Filing Liens On Property To “Protect†(Hide/Mask) Equity
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
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?
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.
There's a legal way for both and an illegal way for both. Both illegal ways are unethical.
Please do enlighten us Tim....that is...if you can without revealing facts from cases in process.
I don't see how using perfectly valid 2nd liens to add security interest to private loans could be construed as unethical. How is this any different than calibrating your overall portfolio equity with non-private loans? That is a major stretch IMO.
It appears to me that there are many ways to disguise equity too...not just two. Heck...I listed three above....filing false liens, filing legitimate 2nds that would otherwise not exist, and filing HELOCs that are paid down to keep them of record. I am sure there are plenty of other scenarios too.
You're on your own Hancock. Enough people here have told you to not break the law.
You're changing the tune, now it's a valid lien, a valid loan that is secured. That's not what we were answering before.
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?
Okie dokie...please do cite the law Tim. I have asked several times.
My attorney today seemed to have no issue with filing 2nd liens. I'll know more when I have lunch with him. It is always nice to ask specific questions and pose specific scenarios and get a blanket....you're breaking the law comment.
I’ve heard the term “equity stripping†used more commonly in the context of the foreclosure rescue scams popular a few years ago. I suppose that since it involves an encumbrance, the term could be appropriate here. In the case of Bryan’s question however, it’s more commonly called a “friendly lien†or sometimes a “friendly mortgage†and it can be a legitimate asset protection strategy if done properly.
One proper example might be borrowing money from your parents, secured by a deed of trust against your home, for the purpose of buying a car, paying off a school loan, or maybe a medical bill. Here, you’re friendly with the lender, you received consideration for a legitimate loan with a legitimate purpose, and (hopefully) didn’t do it to defraud a creditor.
Alternately, you could become a secret shareholder in a Nevada Corporation that liens your property with no apparent consideration. Then, you could represent this corporation as a bona fide creditor to a federal judge in bankruptcy court.
Errr...
OK, probably not a great idea as attorney William S. Reed of Asset Protection Group, Inc. (APGI), who allegedly arranged these, was charged here: http://www.justice.gov/tax/WReed_Complaint.pdf
This is the gist of the case, cited from the complaint:
A. Fraudulent Liens
30. Under APGI’s so-called “friendly lien†program, a customer has APGI form a Nevada corporation, of which the customer is the sole, but secret owner. The customer then gives the corporation a note secured by a deed of trust, and the deed of trust is recorded in the county where the customer’s property is located, so as to encumber that property.
31. The conveyance of a “friendly lien†is simply a fraudulent conveyance of an interest in property for no consideration. The object of the fraudulent lien is to defraud creditors.
32. Such fraudulent liens enable APGI’s customers to falsely protect equity in their real estate by discouraging bona fide creditors from executing on the real estate based on the false impression that the customer has little or no equity in the property.
33. Reed generally keeps a release or subordination agreement, which Reed can then record if the customer ever needs to clear title to convey the property or use the property as collateral for a loan. APGI advised customers that it could take two to three days to release the fraudulent liens.
34. In some cases, APGI customers have used Reed’s scheme to create fraudulent liens exceeding $1 million. APGI charged customers $250 for preparing fraudulent liens. APGI charged an additional $125 for a pre-signed release of the fraudulent liens.
35. Reed falsely advised his customers that these fraudulent liens were legal.
36. APGI’s customers with “friendly liens†have falsely represented the nature of these liens to bankruptcy courts and one APGI customer is a defendant in a fraudulent conveyance lawsuit in California.
Great post Jeff...I tried to vote for it, but I am out of vote bullets temporarily!
The case you cited seems to be close to the extreme filing of false liens. I also agree that this question is similar to silent seconds and that equity stripping is generally used in conjunction with foreclosure rescue scams. I have never heard of it applying to cases like what I have described.
The question remains whether or not the "Mitch technique" or recording of legitimate 2nds from private lenders to mask equity is okay. I can't imagine how recording legitimate 2nds that would otherwise go uncollateralized would be non-kosher, but it wouldn't be the first time I was wrong about something....or the last.
What are your thoughts on the "Mitch technique" (my apologies to Mitch!)?
No problem, Bryan, but I can't really take credit for this. :wink:
I looked into this technique a little more and in order to clarify a few things, this is what I found.
