Filing Liens On Property To “Protect” (Hide/Mask) Equity

[Bryan Hancock]

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?

[Mitch Kronowit]

Originally posted by Bryan Hancock:

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.