Underactive Vs. Overactive Conscience
I have this idea, but something tells me it's either fraudulent or just wrong. On the other hand, maybe I just have an overactive conscience.
The property is in foreclosure, with auction date in October. The seller needs to get 10K out of the deal.
I was thinking to get the owner under contract for the amount owed the 1st mortgagee + 10K, then purchase the 2nd mortgage at a discount. This would give me about 30K to work with for repairs, profit, closing, holding, etc. It could work.
But then the seller got another offer from another investor. He would get 10K & the buyer would pay off the arrears. (Honestly I don't see how the numbers can work out for the other investor this way).
At this point the evil thought-processes started to unfold.....
If I were to purchase the 2nd mortgagee's note at a discount, but let the other investor purchase the property, I would make about 30K without any holding costs, repairs, etc.
Sounds great, right? To do this I would have to pay the seller some money to hold off the other guy for a few weeks so I could purchase the note - because otherwise he would rather have his 10K sooner as opposed to 4 weeks from now. There has to be a monetary incentive for him. All this time the 2nd mortgagee has no idea that they could have had their loan paid off in full....OK, I know I'm not supposed to feel sorry for the lender...
So am I thinking extremely clever & creative thoughts? Or is this an evil plot to get myself & everyone I know into trouble?
So is there any problem involved with paying the seller something to hold off the other investor until the note is sold? For the seller only a monetary incentive would be effective in this case. If this method is ok, how would I go about it? Just hand him the cash? Or somehow pay through escrow?
I would have the seller sign an option to purchase the property within X days and give them whatever for the consideration. To protect yourself you should record this document. The problem with that is that the 2nd mortgagee might do title work before they sold the mortgage. Maybe the SSPro has some first hand experience or a better idea than I do?
Myfrogger, would it suffice to just have the purchase option notarized rather than recorded?
Well let me reconsider my answer. Its not immoral to go offer to buy the second. It is immoral to tell the first you are going to buy his property in order to buy time so that you can go buy the second. Even if that offer to buy contains consideration if it is based in a fraud (I just need a week or two to put my deal together) then its immoral, imnsho.
I do agree that it is immoral to tell the owner that you only need a couple of weeks to put it together than then never follow through. I was only thinking that this paperwork would protect your interest and what you are trying to do.
This is probably an attorney question of the right paperwork to use....
In the meantime...hurry hurry hurry and buy that 2nd
Not to sound ignorant here, but why is it immoral to get the owner involved here - would it be considered bribing? That is what my gut-feeling tells me.
In any case I am rushing to buy the note if possible. However, I will tell the owner that he will have to decide which of us he wants to go through. I am still willing to purchase the property after I acquire the note, even though it may mean less profit.
So thanks all for your input since I have absolutely no wish to be involved with transactions that might in any way be considered shady. I'm off to find more properties!
Your kicker in this deal is "foreclosure", now if you by the 2nd note and the first follows through with foreclosure you could loose all your investment.
If a profit can be made and it is a good deal, this is my normal process:
I agree to keep the foreclosure off my customers credit records.
I agree to bring his loan(s) current.
I agree to make his future payment.
I agree to give him/her interest in any net proceeds.
In turn he deeds the property over to my trust
We sign a purchase agreement
We sign an agreement of the terms of interest as stated above.
This is called a land trust transaction and has been a great tool that has helped me help a lot of folks in foreclosure.
JohnMichael
I plan to eliminate the risk of losing my investment in the 2nd by paying off the 1st in full when I actually purchase the property. I wouldn't let it actually go all the way to auction.
But the method you mention sounds very interesting. Would you use some hypothetical numbers to explain what you mean?
nwms
A Land Trust is a specialized type of trust formed to deal with real property (not personal property) for the benefit of one or more persons referred to as "beneficiaries." The person creating the Trust is often known as the "Trust Creator" or "Grantor." The person or institution holding legal and equitable title to the real property is called the "Trustee."
Before you take on land trust investing you should learn all you can on this form of investing as many make the following mistakes:
The payments were NOT made on time or not made at all.
The investor did not fully disclose the risks or the adverse effects to the seller.
The investor implied some payoff in the near future.
The investor made the decision to deal with an unstable, flaky seller.
