All Forum Posts by: Jon Pitcher

@Jeff Hsieh

I'm not licensed in your state, so no legal advice here.  You should consult an attorney before you go too deep into this venture.  

You can avoid many problems with a well-drafted operating agreement that addresses the following issues:

1.  Who will make the day-to-day decisions?  Typically you want one or maybe two managers who can handle managing the property (or hiring a property manager) and making choices on paint colors and appliances.

2.  Which decisions will require member consent?  Big decisions should require a majority (or super-majority) member vote or written consent.  Examples would be decisions to purchase a property, borrow money against a property, sell a property, etc.

3.  How and to whom is any member allowed to sell his/her membership interest?  Does it trigger a right of first refusal in the other members?  You don't want to allow the members to sell their interests without approval.  And if a member dies, you don't want to be stuck with the member's heirs as your new business partners.

4.  What happens when a member wants out of the deal?  You should have some kind of forced buy/sell mechanism so that you don't have to resort to litigation to split up the business.

@Danny Ondik

A corporation is not a good vehicle for rental properties, tax-wise. You want to preserve the "passive" status of the income, which an LLC does but a corporation does not. An LLC does also provide asset protection (if used properly), but you can't use it with conventional financing. At least not without risking the bank being able to call your loan due.

@Danny Ondik

If you are talking about owning rental properties, you don't want a corporation, you want a limited liability company (LLC). Whether you need one or not depends on your circumstances. Generally I recommend them if you are paying cash or using a lender that will allow you to hold the property in an LLC (such as a portfolio lender). If you are using conventional financing, then you should leave the property in your personal name.

@Ginny Shaw Disclaimer – I am licensed in Texas, but I practice in Oklahoma and am not familiar with the Texas Landlord/Tenant Act or Fair Housing Laws.  So this is not legal advice, and you should consult a Texas real estate lawyer.

Here are the steps I would take in my state:

1.Give written notice to all of the tenants letting them know you have purchased the property and will be inspecting all of the units and making necessary repairs. Explain that you have reviewed the current leases and have identified some unenforceable provisions. Note that you manage all of your properties in compliance with state and federal Fair Housing laws. You will not attempt to enforce any discriminatory or otherwise unenforceable lease provisions. I would send this by certified mail and post it on the doors.

2.Inspect the units. Make repairs, starting with safety issues , then any repairs required to bring the units into compliance with state law, then any reasonable repairs requested by the tenants. If any tenants have a disability, watch out for any accommodation requests that the previous owner might have ignored.

3.Determine from your inspections and the rent records, which of these tenants do you want to retain? Note - you are basing this on the tenants’ payment history, lease violations, and the condition of the units, not on any protected class factors.

4.Send a letter to tenants you wish to retain, inviting them to renew their leases. If any take you up on the offer, use a good lease form.

5.Send a letter to the tenants that you don’t wish to retain, giving them the option to leave at any time by giving you 30 days’ notice. Or even a shorter notice. If any are behind on rent, evict them or offer cash for keys.

6.With respect to tenants who didn’t sign a new lease or leave, put a good lease/tenant in place as their leases expire.

In my area, all of the properties on auction.com have already been foreclosed.  So if someone is living there, you don't have to worry about foreclosing the property to get them out. 

I bought a property from auction.com last year that was listed as "occupied".  But by the time I went to see it, the sheriff had served a writ of assistance and the owners were gone.

I can help with estate planning and LLC formation.

You are not being paranoid, there is a lot of risk for you in this transaction.  You should insist on both closings happening at once in the same office.  PM me if you need a contact for a good title attorney/closing company that understands this transaction.  

Do you have a copy of the contract between the wholesaler and the seller?  Even assuming there is a good contract there, you still need the seller to show up and sign the deed at closing.  If he/she doesn't show, you have bought a lawsuit instead of a house.

1.  Sign a lease agreement with your tenant.  Here's a form promulgated by the Texas Association of Realtors.  It's probably 5 pages longer than it needs to be, but it will work:

http://www.leaseaustin.net/assets/docs/lease_agree...

You don't need to invoice your tenant every month.  The lease spells out the payment terms, and it is the tenant's responsibility to pay you each month.  If they don't pay you, then find an eviction lawyer in your area and get some guidance on how to post the required notice and get them out of your house.  The lender is going to know that the tenant's lease payment obligation will end when they buy the house, so the rent isn't going to hurt their debt-to-income ratio or otherwise harm their ability to get a mortgage.

2.  The rent you collect will count as income.  Against that income, you can deduct mortgage interest, property taxes, insurance, repairs and depreciation for the period of time that the tenant lived there.  You can't deduct the principal portion of your mortgage payment.  Your best move here is to keep good records and take all of your documents to a CPA at tax time.  

@Gary Dale McKee

An excerpt from the Oklahoma Fair Housing Law:

"§25-1452. Discriminatory housing practices - Categories or classes of persons protected - Jurisdiction of Human Rights Commission. 

A. It shall be an unlawful discriminatory housing practice for any person, or any agent or employee of such person:

To refuse to consider as a valid source of income any public assistance, alimony, or child support, awarded by a court, when that source can be verified as to its amount, length of time received, regularity, or receipt because of race, color, religion, gender, national origin, age, familial status, or handicap;"

https://www.ok.gov/OREC/documents/CompleteDiscrimI...

It is illegal in Oklahoma to discriminate against an applicant because their income is from public assistance.  And it is illegal at both the state and federal levels to discriminate on the basis of a person's disability.  I would advise you to approve this applicant unless there is a strong, objective reason not to - such as eviction history, a recent criminal conviction, or their income (including all disability income) is less than whatever standard you have used for all of your past tenants.  

The majority of fair housing lawsuits are brought by tenants with disabilities.  This is not an area where you want to "go with your gut" or try to avoid a hassle.

I have uploaded an Oklahoma residential lease form to FilePlace.  If anyone has comments on the document, please let me know.  Especially if you see any errors or important provisions that I've missed.   

https://www.biggerpockets.com/files/user/JonP22/fi...