All Forum Posts by: Justin Kay

@Brandon Sowers I don't think I can tell you the maximum you can get away with in Burlington, but I do think, at a minimum, your set up fee seems low.

I can tell you what I paid for a PM in Raleigh a few years ago though, for comparison. Mind you Raleigh and Burlington are worlds apart, but it should give you an idea. I'll caution you by saying after getting hit with the fees of this PM I fired them and self managed, but just so you know. The other PM charged 10% of rent collected, plus 50% of the first month's rent as a set up fee. They also kept all application fees (I think they charged $50-100 per application). In addition, we were required to use their contracted repair people, and they added a 15% mark up on all repair costs. 

In practice, the 50% of first month's rent seemed crazy, and I wasn't a fan of being forced to use their contractors, but my other investor insisted on using them. I ended up firing them because it took them 4 months to find a tenant, and even then would only push it if we agreed to drop rent below market. The tenant they found would only agree to a 6 month term (but still took the full fees). The PM had a clause that if a repair came up, they would call us and give us 2 hours to authorize the repair. If we didn't give them direction, or if they disagreed with the necessity of the repair (or they deemed it an "emergency"), they contracted for the repairs anyway and charged us accordingly. We got hit with a few repair bills that, upon closer inspection, were something like $600 for an hours worth of work in replacing a PVC pipe part that costs $2. Plus their 15% mark up. Its no wonder we fired them after the 6 month rental expired.

@Robert Malan - I'm assuming you already have your LLC set up properly, with a lock solid Operating Agreement. If not, this is obviously the first place you need to go.

Transferring the rental into an LLC is easy. Write up a basic bill of sale between you and the LLC, where you sell the rental to the LLC. Prepare a simple Deed (either a Warranty Deed, or a Quitclaim Deed most likely), file it with your state's appropriate office (usually a County Register of Deeds), and you're done.

The loan is a little more challenging though. Transferring the rental from your name to the LLC is typically a term of default under the loan documents (read through them to make sure). Usually, provided the payments remain current, a bank won't care. Although it's an easy default for them to claim in the event the bank wants to clear their books later. So you can go to the bank and see if they'll waive the default (get it in writing). It isn't the preferred option though, as the LLC now owns the home but you're legally responsible for the payments, which could leave you holding the bag (even more reason to have a lock solid operating agreement that resolves these sort of issues). The preferred option would be to get a new loan in the LLC's name, shortly after you deed the property. You'll likely need to personally guarantee the loan, so you're still on the hook, but as a guarantor and not an obligor (honestly though not much difference).

As far as the other partner's buy in, look at the operating agreement and see what it says. Beyond that, you're selling the home to the LLC, so you should get some form of reasonable compensation based on the equity level, cash flow, and projected investment potential. How much the LLC takes from you as a "cash infusion" or transfer of member interests, and how much the LLC takes from your partner as a purchase of the member interest depends not only on the asset being transferred in, but who's doing the work moving forward, are you taking salaries, is there recourse, is he getting a full member interest or just an economic (profits) interest . . . In the end, it's all open to negotiation.

@Rob Leavell, generally speaking no. C-Corp, S-Corp, Partnerships, LLCs, Trusts . . . they're all separate legal entities, and the same issues apply. They'll have very different tax issues though. 

Trusts have fewer issues as it relates to valuing transfers in though. It's assumed that you're not getting something back of comparable value when you transfer to a trust. But in order for a trust to legally exist, you need a Settlor (person giving assets), a Trustee (person holding assets), and a Beneficiary (person the assets are being held for the benefit of). Two of those positions can be the same person, but not all three. Which means if you as an individual that owns a home wants to put it into a trust to shield liability, you'll need to either have someone else be the Trustee (good luck without paying them), or the Beneficiary (maybe your kids, but doesn't seem to make sense if your goal was to hold on to the properties). You'll also have a harder time getting the assets out of the trust, should you want to later. Last point, Trust tax filings are often more difficult than disregarded LLC entities, so keep that in mind. Because of this, Trusts are usually great asset planning and asset succession tools, but not the greatest asset protection tools, in my opinion. State law applies though, so it may vary state to state.