The investor gave legal advice (you'd be surprise how many do).
The investor did not maintain an open line of communication when things went wrong.
The investor did not clarify and get confirmation that the seller understood the entire process.
The words of the investor did not match the documents or the investor's actions did not match their implications.
No matter how good the deal appears, do not do long-term deals with an unstable sellers.
Be honest, Be honest, Be honest and you will face great success.
Depending on your state's redemption laws, you may not have to purchase the first at the auction, you may, as holder of the second, have the right to redeem the first from whoever buys it at the sale, if it gets that far. You'd need the cash though for that. Check your laws.
Of course, it would be easier to buy it before all that happens. Be aware, though, since your seller may be playing investors off of each other for the best deal. Some sellers will get greedy or confused and sign agrements with several, which could end up blowing the deal for all.
Hey, check out http://www.smallbizincorporator.com ... It's got a good bit o'iformation you may find helpful on llc's.
The main advantage of an LLC is that a judgment holder's exclusive remedy when suing you personally is to obtain a charging order. This means that the courts are not allowed by law to give ownership of your LLC away to pay for your debts as they are able to with corps--the only thing they can do is grant a charging order which entitles the judgment holder to proceeds of that LLC. It is true that you can just simply start retaining the LLC's earnings and the judgment holder will start paying tax on profits it never received! They will be modivated to settle for pennies on the dollar. I'm sure you knew all of this but I would definatly use an LLC in charging order states.
I have my attorney draft all documents as it only costs me about $250/entity. I would highly advise you to pay the small fee and have an attorney draft the first set of documents. From there if you wish to simply copy them--that is wiser.
If you are destined not to use an attorney, I may have some documents from Iowa that i'm willing to share. Not sure if those would help you in Illinois tho.
I use www.mycorporation.com and typically use Delaware LLCs due to slightly better liability protection due to state laws as well as confidentiality issues with "public data". However, as time passes there is less and less difference between Delaware and other states.
[addsig]
Thanks Frogger,
In all the reading I have done on LLC's no-one ever mentioned this aspect.
Mark
Howdy,
When engauging in real estate transactions, would a corporation or LLC be required to register as a foreign corporation in the state where the property is held?
I do not have an LLC yet, but I did investigage them a little before forming several corporations.
Quote:1) do you have the impression that any particular states are better for organizing LLC's than others (as Delaware and NV have been for corporations)?
Question to anyone who knows in answer to a question
If the state of incorporation doesn't matter, then I'd definately check out another state - looks like Illinois filing fee is $500 vs. NV $85. Plus don't overlook the state tax advantages.
2)Good article here: http://www.entrepreneur.com/article/0,4621,288849,00.html
Exert: "LLCs are also more flexible in distributing profits than S corporations, wherein the corporation can only have one class of stock and your percentage of ownership determines the percentage of pass-through income. On the other hand, an LLC can have many different classes of interest, and the percentage of pass-through income is not tied to ownership percentage. The pass-through percentage can be set by agreement of the members in the LLC's operating agreement."
3)& 4) I checked out some books at the library that had a general outline of an Operating Agreement. Check with State Requirements as a few can vary. One inexpensive book I bought was "How to Profit by Forming Your Own Limited Liability Company" by Scott E. Friedman Decent overview, but I used the library as well so as not to depend on one source.
Myfrogger, do you have any special resources for more information? I haven't heard of this either and want to find out more.
Happy researching,
Terry
"Question to anyone who knows in answer to a question
When engauging in real estate transactions, would a corporation or LLC be required to register as a foreign corporation in the state where the property is held?"
Answer: This is in legal area known as "Doing Business" and what is/isn't is a little different bit of law in every state.
But, for most part, if you or I have the odd rental in any state, then NO, no state regis. in that state is required.
But if I were opening a rental office in "Jerseysippi", and renting 500+ units, then probably I'd feel uncomfortable NOT registering and paying the few bucks required.
Seriously, there are LOTS of court decisions on just this question, so many in fact that CT Corp publishes a little book for lawyers every year or so on the law & court decisions in all states.
Gen speaking, the states are somewhat loathe to say by statute that everythin is DB, because then the other states would retaliate and say that every business doing ANY business in that state is then required to register, get biz license, etc.
