All Forum Posts by: David Gotsill

This isn't legal advice, but think carefully here.

@Jason Polykoff (You/seller need to consult with an attorney in that jurisdiction, but) Seller has limited options, and you as buyer SHOULD NOT proceed without clear chain of title.  There is likely some cause of action in the jurisdiction similar to a "quiet title" claim, where the son sues the mother (in court) and the judge rules that mother no longer has a claim to title due to the sales documents that seller claims to have.  Do you want to get involved in that family drama?  This is 100% seller's bad for not getting the deed settled.

While the quitclaim suggested by @Daniel Delarosa can be very effective in some situations, it is way too risky here, where it's clear that the mother still intends to challenge.  If the suggestion was that you allow seller to transfer to you via quitclaim, here's one way that could play out to your extreme disadvantage:  Seller transfers to you via quitclaim.  A quitclaim basically says (and I'm paraphrasing to make a point) "Hey buyer, I as seller don't know what I own, and I don't promise I own it all, but what I do own I transfer to you".  So you take title under a quitclaim.  You think you own, but mom is still on a prior deed, so she still owns.  Perhaps you own whatever portion that the seller used to own (if both son and mom were on prior deed), or perhaps you own nothing and mom owns it all (if she is the only one on prior deed)?  You have to fight it out in court.  Too risky in this case.

If you're thinking of getting a loan, no way a bank will finance you in this case, since they're going to check chain of title.  In this way, the bank is on your side to make sure you get what you think you're getting.

@Thomas Combs - I believe that you'd separately mentioned that you were partnering up with some buddies, so I believe you will want an LLC (although you could do it as a general partnership w/o the LLC - not advisable).

For your specific question about limiting liability, there are 2 main things you need to think about. First, your LLC Agreement/Operating Agreement should include a provision that the members are only liable (to the LLC) for the amount of contributions, and are not required to make any further contributions. The effect is that in the normal course your liability is limited to the amount of capital you've contributed.

Second, in order to maintain the separateness of the LLC (separate from the identity of the members), the LLC must follow certain rules referred to as corporate formalities. The biggest one is not co-mingling funds. This means that the LLC should have its own account, and that no member should use the LLC account for personal use. There are other important corporate formalities, such has use of the name and holding yourself out, but I think not co-mingling is most important. These corporate formalities are sometimes listed in an LLC Agreement, and almost always a requirement of any lender who is lending to the LLC.

Liability can be further complicated if the lender requires one or more member to provide a full guarantee or a bad-boy guarantee.  This will be case-by-case.  

You also asked about 1 prop vs. 10 props. A good general way to think about this is that the assets of the LLC may be used to cover debts of the LLC. If the LLC has one property, then when the LLC has a debt (think victor in a lawsuit), only that property is available to cover the debt. If the property is not enough, then generally the victor plaintiff is SOL. If the LLC has 10 properties, then when the LLC has a debt arising from property 1, the victor plaintiff can collect against all properties. This sounds scary and all, but in practice this is usually managed with insurance.

Another consideration is that lenders don't like sharing. So, if the LLC is going to borrow against the property, the lender may require a property-specific LLC. The reasoning is similar to the plaintiff idea. BoA doesn't want to lend to you on property 2, when WellsFargo has a mortgage on property 1, because if Wells forecloses on prop 1 it could make life difficult for BoA.

These are all interesting things to think about, but I would second the advice from @Ilan M Aliphas - don't get caught up in this just yet.  Effort is better spent on the deal.

- Dave

Thanks for the additional information @Thomas Combs.  Seems like you guys are willing to put in the effort to make it work, which, in my opinion, is key.  

I guess I'd also consider how much (in actual money) the One is putting in, and whether or not that's really worth it for you guys to allow him to cause an (orderly) sale at any time.  We could look at it as choosing between paying his portion now (i.e., he doesn't own a portion), or buying him out in the future (in the event he wants to sell and you exercise your ROFO).  Hard to do this comparison without a particular property in mind, but you might play with those numbers.  If you're acquiring at 300k, and his portion is 1/3 of the 25% down payment, then he's in at 25k.  If you buy something that needs sweat equity or other work, and you're in a good sub-market in Denver, you could reasonably be at at 400 in 1 year (just for the purpose of this comparison).  if you have to buy him out after 1 year, the loan is essentially at full amount, so you owe him 1/3 of 400k (fmv) - 225k (loan balance) = apprx 58k.  In that 1 year your purchase price for his portion just more than doubled.  Obviously there are a ton of assumptions in here and it's oversimplified, but I guess the idea that he'd want out so soon really nags on me.  Spider sense tingles danger.

