All Forum Posts by: Chris A.

Gerald, 

Im not 100% clear on your personal business and real estate business structure so take my advice with a grain of salt. You would want to consider using an S-Corp if: 1) you're disqualified from being considered a real estate professional because you have another job and 2) you have sufficient real estate income that is not passive in nature. A CPA can explain to you when the hassle of an S-Corp might start to make sense, but my take is: if you are making enough money from non passive activities that you can pay yourself a reasonable salary and still have money left over to distribute, do it. You'll save on self employment tax on the surplus distribution. 

Hi Yahav, 

This is a fairly nuanced jurisdictional question so I recommend you consult an attorney. It depends what kind of liability you are trying to protect against. If your property in Arizona is vested in an entity, it doesn't matter where the entity is filed, you will be subject to Arizona law for cases arising out of that property. Concerning bottom up liability, keep in mind that you will have to domesticate a Wyoming entity to do business AZ. This means a creditor could seek charging order under AZ law. 

I don't have much experience with CA LPs. Sorry. 

Haven't been on BP in a while, but thought this would be a good way to refocus. Would anyone be wiling to share resources, templates, examples that could be used to help develop a business process manual?

I'd like to create a kind of internal operating procedure manual for property managers, book keepers, deal analysis, and....myself haha. I see this as more specific than a business plan and something that I could share with partners and employees to help keep us all focused on the important tasks. Any ideas? 

@Jeremy Jones, These guys all summed it up pretty well. Seems like a great opportunity and a nice way to provide value to everyone involved in the transaction. 

I prefer just going to the title company, but Im biased ;)  

@Jay Hinrichs, You're right, and I will definitely tone down my posts in the future. You have great experience we can learn from, and I can see where you are coming from. I've never done a deal with a seller who would be at risk, and gambling with someone else's livelihood is just not something I am comfortable with.  

The only think I can do to justify my bankruptcy statement is to give you a real example: An old woman passed away. She had a reverses mortgage and other liens that far exceeded the value of the property (it was in disrepair). We bought the property from the heirs subject to the mortgages. They just wanted out because there was no equity and the lender was starting a foreclosure. So we started our renovation under the gun of a pending foreclosure (the house had some structural problems, she was a hoarder, and the prop been updated since the 70s). We got part way though, but there was some permitting problems that took longer thank we thought, and right before the foreclosure had to throw the property in bankruptcy. We drug our feet to buy us time to get the permits sorted, and when we finally showed our plan to the court, they approved it because it was a win, win, win: The heirs got something when they weren't going to get anything, the bank got way more than they would have got in a foreclosure because we improved the property, and we made a nice pay day. No ones credit was hurt and we didn't have to feel like we were screwing anyone over....So I guess its just a matter of perspective. 

But again, you are right about needing to show the dangers, and I will be more careful about what I post in the future.

@Jay Hinrichs, also just wanted to note that you picked out the one scenario I mentioned that could hurt a seller, but I also gave examples of three or four others that wouldn't. Your statements kind of seem like an unfair characterization of my post and I would appreciate an apology. 

@Jay Hinrichs

Jay, Im sorry that my post upset you. You are right, that it is powerful information and in the wrong hands could do a lot of damage to the average consumer. Most of my transactions are business to business, and I guess I assume a higher level of sophistication when I write my responses (I know Jeremy is reasonably experienced), and sometimes assume, incorrectly, that the seller knows they need to take the potential risks into account when determining their sales price. 

I could have worded the post better. My intention was not to express my personal views or attitude, but to illustrate two different extremes: one when the investor is worried about due on sale and one when they aren't. I guess I made the point to strongly, but there are times when both the buyer and seller really aren't worried about the loan, such as in a business to business transaction or when the seller is already in a bankruptcy or foreclosure or the property is in distressed condition. In those cases the hammer is already falling and the seller would be happy to get anything they can from a buyer who is willing to take the property subject to. They understand the risks upfront. 

So in summary: My statements were a poor shot at showing the two opposite extreme possibilities in a situation, and weren't meant to suggest that people approach sellers with the intention of not making good on their obligation. I do my best to do right by people and realize how that statement could have been interpreted differently. 

@Jeremy Jones, Seems like you got it man! 

The county does not check what they documents are or who executed them. There have been cases of hate groups or angry persons forging peoples signatures to record documents to encumber property. Obviously the stuff doesn't stand up, but you still have to go to court and have them issue a judgment to clear your title to the property which can be expensive. 

