All Forum Posts by: Mitch Kronowit

Like Nathan said, if the price is right, you got a deal.

Personally, I don't want to live on a busy street and neither do many other people, but if the purchase price is low enough, you can set the rent very competitively. There are sure to be plenty of tenants out there who won't mind the added noise, especially if it gets them into a place for $100 or so less than another similar place.

We used J. Scott's list on our last rehab and it saved us hours of time and effort. Thanks J. Don's list is quite similar to his.

The only thing I have to expand on is before you start demo/trash-out, complete any critical safety issues that may exist before you break out the crowbars. Namely, look for any leaks (we once found a bad water heater that was peeing all over the garage floor) and any electrical problems that may shock you (pun intended). Also make sure you can secure the property at the end of the day, i.e., verify all door and window locks are serviceable lest the squatters move into your job site without so much as offering to pick up a paint roller.

Then grab your sledgehammers and go to town. Decide right away what's staying and what's going. Paint after major repairs/modifications are done, not before, and those shiny new appliances can wait until almost last so they don't get damaged in the chaos.

What Dion said. Mortgage brokers are often compensated with points paid by the LENDER, not the borrower. These "back end" points, as they are called, can be thought of as a reward or bonus for the broker selling a loan that makes the lender extra money, such as an interest rate slightly above market.

Consider this example:

Let's say the current going rate for a 30-year fixed rate mortgage is 4.5%, paying ZERO points. The lender's rate sheet may have a table that looks like so:

4.0% = -1 pts
4.25% = 0 pts
4.5% = 1 pts.
4.75% = 2 pts.
5.0% = 3 pts.

So, if the broker sells a mortgage at 4.5% (the market rate) and doesn't charge any points, the lender will still pay him 1 point, on the back-end, for his trouble. But look what happens when the rate sold is higher or lower.

If the broker sells below market rates, such as 4.25 or 4.0%, the lender is basically saying, "I hope you charged some points up front, because we ain't paying you squat!". Often times, this isn't a problem because many borrowers will "buy down" their interest rate so they can brag about what a great deal they got at this weekend's cocktail party. Of course, some wise-*** in the group (usually me) will ask, "How many POINTS did that rate cost you?!?!". Most borrowers don't like to answer that question. ;-)

Now, if the broker manages to sell a higher interest rate (convinces the borrowers their credit is crap, their income is pathetic, etc.), they can often offer several concessions to the borrower, such as pay their closing costs, because the lender is paying the broker a fat little bonus for selling the higher rate, which makes the note much more valuable on the secondary market (yeah, selling the mortgage to somebody else for a premium) or as a portfolio loan (the lender services the loan and enjoys all that extra interest).

Orange County home values (as well as the rest of the country) are at historic lows. If you sell now, you're basically "locking in" a loss. I would keep renting it, enjoy the cash flow, and wait for the market to pick up again, which will probably happen in Orange County before it hits the rest of the nation. Then, you can always do a 1031 exchange if you want to "move up" into four-plex and defer the capital gains tax.

As long as we're playing "Show me yours and I'll show you mine":

Dornfried v. Granquist, No. CV000502628S, 2001 WL 306851 (Conn.Super. March 13, 2001).
The plaintiff sought to hold the individual owner and manager of an LLC liable for breach of contract, but the court determined that the plaintiff's contract was with the LLC and that the contract adequately disclosed the representative capacity of the individual who signed as "manager." The court emphasized that the LLC statutes give the term "manager" a special connotation and protect managers from liability to third parties. The court rejected the plaintiff's arguments that the court should disregard the liability shield of the LLC under the instrumentality or identity rule because the plaintiff failed to plead either theory.

