TERMS AND DISCLAIMERS - Amazon Web Servicesomegawealthprotection.s3.amazonaws.com/Omega... ·...

ii Introduction

TERMS AND DISCLAIMERS

NO ATTORNEY-CLIENT PRIVILEGE OR LEGAL ADVICE: While the authors are attorneys who have discussed various legal, business and other concepts herein, nothing herein shall be construed to constitute specific legal advice or recommendations. Furthermore, by using this training program, you understand that you should still seek legal and financial counsel when appropriate for your specific situation. Your participation in this course shall NOT create an attorney-client privileged relationship under any circumstance.

NO WARRANTIES: This training program is being provided AS IS for informational purposes, without any warranties, except for any applicable return policies. This training program is not guaranteed to produce any particular result. Use the information contained herein at your own risk.

TRADEMARKS: Innoventum, the Innoventum logo, and “where innovation meets momentum” are the registered trademarks of Innoventum, Inc. IDontLikeToWork is a trademark of IDontLikeToWork LLC. All other product names and companies mentioned herein may be trademarks of their respective owners. Innoventum and IDontLikeToWork LLC make no claim in the trademarks of these third parties.

NO ENDORSEMENT: None of the companies mentioned herein have endorsed this product.

ILLUSTRATION COPYRIGHTS: The majority of the photographs and illustrations used herein are the copyright of iStockPhoto.com and their respective authors, and AnimationFactory.com and their respective authors.

COPYRIGHT: This training program is owned and published jointly by Innoventum, Inc. and IDontLikeToWork LLC. To purchase additional copies of this training program, please contact IDontLikeToWork LLC at: 6659 Pearl Rd Suite 301 Parma Hts, OH 44130 Phone: 440-545-2095

© 2010 Innoventum, Inc. and IDontLikeToWork LLC. All Rights Reserved.

iiiIntroduction

ABOUT THE AUTHORS

Jeffery S. Watson

Jeff is a graduate of Ohio Bible College and the Cleveland Marshall College of Law. He was admitted to the Ohio Bar in May 1991 and since then has been a full-time attorney with an active trial/hearing practice. For the last five years he has been the owner of a successful solo practice.

Jeff has been a landlord and real estate investor since 1993. His real estate investing experience includes rehabbing, creative buying, long term holding of numerous rental properties and apartment buildings, and actively handling several short sales in more than one state at any given time.

He is a nationally recognized authority in the area of Short Sale transactions and disclosures. He is the co-creator of the Option Contract method that transparently discloses “back to back” transactions for short sale quick-turns. He represents established real estate investors in commercial and residential matters and frequently consults with title companies on closing protocol for short sales.

He is also legal counsel to Nova Star Real Estate Brokerage Ltd, Sharp Concepts Realty LLC Brokerage and Eagleville Bible Church Inc.

He is co-founder and part owner of Venture Land Title LLC, Strategic Real Estate Coach, Inc., and Realeflow LLC. He regularly prepares deeds and other documents for local title companies and real estate brokerages.

He is the Author of 4 digital books:

“How to Hire Your ‘Dream Team’”“Understanding the Foreclosure Process”“Death of the Land Trust … in Short Sales”“Short Sales Done Right – How to Profitably and Legally Navigate the Short Sale Jungle”

Jeff, his wife Lorri and their five children reside in a small town on the shores of beautiful Lake Erie in northeast Ohio.

Introductioniv

ABOUT THE AUTHORS (CONTINUED)

Denise GosnellDenise Gosnell is a world recognized author and attorney with a unique background in technology, law, business, and entrepreneurship. Denise is also a licensed real estate broker in the State of Indiana, and has extensive experience in real estate legal and business matters. Denise’s husband has been a real estate investor for over 30 years, and owns dozens of rental properties. Denise has represented her husband in over a hundred transactions over the past ten years, ranging from deed preparation, closings, land contracts, tenant evictions, etc.Denise is the President & CEO of Innoventum, Inc., a content publishing company. She also practices law through her law firm Gosnell & Associates, Inc.

Jynell BerkshireJynell Berkshire has a unique combination of legal, business, and public policy talents. Jynell has over fourteen years of experience in government relations and assisting start-up and existing companies with initial formation, growth, and funding challenges. Jynell is also a licensed real estate salesperson in the State of Indiana, and has extensive experience in real estate matters. Jynell is the owner and managing member of a real estate company that owns several rental properties. She represents herself in dozens of real estate matters, from tenant screening and evictions, to deed preparation, and property acquisition through tax sales, etc.Jynell is the Vice President of Innoventum, Inc., a content publishing company. She also practices law, and provides strategic consulting through her consulting company eGlobal Consulting, Inc.