Hey @Thomas Combs - welcome to BP.

I'm a big fan of partnerships/joint ventures in real estate, and am involved in a few myself.  I'd like to clarify a couple of aspects of your plan, and share a few thoughts for your consideration.  Some of it's pretty technical, so feel free to ask follow up questions.  Also, I sound like a wet blanket.  Ask my other real estate partners, I'm good at that...

Why? Why are you partnering? Just in general, I would typically expect to see partnerships when going after bigger fish, rather than one SFH. Can one guy just buy it and let the others lease?

Financing.  Are you intending to obtain financing?  In my experience, the lender will have to rely on your personal accounts (of one or more of you), and that person or persons will be signing on the loan.  Probably not feasible (or worth it for any of you) for you each to be on the loan.  If, ultimately, one of you is on the loan, then is that partner entitled to an "extra" piece to compensate him for the extra risk?  If you're not using financing and instead are coming out of pocket for the full purchase price...THEN I'd strongly encourage you to reconsider and instead strategically use a loan to get other property.

Exit.  

(1) You've picked up on one of the key issues for any partnership. As to the Two to buy out the One, that's easy enough in principle. You have a ROFO/ROFR provision of your governing agreement (we're referring here to "partners", but I presume that you would actually be forming an LLC, and therefore would all technically be "members", and in such case your governing agreement would be the LLC Agreement/Operating Agreement (same thing, different name used by different folks)). With a ROFO - Mr. One would have to offer his interest for sale to the Mssrs. Two and Three prior to being able to sell to a third party. The fun starts when you try to value the purchase price for Mr. One's portion. Could be agreed in advance, could be FMV, could be something else. You'll also want to set out the process, including how long Mssrs. Two and Three have to exercise after receiving notice, what happens if both Two and Three want to exercise, and what happens if Two and Three don't exercise. Meaning, can One sell to anyone? Or are there limitations, such as a buyer reasonably approved by Two and Three. In a partnership of this size, I would personally never permit unrestricted transfer. There is too much risk. IMHO, a lot of work for one SFH.

(2) As to allowing Mr. One to sell whenever he wants (subject to the ROFO above), you'll have to confirm it's permitted under any loan that he is signing under.  Lender would typically restrict any transfers that alter "control".  So if One is deemed to control the borrower, he might not be able to sell without Lender approval.  Also, I would be sure to build in certain protections - such as a sale "in the ordinary course" or "in a customary, orderly manner" or some such.  You want to avoid allowing him to cause a fire sale, particularly if he has less to lose than the other partners.  Again, in general, I would never allow "sale at any time" without some protection.

Eventually, you want to consider what each partner is contributing, and how much it's worth of the whole.  You'll also want to decide how decision making works.  2/3 votes for any action?  Certain action requires unanimous consent?  Set out the business plan in detail in the beginning, and any variation requires unanimous consent?  

Again, this is not meant to discourage you.  Just get you thinking.  

Good luck!

David

@James Frazee - Hey James.  If I understand your ask correctly, you're wondering about your ability to borrow from Japanese lenders against properties in Japan?  And you're starting out, but want to build a portfolio that would allow you to obtain PR in 1 year?  Is that right?

I do have some thoughts, and there are also a handful of other Japan-based investors on BP who may want to add their thoughts as well.  FWIW, I have borrowed in Japan for personal and investment purposes.

If you're trying to get PR, then I am guessing you're in Japan on some other status? I am not aware of any specific threshold for real estate holdings that would, in and of itself, qualify you for PR.  Is there such a rule?  If so, what is the threshold?  For example, do you prove you own/control sufficient real estate based on the market value of the properties?  Or do you have to show sufficient positive annual cash flow (such as to support your lifestyle and show you won't be a burden on society)?  I'll admit that I don't follow the regs that carefully, but I would be cautious about placing all of your eggs in that basket.  And the 1 year time frame - do you have any basis for this?  Seems a bit aggressive to me.  

Among my (admittedly limited) circle of friends and acquaintances, only those with PR have been able to borrow from Japanese lenders.  The exception is that I know a couple of people who did not actually have PR when they got their loans, but they had applied for PR (and had shown their lender proof of such PR application) at the time of the loan.  