When two parties exchange a property and record a deed with the county, the county is 'posting' it to the public record. You are not notifying the county so much as giving everyone in the wide world who might care to look, notice of what you did. All you have to do to transfer something is make it generally known. Property laws require you do that by giving public notice at the recorder. 

There are three ways that I know of why a lender would get notice of a transfer: 1) They review the property records regularly and see that a deed was posted (I think we already understand that this is unlikely since it would be an expensive, time consuming hassle).  2) There notice a different name on the payment check.  3) Insurance beneficiaries change. Lenders required they be name additional insured on an owners insurance policy, If you get insurance put in your name as the buyer, the corresponding change will also be sent to the lender. 

Jeremy, Courts want to encourage efficiency in the market by allowing freedom of contract and efficient breach. The Supreme court was clear that its not fraud to violate a due on sale and other lesser courts have said you cant be sued for intentionally trying to conceal a sale because you have no duty to notify them. 

To get at @Jon Quigley's question, I usually break down the risk a few ways: 

1. Is there a due on sale clause? Read the loan documents and see if it even exists. If it doesn't, no problem carry on. 

2. There is a due on sale clause, but I don't care. Why wouldn't I care?

a. The loan was with a huge bank, or service by MERS and sold to a collateralized pool. No one knows where the note is, or who holds it, so none of the 3 ways a lender could recognize the transfer are triggered. The people who would understand who really needs to be paying are so far removed from the people processing the payment, that as long as payment keeps coming in no alarms are raised and no one is the wiser.

b. It doesn't matter to me if they find out because by the time they figure out what happened, send notice of their intent to foreclose, and waited the legally required time before they can foreclose, I've renovated the property or turned around the cash flows and have new financing ready to go, or a buyer lined up. Worst case scenario I can throw the property into bankruptcy the day before the foreclosure, drag my feet filing schedules, and buy myself another month or two to get the property stabilized. 

3.  There is a due on sale clause, and Im worried that the bank is going to call the loan. 

Seller sets up a trust where he is the trustee and beneficiary under the trust. He transfers the property to the trust. This isnt a volition of due on sale because its technically still him as the owner, just though his trust. Now you and the seller do your deal, he quietly transfers beneficial interest in the trust to you as the new owner (this is not a recorded event and the only record of it is the docs between you). Seller stays on as the trustee so that payment and insurance still have his name on them. He gives you all the checkbooks and stuff so there is really no work for him, and any extra work he feels like he would have to do means an increase in purchase price for him. Loan gets paid as normal and no one is the wiser. 

The second option is to do some sort of wrap loan where you pay to account servicing, they take whatever portion of the money they need to and then pay it on behalf of the seller to the old first loan. This makes it look like the payment is coming from the same place, but does not overcome the record change and insurance issues. 

Im painting with really broad strokes here, but you get the idea. Obviously, if you are going to pull a move with this level of sophistication you need to get a good real estate and tax attorney to make sure everything is kosher for your particular state laws. 

In my experience lenders hardly ever notice and wont push the issue until interest rates start going up...people will sell subject to so that the buyer can stay with a low fixed rate when the rate environment is higher. Banks obviously need to move their loans with the interest rates so now they have an incentive to push for DOS.

Hope that helps. 

Wow! I am grateful for all the wonderful and detailed responses. 

To address some of your questions: the plan would be to come in with a substantial down payment. I've worked in the private lending and flip worlds for years and got a lead on some good interim financing from a private pension plan. Its high rate, interest only, two or three year term, but the property would still generate a generous return compared to my smaller properties. During that next two years we would work to turn the management around. I have some smaller rentals under owner carry back, and would look to refinance all the properties under maybe some sort of umbrella or commercial loan (still talking to lenders, but would be curious to hear your experiences). 

I have an experienced property manager who manages my other properties and believe we could be effective with this property. As @Jeremy Jones and @Colleen F. mentioned, the goal would be to provide an exceptional product, increase the cash flows, and therefore our value. 

@David H., you mentioned cable and internet royalties. This is a new concept to me and would love to hear more....

@Chris Simmons -

Thanks for your reply.

The complex is made up of 3 buildings in a 'U' Shape with parking in the middle. Units are individually metered except for water and sewer which would be paid by landlord. There is a laundry facility. Will need to investigate this arrangement further.

No snow removal, thank 'insert deity here'.

Great tip on the distinction of landlord tenant for larger units. Will investigate that.