Realistically speaking though, it doesn't really create that much more layer of work. You just need to put the playbook out there in advance and follow it. It isn't something you should just throw together.

 Not unless he's subpoenaed.

@James Wise at least you got his signed autograph at the end of the Complaint (the Verification)

@Sarah Mcdermott Consult with an attorney.

I don't mean to be frank or abrupt, but the answer to your problem won't show up on an internet forum. Without knowing where you are, the realtor that is making demands, or seeing the documents you're referring to, only your attorney can help you.

@Hobie Day It depends on how familiar you are with what you want. I've known landlords that have seen enough agreements that they can tell you exactly the clause they want, so they put it together and have the attorney "tie it all in" and it isn't that expensive. But they're very familiar with their agreements. If you're starting out, and aren't sure what you're really altering or the ramifications of the changes you're making, yes I would just hire an attorney and tell them what your intended goal is (but tell them you want them to modify an existing agreement, not create a new agreement), assuming you trust the attorney.

@Hobie Day California's market is very different than NC's. Everything is more expensive in CA, so take that into consideration.

If you gave me an agreement to look over, and it was a basic form, maybe 0.3-0.6 hours. If I had to re-write a good portion, but not too much of it, maybe 0.5-1.5 hours. If you want a custom suited form, probably closer to 3.0-5.0+ hours, depending on what you want. Take that time and multiply it by the attorney's hourly rate, then discount it by their "efficiency." 

Funny thing is, most people try and get away from the 2 hours, and into the 0.2 hours, by doing the work themselves and customizing a basic form and giving it to an attorney to "bless it." But they usually screw it up. Then the attorney has to spend more time trying to correct what you did, and it ends up being 4 hours instead of the original 2, because the attorney could have taken a former "custom" agreement from another client and modified it to suit your needs, but what you presented was so abnormal they had to create a "new" custom agreement.

@Rob Leavell Yes you could start an LLC after the portfolio is started, but there are some tricks you need to look out for. For one, if the property has a lien on it, it'll typically be an event of default if you transfer the property to another owner. In the vast majority of situations the bank will never actually invoke the default, as long as the payments remain current. But if the bank undergoes a restructuring event, or wants to lighten its books in a certain area, they'll immediately claim default and begin the foreclosure process. As it's owned by an entity, there are fewer hoops they'll need to jump through in the foreclosure process, giving you a small amount of time to restructure your loan situation. I've seen it happen, and it isn't pretty (clients typically had to get very high interest loans, as they were the only ones that were willing to loan in short time windows on properties in foreclosure). So if you transfer a property to an LLC, you either need the bank's approval in advance or you need to refi at that time, and refi'ing with a new LLC can sometimes be challenging, even if it is cash flowing (not impossible though).

There are also some legal concerns. You need to treat the LLC like a separate and distinct legal entity, because it is. You can transfer the property to the LLC in exchange for stock, valued accordingly, or you can transfer money to the LLC in exchange for stock and then sell the property to you in exchange for the money you put into the LLC. But you have to make sure the valuations are roughly accurate. If I put $100 in an LLC and then sold a property with $20k equity in it to me for $100, it could be challenged later as a sham corporation (not likely but still possible).

Lastly there are some tax consequences. It all depends on the valuation you put on the property, who the owners are, if they have full member interests or partial economic interests, ect. Not impossible, just make sure you have your ducks in a row before you do it.

The issues are significantly less if the property starts and ends in the LLC.

@Zocky Zhang I never had a Chapter 11 closing statement pay funds to the "US Bankruptcy Court." They wouldn't process any funds in my district, instead the funds would be either paid directly to the lien holders in accordance with a Court Order approving a sale, or the liens would be transferred to proceeds pursuant to a Court Order and paid to the DIP (Debtor-in-Possession or seller) and paid out in accordance with a future Plan of Reorganization. But I guess other districts could do it differently. I don't practice everywhere.

I don't know why the settlement statement would mention Chapter 11 or bankruptcy court unless they already filed. You should be reviewing a Court Order stating you have authority to buy the property, and haven't violated the Automatic Stay, as well as receiving the protections you need, before you close on anything.

Seems like a wonderful time to hire an attorney!