Friendly Liens
I am in talks with a couple different asset protection companies that are reccomending the use of friendly liens. Does anyone have experience in using this form of protection? They reccomend setting up a nevada corp, having you the sole owner and issuing liens to strip out your equity in your properties. Couldn't you setup a corporation yourself and do this? Would appreciate any thoughts or experiences you guys may have.
Ray
Anyone heard about these? Anyone used them before? I spoke to three national asset protection companies and 2 of them reccomended them and guaranteed against lawsuits.
Appreciate any info.
Anyone done other strategies to hide or strip out equity?
Well Ray, I know a little about this strategy and I don't think it is going to work. In fact if it ever becomes a real issue I think its likely to backfire and cause big trouble.
The idea here is to make yourself look uncollectable. I.e. to convince potential litigants that there is no point in suing because you don't have any money to collect anyway.
Unfortuantely you cannot have it both ways. To look really uncollectable your credit rating has to stink, you cannot drive a nice car and must owe money even on the beater.
Lets say that a tenant gets injured on your property due to your negligence. Not just a little injured, big time disabled. And not just due to an accident, you are clearly negligent.
This guy is going to get an attny. And that attny is going to be a guy who specializes in these kinds of cases. He isn't going to be put off by the fact that you appear to be uncollectable, he's going to sue you anyway because there must be some assets someplace, after all you are a landlord.
He's going to look at your out-of state corp and the liens and he is going to say, "oh this guy think's he's being clever," and he is going to put a couple of investigators on the case and show that you filed liens on yourself solely to hide assets from the court. The judge is going to conclude that you were not only negligent you were willfully negligent and did not take the actions to remedy the situation that caused the tenants injury because you thought your fraudulent liens were going to protect you from the lawsuit. You look bad. They are going to nail your ass.
Now the issue is whether this mechanism will protect you from nusance suits. Truth of the matter is that there just aren't that many nuisance suits out there and they tend to go away pretty easily. Even though they are a plague on the land Lawyers like to get paid and there just isn't that much money chasing $5,000 to $10,000 claims..
Good points Mark,
From talking with litigation lawyers I hear the horror stories of lawyers going after 100's of landlords a month just to toss the dice and as the cost of defense lawyers is so high, most end in a payout, of which all of the above terrifies me.
So, my original strategy was to use land trusts with an LLC as the beneficiary and I'm thinking a corp as the trustee, is that solid enough do you guys think?
ray,
You can have a barred and chained steel door in front of your LLC held land trust with a corp trustee that is owned by another LLC held corp and so on and so own, and if a person wanted to "get to you' bad enough, they will. These methods are really used to prevent the scammers and sue happy from seeing an easy target. Your best course of action is not to do anything to the point where people would want to sue you. Barring that, whether you choose to use any of the above methods of hiding your assets, your best protection is a good, solid insurance policy.
BTW, a much simplier way of appearing debt-ridden is to just get an equity line of credit on your properties for the max available. Equity lines appear as a full loan when someone researches it.
Roger
Roger, great point about the equity line, that is a great idea. And so you guys know, I treat my tenants like gold (as long as they pay), it;s the frivolous ones that scare me.
Thank you very much guys,
Ray Higdon
Friendly liens can definitely work. Have one LLC make a large loan to whatever entity owns the property, record it, show a paper trail, and that loan will have precedence in the event of a legal challenge. Since the first thing an attorney does is an owner asset search, that property will have a promissory note recorded that is first in-line that leaves no equity left to future judgment creditors, few lawyers will even pursue the matter.
The answer to your question depends entirely on your contract. *** It will state Who is at breach?
It may be wise to pay a reputable real estate attorney a few bucks and have him/her go over it with you.
Are you buying the the whole lot of 20 units? (even if they are conveyed into single units.) Have you had it appraised? Do you *want * them conveyed into single properties?
You have some lemons here and might want to try to make some lemonade. First, retain legal counsel and have a strongly worded letter sent out to Mr. Seller and his attornies to at least try to get them to play ball. The sale was misrepresented to you at the beginning (that they were already conveyed as condos, which they were not) and it makes a big difference between residential and commercial funding plus the value of the property - this is your leverage, because it was intended fraud. (Lawyers don't like to hear that term and will advise their client to sit up and pay attention to what you've got to say.) Mr. Seller has your $5000 already and doesn't seem to want to give it back - approach it as one big L/O deal - all 20 units in one package. AND, renegotiate the price because of the cost of the conveyance. Keep the lease under your belt for 6 months and go for the commercial loan to include the cost of conveyance - if it appraises out well, trust me, you will not have a problem. Mr. Seller is in a world of poop if you decide to go after him legally...my bet is that he'd want to avoid that.
20 separate residential loans was going to cost you an arm & a leg in processing & fees, anyway. That bank must be grinning from ear to ear since you walked in. I have been getting a huge education these days in serious creative financing, and believe me, this is not the way you want to go. You're getting robbed. That bank can do the commercial loan, they are just playing with you.
In the future - keep a settlement company on hand for big earnest money payments to sellers. Never hand over to a seller what you are willing to lose. Just like Vegas.
I see this as a huge opportunity that you can turn into your favor because Mr. Seller stole from you and committed fraud.
"the reason I say that the bank will not loan money on the property is that commercially the deal won't qualify since it has only 10 units rented out of 20, thats all. "
That's what they are telling you. They are still playing with you. It's easier for them to sell the note when it is fully rented. "Qualify" in a banker's vocab is the same as "How fast can we sell the note?" If they force you into 20 separate residential loans, they will make a *killing* when they sell/trade your paper. They *want* you to take the res. deal.
Has it been appraised? If the bank is strictly looking at it from an Income Approach, that's their excuse. How about looking at it from a Comparable Sales approach? A full commercial appraisal would indicate both. Have you shopped banks? Do you have enough equitable interest on the table (i.e. how much do you have to put down?) Is your credit decent?
Go back to Mr. Seller and say to his answering machine, "Look, I got a solution to this mess. You want out of the property, I'd like to have the property, but some of the game pieces have changed. I'm not going to hunt you down for the $5000 if we can come to some other arrangement that is *agreeable to us both." Then, you get it under contract with a L/O and go from there.
*agreeable - meaning Mr. Seller won't be sued by you for misrepresentation and fraud!
Take the $$ you were planning to pay the Bank in 20 loans worth of fees, spiff up the other 10 units and get them rented. You'll then get your commercial loan without a problem.
Otherwise, sue the bugger! LOL