A very onerous requirement in that there are lots & lots of us doing the odd piece of business in other states, and of course there are the cos. whose sales agents are everywhere, hawking that cos. products & services.
Should every one of those cos. be required to register in all the other states?
You can see the huge problems involved.
[addsig]
I examined the aspect of which state to incorperate in in great detail before I decided to go with my home state. It was my accountant who finally made my decision for me. He says that under Iowa law, if you have sales, employees, or property in the state of Iowa, you must pay state taxes. My attorney also said that foreign corporations wishing to purchase real property need to register with the state and pay fees.
The only advantage that I saw was that it may be more difficult to sue a foreign corporation because you could probably argue that the plaintiff come to that foreign state to sue you. Of course you would too.
With no tax benefits and having it more costly to operate, I decided to use my own state.
In a state such as california where LLC's are highly taxed and if I recall reading they do not use charging orders---a foreign LLC may be the way to go. I don't know if that eliminates the tax though.
I know you said you don't want to use an attorney but with the thousands of attorneys in chicago, you could get thousands of free consultation hours. When I first started investing I interviewed about 35-40 attorneys. This was beneficial in that I found the attorneys that I work with currently and also got a TON of free advise! I'm sure you could do the same if you've got the time.
Yeah, I think I've pretty much decided to use a LLC based in whatever state the property is located in. Sure you save on registration fees by moving to a low-cost state but then you need to pay foriegn company fees that work out to be almost the same.
My request is not based in a desire to avoid attny's fees-- really. The manner of business organization is an important part of how you do business and I am just anal enough to want to be involved in that process at a very hands-on level. In the same way that I built an excel spreadsheet to do property analysis rather than rely on some off-the-shelf software package. By getting a dozen or so LLC agreements, comparing them, editing and constructing a custom one I get to see what the issues are, think about how I feel about those issues and put together a document that meets my needs. Although I could go talk to a dozen attnys for their hour or two of free initial time I feel like I get a better understanding of the process in this way. When I have the document more or less the way I want it I will pay an attny who specializes in these exact matters to review. It is a system I have used many times (I even filed a pro-se lawsuit once just to go through the process and figure out how civil proceedure works.) and for me it works. Not saying its the only way, just that it works for me. Thanks for your help, I do appreciate the agreements that various of you have offered to send my way.
I guess here's a final story to try to make the point. You often see the phrase "Null and Void" in contracts. Now, what is the difference between "Null" and "Void"? In essence there isn't any. So why do lawyers use the phrase? Because in 1066 William of Orange conquered England. Many people (they tended to be nobles) as a result spoke french while most (they tended to be lower classes) spoke Saxon. Null is a french word and Void is a saxon one. The attnys at the time thought that any provision central enough to the contract that breaking it would nullify the contract should be clearly understood no matter which language the person entering into the contract spoke. So they put both words in the contract. So for 900 years attnys have been saying "Null and Void" even though the redundancy was probably unnecessary for 600 or more of those 900 years.
Likewise in partnership agreements, contracts etc. Attnys have a tendency to repeat what they have recieved without lots of thought. I like to go through such agreements and actually think about what is being said. In order to do that I find it helpful to acquire a sampling of different things that have been said to compare. Again, it is a system that works for me.
Many good points have been raised thus far and I would like to add just a few more.
1. If you own an active rental property then the LLC should be registed in the state where the property resides. Rental activity is considered DOING BUSINESS and thus, requries registration. Failure to register can result in lack of standing (can not bring an action in state court e.g., unlawful detainer) and penalties.
2. The LLC operating agreement is the most important aspect of your entity formation. The operating agreement spells out how income and losses are to be allocated (economic effect), management rights, member protections, and LLC powers and duties.
3. The LLC offers great asset protection however, the charging order protection does not apply to inside liability. Inside liabiilty is when the LLC is sued because the LLC caused the harm compared to outside liability when the member is sued for his personal acts (you get in a car accident). The state in which you choose to form your LLC can greatly impact the degree of protection the courts will afford when dealing with LLC governance. For example, one of my employees successfully defended a client on a 20 mill claim because the entity was created in Nevada then registered in Washington to conduct business. The court applied Nevada law and our client won had the court applied WA law our client would have lost. Thus, where you choose to establish the entity can have an impact at a later date.