All Forum Posts by: Justin K.

I am calling on all the experts I know in this field for some advice.

Last night we won a PA Tax Sale property at the Tax Auction.  I know, the whole buyer beware and the risks associated with buying at the tax sale.  We did a ton of research on this property and are confident in what we bought.  The property was owned by a trust and 'vacantish' (i.e. nobody lives there, but a portion of the house was recently rented.  The other part of the house is being used as storage for a lifetime of stuff that the previous owner - trust creator - amassed).  The grass is still being mowed by the beneficiary of the trust, but they did not pay the taxes.  I understand that in PA they have 30 days to contest the sale.  I also have documentation from the county and my photographs of the property being properly posted, so even if contested they will not win.  The county will transfer deed to me on 12/31.  

My question is, I would like to enter the property and secure/winterize the property.  I am not interested in the previous owners personal property, except to someday (after I hold the deed) get a dumpster in there to get it out of my way.  

When can I enter the property to secure/winterize it?  Do I have to wait until I hold the deed, or since I technically paid for it can I go in now/soon?

@Chris K. @David Krulac @Steve Babiak

For some reason David and Steves tags are not working.  But I appreciate your responses in advance.

Thanks for the input guys!  I really appreciate all of your opinions.

Wondering if @Chris K. or @Scott Smith have any opinions on legality or asset protection?

Thanks for the input @Don Konipol!  I am not talking about avoiding legitimate lawsuits with this strategy.  I am suggesting it as an opportunity to appear 'judgement proof'.  As in, an aggressive attorney would look at my assets and say, 'there is nothing here to gain' and not even file the lawsuit.  In my opinion if I did something that caused legitimate harm to someone else then I would be at the very least morally obligated to make the situation 'right'.  I am suggesting this to avoid frivolous lawsuits.    

Once a suit is filed the ownership of everything would become public knowledge anyway.

Currently in my area a few attorneys have been running television ads saying, 'If you slip and fall on someones property we can get you paid!  You may be entitled to thousands of dollars!'

So I am wondering if this is a legitimate asset protection strategy and would highly value any mortgage lenders or attorneys opinions.  I haven't heard this discussed before.

My wife and I own several properties.  I have a fantastic job and she is a stay at home mom to our two beautiful girls.  We own several properties that do pretty well, but I am at the end of my time availability in a given week.  Therefore instead of expanding our portfolio to increase cash flow we are looking at reducing debt to increase cash flow.  I understand that its not mathematically the best solution because we lose tax efficiency, yada yada yada.  We have also looked into hiring property management, but we live in a rural area and although these companies exist near us we have found that their average occupancy rate is in the 70-80% range, where last year my occupancy was 95%.  Charging first months rent and 10% thereafter with a significantly lower occupancy rate doesn't justify the cost for the 'service' (or disservice) to us.  But that is not what this post is about.

As we pay off properties the fear is that all this equity has been created and now we could be sued by an ambulance chaser attorney or anyone that wants to try to become a 'slip and fall millionaire'.  We do carry good liability insurance and we treat our tenants and their guests like they are family.  We dont want any of our properties to be forced to sell for the equity after a potential lawsuit.  So here is my strategy.  

Create a Nevada LLC - (or any state that offers owner anonymity) i.e. "Main St. Loan and Finance LLC"

Pay off a property we currently own and have financed with a bank.

Have a bank that we have a fantastic working relationship with write a new loan with the terms I agree to, knowing that the property will be 'underwater' and the length of the term is crazy long (like 30 or 40 years).

After the bank funds the property loan to my Property Ownership LLC, use the funds to immediately buy the loan from the bank with my "Main St. Loan and Finance LLC". (Our local bank sells all of their loans and collects the origination fee and all the other closing fees, etc).

Now I own the property and the note putting the property underwater.  I would never make a mortgage payment to myself so I wouldn't generate the need to file any IRS tax paperwork, but I would also never file foreclosure on myself either.  In the event that we would be sued the property has no equity, hopefully preventing frivolous lawsuits.  

Please note, in the event of a legitimate lawsuit we do have liability insurance to cover any claims.

This is an attempt to design a lifestyle and not necessarily the best mathematical return.  

Your thoughts are greatly appreciated!

You assumed (took the previous owners position) on his lease when you bought the property.  So you are stuck with it, unless his lease afforded a new owner the right to terminate the lease within X number of days of acquiring the property, but my guess is the lease wont say that if it didnt even talk about late fees.  You could always offer him $50 cash to sign a new lease with you at the first of the year.  You pay him $50 in order to get a real lease in place.  You also lock him in to renting from you for the next 12 months.  If I am him though I wouldnt take the $50, at which point you have to live with him being late or you have to file eviction on the 8th (after serving proper notice to him on the 1st) for non-payment of rent, as mentioned above.  The devil is in the due-diligence details.  Chalk it up as a learning experience and move on.  I own a handful of properties now and have missed something in due-diligence when we purchased every single property.  Thankfully nothing too costly.  Although it sucks, its cheap tuition to pay.  

