All Forum Posts by: David Piqueira

@Steven J. Yeah, I get that aspect, and I think that it is important. You did a good job outlining how dividing your assets into multiple LLCs can help protect lawsuits against one LLC from affecting your larger portfolio. The part that I struggle with is that you only get that protection if the lawsuit is for a larger amount of money than the value of your LLC. So if somebody sues you for improper foreclosure (NPL LLC), they won't be able to touch your million dollars (cash LLC) if the suit is more than the value of NPL LLC. But if the value of the suit is less than NPL LLC, then you don't actually realize the advantages of your asset protection structure.

I guess it's the difference between LLC protection and insurance. It just seems to me like most of the lawsuits would be for less than the value of your LLC. In Adam's case, he was being sued for 150k, but if his NPL LLC holds 200k worth of notes (say, 10 notes each with UPB of 20k, not even a super large portfolio) then he is still screwed if he loses the lawsuit. The resulting lawsuit would essentially wipe out the entire value of that LLC. Unless I am missing something.

Thanks for the input!

Oh, I agree that it is a good idea to form an LLC to hold PN/NPN. I have actually already created one, and plan on being as diligent as possible with book keeping / record keeping / accounting, in order to preserve the veil of limited liability as much as possible.

More than anything else, one of my character traits is to drill down to the dirty details as much as possible in order to understand how things work. It's probably the engineering side of my personality. Instead of just accepting conventional wisdom I prefer to ask a bunch of questions until I really understand how things work in the real world. In this case, the conventional wisdom is to hold these assets in an LLC for liability protection, since lawsuits are part and parcel of the note investing business. I trust that this is the correct thing to do, but I feel like the protection offered is overstated, or I don't fully understand how to correctly utilize these entities to maximize protection.

I still don't think I fully understand the best way to protect assets, but i'm fine with that for now. Maybe when I have a larger portfolio I will revisit this topic. And of course I will talk to attorneys along the way to see what nuggets of wisdom they can inculcate. 

Thank you for taking the time to answer all of my silly questions @Adam Adams, and happy holidays!

@Adam Adams I spoke with an attorney and he said, "that all of the assets in an LLC are subject to creditor claims against that LLC. If each asset is placed in a separate LLC, you have a fighting chance that a court would limit satisfaction of a claim against one LLC to just its assets. Single member LLCs have not been as effective as we would have liked in keeping personal creditors out of the LLC's assets and in some cases have allowed the LLC creditors to pierce the veil of limited liability and reach the assets of the owner. In my opinion it's better than nothing."

This is what I stated before, I don't really understand how an LLC provides you that much asset protection against lawsuits, since all of the assets in the LLC are subject to creditor claims. They would only potentially protect you from lawsuits more than the value of your LLC. This could still lead to pretty significant losses in the event of a lawsuit.

A lot of people like the Singer Law Group for special servicing.

Oh, I also want to ask what you think is the advantage of collecting rent under LLC? Since the property is not actually titled to the LLC you don't have liability protection that the LLC normally provides. You may want to look at umbrella insurance. I don't really understand what you are trying to do here.

If you have a two member LLC this will be taxed as a partnership, which is a pass through entity for tax purposes. Meaning you get taxed at your personal income rate. Doesn't matter if you hold the property in your name or in an LLC, or where the rent checks are being made out to. You will be taxed at your income tax bracket in all cases. There is an exception, where you can have an LLC taxed as a corporation, but that doesn't sound like what you're doing.

The only difference would be for filing. If you have an LLC being taxed as a partnership, you will also need to file a schedule k-1. This basically shows distributions from your LLC to the members. For this reason, if you go to a tax preparer, they will likely charge you more to file if the entity you operating out of is an LLC.

The big take away is that you will be taxed at the same rate regardless if your entity is an LLC, partnership, or joint venture. Filing taxes might be marginally more expensive if it's an LLC/partnership.

Got it. So if you did want to wind up with the property, you could find a NPN with an UPB greater than the home value. You could purchase this note for a discount, making the purchase price less than the home value. When you foreclose, the minimum bid at auction would be higher than the home value, so nobody would bid on it and you would end up getting the house for the purchase price of the note. Hopefully this would end up being a decent discount on the house. Then you could either rent or sell it. I think I understand.

Thanks @Bob Malecki and @Gail Greenberg

@Adam Adams So to take your real world example, let's say that the person suing you wins the case for 150k (let's hope they don't, but this is hypothetical). I imagine that the suit is against the LLC you created to hold notes. I also imagine that you probably have more than 150k in holdings in that LLC. So would you need to liquidate some assets in order to payout the plaintiff? Are you actually performing damage reduction in this case? Or is that where putting liens on everything comes into play? I'm not sure I understood that part...

I also understand a lot more about how foreclosures actually work now. As far as setting the minimum bid at the auction goes, I assume you are required to show proof of your additional expenses? If the UPB is $50,000 and you want to set the minimum bid at $80,000, you better have proof that you actually spent 30k in additional costs?

If the house sells at auction, I didn't realize that the borrower gets the money over the minimum bid amount, but that completely makes sense. That's why I asked my question above, assuming that you have to prove your additional costs. It would be unfair to claim that you spent more on additional costs than you actually did, because that would be cheating the borrower out of their equity.

What happens if the house doesn't sell at auction? If nobody bids the minimum? Then do you get the deed to the property? What about the borrower, do they get anything?

Thanks for explaining all of this @Gail Greenberg! 

@Bob Malecki Specifically, what are you looking to protect against? An example of the types of lawsuits that you are protecting against would be helpful, thanks!

@Account Closed So you mainly have an LLC to protect against lawsuits in the area of lending / debt collection? It's because the regulations that govern those activities are so complicated and vary so much throughout the country its easy to find yourself in a lawsuit because you weren't aware of something? Maybe I don't understand specifically how LLCs protect you, but if your LLC has over 150k in it (say, 4 notes with an UPB of 40k each), and you lose that lawsuit, wouldn't you still have to liquidate and pay the plaintiff the money? That's mainly the part I don't get, it seems like LLCs created for paper investing would typically have enough money in assets to pay out the suits brought against them. So the LLC only protects you if you are being sued for more than the value of the LLC, right?