Hunter v. Youthstream Media Networks, Inc., 241 F.Supp.2d 52 (D. Mass. 2002).
The plaintiff moved for pre-trial equitable attachment of the assets of an LLC member, alleging that the LLC member was liable for the LLC's breach of contract based on veil-piercing principles. The court denied the motion. The court found that the plaintiff failed to establish he was likely to prevail on the piercing claim. The court cited corporate veil-piercing cases and set forth the following factors considered in a corporate veil-piercing case: insufficient capitalization, non-observance of corporate formalities, nonpayment of dividends, insolvency of the corporation at the time of the litigated transactions, siphoning of corporate funds by dominant shareholders, non-functioning officers and directors other than shareholders, absence of corporate records, use of the corporation for transactions of dominant shareholders, and use of the corporation in promoting fraud. The court acknowledged that the plaintiff's evidence portended some indicia of control by the member over the LLC but pointed to a dearth of evidence with respect to most of the factors listed above.

Westmoreland Associates, LLC v. Kispert, No. 082774/99, 2002 WL 50474 (N.Y.City Civ.Ct. Sept. 20, 2002)
(stating that formation of LLC to avoid personal liability is perfectly legal, and refusing to pierce veil of LLC landlord and hold members liable for overcharge because corporate status or nature of the business organization must be used to perpetrate fraud, and LLC status of landlord was irrelevant to tenant's payment of rent).

Collins v. E-magine, LLC, 739 N.Y.S.2d 15 (N.Y. A.D. 1 Dept. 2002
(recognizing statutory liability protection of LLC members and managers and holding plaintiff failed to raise triable issue on alter ego theory in view of "heavy burden to be met if the corporate veil is to be pierced").

Curole v. Ochsner Clinic, LLC, 811 So.2d 92 (La. App. 2002)
(finding allegations insufficient to require an inquiry into whether LLC veil should be pierced to hold CEO of LLC personally liable).

Jordan v. Commonwealth, 549 S.E.2d 621(Va. App. 2001).
The members of an LLC that owned property that created a public nuisance were convicted of maintaining a public nuisance. The Commonwealth acknowledged that title to the property was held in the LLC but argued that the defendants should be deemed the owners of the property because they were the sole members in the LLC, shared its profits, and represented themselves to be the owners. The court of appeals recognized the status of the LLC as a separate legal entity and found that the public nuisance offense, placed in its ancient common law context, only authorizes prosecution of the person or entity that holds actual title to the property on which a nuisance continues. Since the evidence established that the LLC and not the individual members were the owners of the property, the convictions were reversed.

Lastly, this one is a little off topic, but very interesting nonetheless:

Gebhardt Family Investment, L.L.C. v. Nations Title Insurance of New York, Inc., 752 A.2d 1222 (Md.App.200 0).
The issue in this case was whether a title insurance policy continued in effect for property transferred by a husband and wife to their wholly owned LLC. The court held that the transfer terminated the policy. The Gebhardts conveyed the real property to a Virginia LLC of which they were the only members. The deed recited that the LLC paid $160,990 for the property, but Mr. Gebhardt testified that this recitation was for transfer tax purposes and that the LLC did not pay anything for the property. The Gebhardts argued that the conveyance was in effect a conveyance to themselves because they were the sole members of the LLC. The court, however, stressed that an LLC is a separate entity and that there was indeed a transfer from one entity or person to another. The court stated that there was a real conveyance even if no money changed hands because the Gebhardts obtained benefits conferred by a Virginia LLC, including limited liability and estate planning benefits. Finally, the court rejected the argument that, because they had already reported the cloud on the title before the transfer to the LLC, the Gebhardts should be able to recover under the title policy. The court rejected this argument on the basis that any loss suffered by virtue of the cloud on the title would be suffered by the LLC, not the Gebhardts, because the Gebhardts successfully conveyed the entire property under a special warranty deed.
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Yes, there are many more, with decisions that go both ways, that we can play the "case study" game for years with the "I'll see your two veil piercings and raise you an appellate reversal". :wink:

But scorekeeping isn't the goal here. I'm simply trying to demonstrate that these cases are as numerous as they are complex and multi-faceted. That's why I get a little incensed when I see flippant and conjectural remarks such as "LLC's don't offer any real protection" or "piercing the corporate veil is easy". After reviewing, shoot, about 100 or more cases, I can see there are NO absolutes and the majority of cases where the entity was set aside usually involved fraud, gross negligence (such as your New York "lead-lord"), or a clear cut case of "alter ego". In one filing, the LLC members blatantly told their complainer, "Go ahead and sue our LLC. It doesn't have any money. Why do you think we formed it?". Yeah, that didn't go over too well in court! :roll:

However, can you do everything properly and still get screwed by the courts? Heck yeah. But you've increased the odds significantly in your favor by properly forming and maintaining a corporation or LLC for your business rather than going out into the world alone, unarmed, and unafraid.

Woodard argued that the president of the corporation had personally inspected the apartment, knew that there were young children living in the apartment, saw the young children himself with his own eyes and that they were living amongst numerous areas of peeling, chipping and flaking paint and yet he personally failed to take the reasonable and appropriate steps to remedy these defective conditions. Furthermore, even after the president was told of the lead paint hazards and violations and cited by the New York City Department of Health with an Order to Abate the hazardous conditions, he still failed to maintain the apartment in a safe condition and allowed the peeling and chipping paint conditions to continue, resulting in a second Order to Abate from the New York City Department of Health 4 years later for additional lead paint violations.

Does this sound like somebody maintaining their entity in a reasonable and responsible manner? Forming an LLC or Corporation isn't a license to start acting like a careless blithering idiot. Unfortunately, too many slobs out there believe it is and attempt to hide behind laws that weren't meant to defend their behavior.

Thanks for the perspective Dave, but you still haven't provided one single case supporting this claim. I've discussed the "property management" issue with my attorneys (the ones I pay for and whose licenses are on the line should they screw up) and they completely disagree with your stance.

I already said forming an LLC does NOT force you to be a silent partner in your own business. An auto mechanic can place his garage into an LLC or Corporation AND continue to fix cars while enjoying the limited liability of the entity. It's plain and simple, he's conducting work within the scope of his company's business charter or operating agreement. Of course that doesn't mean he's still protected if he decides to open up a sandwich shop in bay #2 of his garage.

The officer of an LLC in the real estate rental business can manage his properties, i.e., advertise, show, take applications, collect rent, and schedule repairs without compromising protection. It's all within the "scope of work". Now, if he tries to fix an electrical service panel without being a licensed electrician and causes a fire, I can see how he can be held personally liable since he was acting outside his "scope" - he's supposed to be a manager, not a contractor. But how is he liable if he hires a licensed electrician and THAT guy goofs up? I still haven't seen ONE property manager step and say "limited liability" is an important feature of hiring one. That's because it doesn't provide any. The LLC protects you, NOT the PM.

I'm keeping my eyes open for one in the northern part of Houston, TX right now. My plan is rent out each room as its own little part-time apartment to several pilot buddies while keeping one room for myself. If the "lodge house" doesn't work out in the long run, my plan is to simply rent out the entire place in the traditional sense. Therefore, finding a house in a good safe area with good schools is paramount.

You can't go by just the number, not anymore. I have tenants who short sold their home and have scores in the 500's, but are otherwise great tenants. Another guy I rented to had a score in the low 700's and I had to evict him after two months.

Bottom line? The credit score is good information, but it's not a litmus test. You need to evaluate the entire picture, i.e., credit, income, history, significant life events, etc.

A lot depends on the region. If I remember correctly, most of Florida (at least the panhandle) is geared towards electric appliances. Therefore, that's what your tenants are more likely to already own and may pass on your rental if they can't use their own dryer. In California, natural gas is the norm and electric dryers are as rare as an honest politician. As far as the stove and water heater, those are usually included with the premises, so I wouldn't expect my tenants to have their own in the U-Haul. But since gas appliances are more readily available in my area, they're typically cheaper and easier to find deals on. Bottom line? Make your rental easy for somebody to move into.