I would note that to many lenders having PR or not may be less of an issue than an ability to communicate in and read Japanese.  Based on what I have heard, most banks won't entertain the idea of lending to a borrower that doesn't speak Japanese.  

Assuming you could get loans, you would still have to pony up the equity portion/down payment.  I don't know what nationality you are, but if you're American (most BP-ers are), then I would strongly encourage you to consider deploying capital in the US before doing so in Japan.

For markets - I think you hit the big ones.  You can include Sapporo in there as well, from what I understand.  Assuming you're looking at residential real estate, then population growth (or at least limited population decline) must be a key metric.  The cities you listed tend to do OK on that front.

I have a number of other questions/concerns, but I don't want to come off as too much of a wet blanket in my first impression (I like to save some cynicism for later impressions too, you know? ;) ).  And I don't mean to be negative.  It seems you have some compelling reasons to stay in/come to Japan long-term.  I'm happy to share my experience to the extent is helpful for you to achieve that goal. 

@Robert Cabral - What you're proposing is very common.  And the cautionary tales that @Michael Plaks shares are common as well.

Using his comments as a springboard, you'll generally want your LLC operating agreement to cover the foreseeable bad-case scenarios, including those mentioned by Michael.

There are are few key terms in any partnership that, in my opinion, must be agreed upon in advance for it to function properly.  These are:

- Contributions - what is each person adding to the deal (@Tom S. flagged this immediately).  If only one person is on the loan, are the other experienced in real estate?  Are they boots on the ground?  Have they separately funded or agreed to separate indemnification of the person on the loan?

- Management/Control - who gets to decide what actions to take?  When do you need unanimous consent?  For example, what percentage of vote is necessary to decide to sell?  To perform material rehab?  To even lower rent?

- Distributions - when are LLC members entitled to receive any distributions? Like Michael said, you don't want to be held hostage over 15k.

- Transfers - can a member get out of the deal?  Can they sell to anyone they want?  Do other members get a right of first refusal?  Approval over any potential new member?

This list could go on, but these 4 are usually my keys.

This isn't mean to dissuade you. I've partnered with a couple of guys I met right here on BP - and it's been a win-win-win.  We're not naive, and we know that we could encounter difficult times in the future.  However, we all thought long and hard about becoming partners, and in the end determined it was in each of our own best interests.  At the end of the day, real estate is still a relationships industry, and you can't ignore the power of quality relationships.

@Nathaniel Garcia - I agree regarding investing in Japan.  I do invest here, but absent some unbelievable, lottery-winning-like opportunity, I don't think I'll take on any new deals in Japan.  Going forward it will be US-based deals only.  I currently focus on investments, with a few partners (met here, through BP), in Huntsville, AL.  

I'm tied up with work for the next 2 weeks (I joined a Japanese crane manufacturing company, and I'm getting my crane operator's license), but after that let's def connect on zoom.  

@Steven E. Quasha the threat of Heather carries some serious heft.  Thanks Steve!

Hey @Nathaniel Garcia - Welcome to BP. Wanted to send a hello from another Japan based US investor.

I don't invest in Hawaii, but my partner and friend is based there - look him up: @Kiley N.

I'd love to chat about investing from Japan.  I'm interested in hearing our thoughts, and of course happy to share any of my experiences that may be helpful.  

As I've just told a couple of other new BPers - if you're in Tokyo, you might consider looking into the Tokyo BiggerPockets monthly face-to-face meetup.  You should be able to find information on the Meetups app.  I attended frequently when I lived in Tokyo (I'm now out in Western Japan), and it was always very productive for me.

Hope to chat soon.

- Dave

@Halei Agra - Hi Halei.  Fellow Japan-based US investor here.  

If I understand your question, you're looking for an English-speaking Japanese "CPA" so that you can understand options for your Japanese/non-American friends, is that correct?  If so, does the Japanese CPA need to speak English?

In any event, DM me and I can refer you to my guy, although he can be very busy and slow to respond.

I'm taking the liberty of pinging @Daniel Mills and @Steven E. Quasha, both who live in Japan and use a Japanese CPA.  Tell them that if they don't share contact details, I'll sick my 7 year old them.

Separately, whenever you have time I'd love to chat and hear about how you invest from Japan - always looking for new and better ideas.

Hope to speak soon.

- Dave