The term "equity stripping" has also been used to describe a predatory loan practice that was common among some sub-prime lenders. They would basically write a loan for the entire equity in the home hoping the unqualified borrower would default and lose the home to the lender in foreclosure. Let's keep this distinction in mind.
My asset protection attorney says the type of equity stripping we're discussing here falls into basically 3 categories.
1. The HELOC or 2nd mortgage - This is the best and most legitimate way to strip equity off your property. You don't even need to draw on the HELOC, just have the amount recorded. You can give any reason you want for taking out the 2nd mortgage and any reason you want for either not drawing on the HELOC or paying back most of the 2nd right away. Just don't draw on the HELOC after getting served papers (as discussed above). :nono:
2. "Friendly" liens - Have a good trusted friend or family member place a lien on your property. You can even "trade" liens by doing the same for their property. But unless there is truly a valid loan being paid to your "friend", this technique is likely to fail in court.
3. Use your own entity to place a lien - This is the least desirable of the 3 because the loan could easily be proved a sham under discovery.
But, as I've said above, these are all "preventative" measures to make your assets very uninteresting to a money-grubbing plaintiff/attorney. Avoiding a lawsuit is much better than fighting one. And if you do get dragged into a legal battle, none of these techniques are going to help. Hence the need for insurance, limited liability entities, and good ol' common sense.
Honestly I've never heard the "equity stripping" term used in the context that it has been used in this thread, although investopedia defines this term exactly as used here. I agree with Mitch's last paragraph.
The bottom line in my book: establishing a lien through a legitimate loan (secured via D-T and recorded) with a legitimate collateral (up to the 'true' value of the asset) using legitimate methods (closed by attorney using real money, HUD-1 prepared, etc.) and not violating public policy (or state/federal laws) is not only perfectly legal, it is a simple an effective method for encumbering a property. The effect of encumbering the property will be that the property is unattractive to creditors and S-2 junk mailers. The second part is what if the lien is paid off? In other words, the lien is established, the borrowed money is returned (perhaps you implement via a transactional lender paid for use of the money), yet the lien remains in public record. The answer is check your state law. In NC if the lien is paid in full, a lien release must be recorded (except note the exception in (d);)
http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/BySection/Chapter_45/GS_45-36.3.html
Great discussion guys! I agree with most of Mitch's and Chris's post too. Filing FALSE liens is obviously wrong, but protecting one's equity through defensive techniques where the liens are legitimate seems okay.
Do others think that this is unethical for some reason? Why?
I have some credit cards with reasonably high credit line balances. I hope it's not unethical to pay the balance off each month.
No problem, Bryan, but I can't really take credit for this. :wink:
I looked into this technique a little more and in order to clarify a few things, this is what I found.
The term "equity stripping" has also been used to describe a predatory loan practice that was common among some sub-prime lenders. They would basically write a loan for the entire equity in the home hoping the unqualified borrower would default and lose the home to the lender in foreclosure. Let's keep this distinction in mind.
My asset protection attorney says the type of equity stripping we're discussing here falls into basically 3 categories.
1. The HELOC or 2nd mortgage - This is the best and most legitimate way to strip equity off your property. You don't even need to draw on the HELOC, just have the amount recorded. You can give any reason you want for taking out the 2nd mortgage and any reason you want for either not drawing on the HELOC or paying back most of the 2nd right away. Just don't draw on the HELOC after getting served papers (as discussed above). :nono:
2. "Friendly" liens - Have a good trusted friend or family member place a lien on your property. You can even "trade" liens by doing the same for their property. But unless there is truly a valid loan being paid to your "friend", this technique is likely to fail in court.
3. Use your own entity to place a lien - This is the least desirable of the 3 because the loan could easily be proved a sham under discovery.
But, as I've said above, these are all "preventative" measures to make your assets very uninteresting to a money-grubbing plaintiff/attorney. Avoiding a lawsuit is much better than fighting one. And if you do get dragged into a legal battle, none of these techniques are going to help. Hence the need for insurance, limited liability entities, and good ol' common sense.
You're going to need to draw on that HELOC after being served to defend the lawsuit. If you can't defend you will lose for sure...guaranteed success for the plaintiff.
I think it is clear that doing something ex post is unethical, unlawful (conspiracy to defraud creditors or some such), pisses judges off, etc.
The question is about the validity of doing it PRIOR to being served as a defensive mechanism/technique. The HELOC example is the murkiest issue to me. Legitimate liens for private loans has to be okay...how could it not be?
