these situations?

While it all may work for a while (until the broker is sued or named as co defendant) it would seem like a good idea for the broker to discuss this with a very experienced real estate attorney to learn the risks involved and to seek ways to mitigate those risks.