Hey Drew, 

This does look like a pretty good deal, but Alex is right. You would need a partner to help you come up with the money. I dont know your situation, but it looks to me that you are biting off more house than you should, even if you can afford the monthly payments. If you are serious about REI (as a BP member I assume you are) may I suggest buying something smaller or house hacking your way up to the $300,000 home.

Currently my wife and our two daughters live in a small 3 bedroom home worth about $140k.  With our income, real estate holdings, and credit score we could easily qualify for a $575k home LOAN which equates to approximately a $719k home.  But we choose to live in the smaller much cheaper home to accomplish our other goals faster.  In our opinion, we dont want to own a Ferrari without having any fuel to put in it.  I would rather own a Honda with enough fuel to drive anywhere in the world I want to go.

Just my 2 cents.  Hope its helpful!  And if you really want this house I hope you can figure out a way to get it and that it will be a blessing to you!  In my experience, creatively financing your personal residence is difficult because your options are really restricted.  Would love to hear what others may have as far as input is concerned.

Justin

I am not a lawyer but have run across the same dilemma.  I believe these answers to be accurate, but would love if others with more knowledge would like to chim in.

1) No, you do not need a brokers license to self manage property in PA.  (Thank God)

2) There are no conflicts. Its not regulated like owning property in your IRA and self dealing (which is strictly forbidden). You own a company and you have the right to hire whoever you wish to perform services for you (including your other company). With that being said I would ere on the side of caution and I would have property management agreements in place between your LLCs and do the bookwork required as if you were managing the properties for someone else. I have heard of this model being used as a risk management strategy (keep no money in the PM LLC and if you ever got sued over a PM issue hopefully your agreement between your LLCs shelters the Property Owning LLC (and the equity in the properties) from the burden of the lawsuit. That being said, I have never heard if that would be beneficial from an attorneys viewpoint.

3) Depending on your property location (Not Philly or Pittsburgh), you shouldnt need any other licenses.  If you do its a local jurisdiction rule and you could check with someone at your county and municipality level for the most accurate answer to that question.  My experience is they just want me to update them with who is living there so they can collect the appropriate taxes from them.  This gets to be a pain when you are managing a lot of units and are almost always showing and filling units.

4) Brokers Licenses are managed to individuals. That individual then has the ability to take that license to their place of employment (your PM LLC) and operate the LLC based on their license. Furthermore, others can work for you under that brokers license and they do not need a license themselves, although you must supervise their work (which is just a good idea since its your license). You see this a lot with real estate agents creating teams and having a clerical person do the majority of the paperwork. That clerical person often doesn't have a license. I have even seen some teams sending non-licensed team members out to do showings, which is crazy in my mind, but to each their own.

Good questions!

Hope my answer helps and would love to hear others input.

PA does not require a grace period and I do not offer one.  Rent is due on the first by 5:00 PM.  Quite frankly, we do it that way so that I (or my wife) only has to make 1 trip to the bank each month.  My mortgage payments are due on the first so the rent should be too (although we are never that close financially).  Also, if the tenant is not able to pay we want to start working something out sooner rather than later.  The grace period just means you are losing time to get a resolution with the tenant or get possession of your unit back.  Either way you have lost time and as you have said.  Time is money.

@Jay 

@J Adamsundefined

I agree that the calculation is easy and I am all for additional revenue streams, but if I am really looking for another revenue stream I would invest the money in the stock market, or buy notes with it, or bitcoin!  But thats none of those are a good idea because I cant risk loss of principal.  

My situation is this.  I have a great W2 job.  I have several small multifamily properties that cashflow tremendously well.  My wife is a stay at home wife and mom that helps immensely with our properties.  Last year she worked a 'job' at our church that netted us $500 in W2 income.  Compared to our total income for the year it was crumbs.  As I completed our taxes I thought, 'The $500 isnt even worth reporting on the taxes, next year she should just volunteer instead of collect a paycheck'.  Now that is a little extreme, but collecting (and tracking) a 0.5% interest on the escrow account we hold just doesnt make sense to me.  Its $20 a year.  If I ever have really large sums of money in an escrow account or if interest rates significantly rise then I may consider it, but currently at this time, I feel as if I am better off putting my time into finding more deals and improving my current units.  $20 just isnt going to change my life in a way that makes this worthwhile.  If interest rates go up to 10% (and I didnt invest in PA) I would certainly reconsider, but under my laws, a 1% admin fee isnt worth it.

Jay, 

PA does require a separate escrow account.  It does not require that account to be interest earning.  If the escrow account is interest earning the interest rate minus the admin fee of 1% max is required to be given to the tenant.  So all the landlord can keep is 1%.  To me it isnt worth the 1% to handle the money.  If I owned a management company that held $1,000,000 in escrow it may be worth earning the $10,000 in escrow administration fees (assuming interest rates are above 1%).  If I was in a state that didnt require the landlord pass the interest on to the tenant and interest rates were considerably higher to where it became a real financial benefit then it becomes an ethical question.  But for 1% (or anything less than inflation) I just cant see it being worthwhile. 

Just my 2 cents!  Good topic of conversation.

Justin