All Forum Posts by: Matt Taylor

@Stephen Polizzi Hi Stephen. You asked for an example. Let's say that the loan amount is $90K with $60K disbursed at closing and $30K to be disbursed later, in 3 construction draws. To keep it simple, let's say that the lending LLC has only 2 members - me as the managing member and the other partner as a passive member. Let's say that our initial contributions are $30K each. Then the initial ownership percentages are 50/50. The LLC Operating Agreement dictates that I will be the one to contribute the additional funds down the line when the construction draws are taken, so after the final construction draw I will have contributed $60K and the other partner $30K. Then the final ownership percentages are 67% and 33%. The profit is distributed to us two members monthly, according to whatever ownership percentages are in effect at the time.

The managing member (me) is paid a monthly management fee to compensate him for servicing the loan and managing the LLC.

I use LLCs to loan money from diverse sources.

In my state (New Hampshire) it is cheap and easy to register a new LLC. I do that as the first step, which just involves going online and filling out a short web form and letting them charge your credit card $100. In 15 minutes you're done.

Then I write an LLC Operating Agreement using past templates and just change the names and dates. Each money source signs the operating agreement to become a member of the LLC.

I go online to the IRS and register for an EIN (employer ID number, even though there are no employees).   

I print out the EIN email that I receive from the IRS and the proof of LLC registration from the state and take them to the bank to open a checking account in the name of the LLC.

Each member sends a check to me made out to the LLC and I deposit those checks to the new account.

Once the checks have all cleared, we go to closing with the LLC as the mortgagee. You'll need a lawyer to draw up the promissory note, the mortgage and other documents. The new LLC holds the first (and usually only) mortgage. Interest payments are made out to the LLC and the manager of the LLC takes care of distributions to the partners.

@Mike Wright

No, sorry.  I only lend in NH.

@David Bennett : There is no need to speculate as to whether the seller owns the property outright.  Instead, you can search the New Hampshire Registry of Deeds here: http://www.nhdeeds.com/ to see if there is an outstanding mortgage on the property.  If he took out a mortgage to buy the place it will be registered there.  If he paid the mortgage off then the mortgage discharge will also be registered there.  If he didn't pay it off you can often work backwards from the info given in the registered mortgage to figure out approximately how much he still owes on the property, assuming a reasonable interest rate for that year and also assuming that he didn't make any extra payments of principal in the intervening years.

You might also want to access the tax collector's website in that town to see if he's behind in his property tax payments.  Any bit of intelligence might be useful in your negotiations.

For a lender, the longer the term on a fixed rate loan, the more the risk, and so the higher the interest rate.  But you are offering to pay him lower interest rates on the longer term loans, which is backwards of what I would expect.  But then you are offering him a higher sales price if he agrees to the longer term loan.

Instead, I would figure out how much you want to pay for the property and keep that amount fixed for all 3 offers.  You can make that offer contingent on seller financing and give him 2 or 3 options for the seller financing, all with the same loan amount but with different loan maturities, where the longer term loans have higher interest rates to compensate him for the higher risk.  This is a more straightforward approach.

Remove the "total cash to buyer after interest" and "total interest" figures from your offer.  To anyone who understands the time value of money that is just irrelevant chaff.  It's the interest rates and the terms that matter.

Never mind, I found it.   Duh!

Folks,

I can't find a way to see a list of my "colleagues" on the site.  Can anyone point me to it?

Thanks,

I forgot to mention - I did receive an unsolicited mailing from a company called LoanMe.com that purports to do business lines of credit for businesses that have been in business less than 2 years.  I don't know how real it is, or if their terms are horrendous.  If you do check it out, let us know the results, will you?

The first step is to get credit cards in the name of the business from Home Depot, Lowe's, office supply stores, etc. Develop a history (as a business) of always paying on time.  Once the business has been established for 2 years and has been profitable, with a good adjusted gross income on its schedule C, then it should be possible to get a line of credit, but you will still have to personally guarantee the debt.

It might be easier to take out a home equity line of credit on your home, if you have enough eqiity.

@Jason Pachomski Egad, are hard money lenders really charging 14% and 6 points in Van Nuys, CA?  Here in New Hampshire it's more like 12% and 2 points. 

I think I may have found a problem with your plan. Here in NH I (and the other HMLs that I am familiar with) will lend a total of 65% of ARV, but you don't get the 65% of ARV all at the closing table when you buy the place. You only get 65% of your purchase price at the closing table. Then you get the rest in 3 or 4 construction draws.

So you really have to make an extensive spreadsheet and plan out your cash flow MONTH BY MONTH, making sure to include all the carrying costs, including loan interest, utilities, property taxes, insurance, etc.  And add in a big fudge factor on your rehab estimate.  I've hardly ever seen a rehab perform under budget - they almost all go over by a significant amount.

Even if you have enough cash overall to do the deal, unless you plan out your cash flow month by month you could get caught short in one or more months.

@Matt Liu 

First of all I'm not a lawyer and have no special expertise in this subject.  I am only repeating what I heard in a public presentation and in private consultations with real estate attorneys, and I may have some of the details wrong as well.   I am not even advocating this approach, only offering it up as food for thought, and I leave the due diligence to you.

Two lawyers who I heard speak recommended titling each property in a separate trust and making the beneficiary of these trusts an LLC which has you as the member.

By the way, as a preface, more than two lawyers specializing in real estate investing and liability protection that I have consulted have insisted that trusts offer no liability protection whatsoever. I have heard contradictory claims from one trust attorney and the general public, but I trust these guys more. The opinion that trusts offer no liability protection is why the beneficiary of the trust should be your LLC rather than you personally.

I will give an example to make it clear(er).... at the risk of carrying on too long and boring everybody.

Let's say you had 10 properties owned by "property1 trust", "property2 trust", etc. The beneficiary of the first 5 trusts could be Numero Uno LLC and the beneficiary of the second 5 trusts would be Numero Dos LLC. So now you could have two credit cards for all those properties instead of 10. One of those credit cards would be in the name of Numero Uno LLC and the other in the name of Numero Dos LLC.

Now the paper boy trips and falls on property1 and sues the owner of property1, which is the property1 trust. The beneficiaries of all your trusts are listed on a secret document called the Schedule of Beneficiaries. Since the Schedule of Beneficiaries is not publicly recorded there is nothing to prevent an unscrupulous landlord from changing the listed beneficiaries of the property2 through property5 trusts from Numero Uno LLC to Numero Dos LLC and backdating the document to before the accident. It is perfectly legal for the trustee (you) to change the schedule of beneficiaries at any time, but backdating it is the squirrely part. So now when you go to court they subpoena the Schedule of Beneficiaries and it will show Numero Uno LLC. Then they may subpoena the list of assets of Numero Uno LLC and that (updated) list shows only the property1 trust, since all of your other trusts and properties are now owned by Numero Dos LLC and are therefore protected from this lawsuit.

I have been told more than once that in practice, when the opposing lawyer sees how the property is titled they won't take the case because they know that their odds of winning a big payoff are small.

The legal fees for setting up the 10 trusts shouldn't be much more than for 1 trust because it's the same document with only the property addresses and dates changed. Once you register the trust with the state, there won't be an additional annual charge, whereas in most states there is an annual charge of from $100 to $500 for each LLC. So this should actually save you money in the long run.