I think Mitch (bullet 1) is saying you can draw up or down on a heloc prior to being served, and I would agree. The issue is more what happens after being served. I'm suggesting you can draw up after being served if the money is used for a legitimate purpose, like defending the lawsuit that started the whole fiasco...how can you not be able to do this.
The reason you want a heloc 2nd vs a straight 2nd is so you can legally create a lien without actually transferring money. If I wanted Mithch's friendly lien bullet 2 to succeed in court I would make the lien a heloc, either 1st or 2nd, that way it's legal and nobody actually had to front any money.
Nobody's talked about a friendly option as a alternative. This might even be a better solution.
A friendly lien HELOC? Is that what you are referring to David? Or would it be a "legitimate" (traditional lender) HELOC that goes unused?
When I discussed this with my attorney yesterday he mentioned friendly liens briefly and said that there would be real problems if the "friendly" lien holder got run over by a bus! I guess this wouldn't be an issue with a HELOC that clouds title without money owed. Does anyone know what title looks like in these cases? Does the max line amount show up and nothing else?
Is there any distinction between using a private HELOC to cloud title to fend off suits versus a HELOC from a legitimate lender? My guess would be the only difference would be how it looks to potential lawyers that would want to sue you.
Yes, friendly lien heloc, i guess i switched the heloc source from bank (what the thread assumed) to private, but i don't see a private friendly heloc any less legitimate than a bank heloc other than what you pointed out about it looking a little fishy. A bank heloc (first choice) would look better than a private heloc no doubt, but harder to qualify and not in the amount to really cover the equity, thus limited protection. Is a private loan any less legal than a bank loan? I think not.
You get a reconveyence at the time the lien is created, but don’t record, so if/when private heloc lender is run over by a bus, no problem.
This is a good thread, hope it keeps going. I haven’t tried any of this stuff, just thought and read about it.
I wouldn't think so. At the risk of dispensing legal advice, if the 2nd mortgage looks, walks, and quacks like a valid lien, then it shouldn't matter if the lender is an institution or your first cousin.
So the question then becomes whether or not a "friendly HELOC" where there is every opportunity to borrow the money and it isn't a sham transaction is:
1. Legal
2. Ethical
3. Preferred to a conventional lender for credibility of protecting the equity
Opinions?
How timely:
Clint Coon's New Article on Friendly LOCs
I would like to hope that this article was to discuss some of the items in this thread, but who knows.
It appears some with actual legal degrees agree that protecting your equity is not fraudulent despite what has been claimed in this thread.
Not sure...the case referenced earlier in this thread seemed to have some similarities too. I haven't studied them or tried to figure out what was different legally.
Do you guys agree that Clint's article seems to propose much of what was discussed earlier in the thread? What are your thoughts on "friendly HELOCs?"
Clint Coons is at it again:
I am assuming his blog was in response to this thread. If we goad him enough perhaps we can get him to respond to some of the commentary on this thread :-)
I personally know a real estate investor who was an attorney and he is still in PRISON!
It is regretable that in our society that some might use their preceived expertise, by the virtue of a law degree or license, to profit by suggesting to the public that breaking the law may not have consequences.
The blog by Mr. Coon concerning this topic is a good example of why I have such disdain for real estate gurus.
While an attorney may be able to draft a strategy that would justify a legitimate lien to achieve the goal suggested in this thread, they generally will not be able to control future events that could put the user of such tactics at a much higher risk. Using such tactics and then having unforseen tax problems, for example, places someone in a completely different situation as mentioned in the subject blog. Since you have no idea what issues may arise, having a false lien recorded at that time can present problems for any real estate investor.
As to comments in this thread, it could be beneficial to someone to rob a liquor store taking cash, but doing so is aganist the law. If your justification for your ethical conduct is based upon the benefit you gain from breaking or skirting the law that is a good thing to know, as I for one will make sure I avoid business dealings with such a person. Where would such a person draw the line in their dealings if that line moves according to their benefit?
I'm not going to argue the moral and ethical ramifications of this topic for the sake of running up the post count in the forums.
Filing a false lien is illegal in every state, regardless of your justification, period! Get a HELOC, pull the money out and pay the interest if you think that is less expensive than insurance. :roll:
Filing a "false lien" is pretty broad Bill. There are tons of different ways to do this and I know that many of the top BP posters have talked about doing this at one time or another throughout posts.
If you have citations to cite please do so. Continuing to say something is "illegal" without addressing the specifics does not make it correct.