Greg ClementGreg Clement is the creator of Realeflow, a world renowned marketing guru, and a visionary business leader in Cleveland, OH. His unique approach to business and life in particular has been responsible for the birth of multiple projects and companies that have greatly impacted the real estate industry. Greg graduated in 1997 from Baldwin Wallace College with a degree in Marketing. Greg has a financial planning background and has used those prior experiences and relationships to further bolster the impact his company has had on the investing community.Greg has been a partner in hundreds of real estate transactions over the last 3 years alone. Many credit Greg for being a catalyst for achieving hyper-growth in their businesses. Greg has created and developed a number of industry changing concepts and ideas such as “The Problem Property Solution” and “The Residential Redevelopment Model.”

Introduction v

TABLE OF CONTENTS

OMEGA BUY AND HOLD FREEDOM MODULE

The Omega Buy And Hold Freedom Module provides several advanced strategies that are specific to real estate businesses that buy and hold properties. These strategies also combine the best battle tested and proven ideas of the four authors of this program.

Chapter 1. Building A Powerful Structure For Buying and Holding........6 Chapter 2. Buy and Hold Risks/Concerns...............................................20 Chapter 3. Sample Agreements To Use For Your Entity That Buys and Holds Properties....................................................32 Appendix A...............................................................................................38 Appendix B...............................................................................................42

7

BUILDING A POWERFUL STRUCTURE FOR BUYING

AND HOLDING

BUYING AND HOLDING real estate can be addicting. One of the best aspects of buying and holding real estate is the fact that you can use the rental income collected from tenants to pay the loan payments that you may owe.

And ideally, you will also have enough left over after paying your loans, taxes, and insurance that there is even a profit left over for you to pay yourself in the meantime.

Some of the wealthiest real estate investors have obtained their wealth through buying and holding real estate. Whenever you plan to hold a lot of real estate for the long term, you become a target for potential lawsuits because you are one of those who are perceived as having “deep pockets”. Thus, it becomes even more important that you take the necessary steps to ensure that you use the right strategies to protect yourself adequately.

In this Chapter, we will explore how to lay the proper foundation for the businesses that will own the properties that you buy and hold. For example, we will cover how to use land trusts in combination with a multiple member LLC and single member LLC for the optimal protection.

For those who do not want to use land trusts, we will also cover how to use a separate single member LLC to hold each property, and a multiple member LLC (that elects partnership tax status) to own the single member LLCs.

And of course, once the company is formed properly, you also need to keep the company in good standing using the various strategies discussed in Chapter 1 of the Battle Tested Real Estate Strategies Module.

As a quick recap, you need to maintain the company in good standing by filing ongoing paperwork with the Secretary of State, and by establishing a credit history for your business. You also need to follow the proper accounting and business procedures so you can easily determine the health of your company, and also stay out of trouble with the IRS and the FTC by complying with their regulations.

Suggested Entity Structure – Scenario 1: Multiple LLC’s

One entity structuring approach we recommend for buying and holding real estate is to use a separate single member LLC to hold each property, and a multiple member LLC (that elects Sub-Chapter S status) to own the units of membership of the single member LLCs.

Before we look at this recommended structure in more detail, let’s first take a quick look at the structure that many people commonly use, which has numerous problems.

W WorksheetsVideo W

Building A Powerful Structure For Buying And Holding8

ABOUT THIS CHAPTERIn this Chapter, we will explore several recommended strategies for building a power structure that you can use for owning the properties you buy and hold. The power structure includes choosing the right type of entity and taxation status so you can maximize your asset protection, while also minimizing the taxes owed. More specifically, this Chapter covers:

Suggested Entity Structure - Scenario 1: Multiple LLC’s . . . . . . . . . . . . . . . . . . . . .•

Essential Clauses To Include In Your LLC Operating Agreement • Electing Sub-S Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Another Suggested Entity Structure – Scenario 2: Land Trusts• In Combination With LLC’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Filing Recommendations: Consider Delaware or Wyoming for Optimum• Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Form the Entities and Maintain Your Company in Good Standing . . . . . . . . . . . . . . •

Summary• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

page 7

page 11

page 14

page 17

page 17

The training videos for Chapter 1 will walk you through the recommended entity and taxation structures to use for your real estate company that buys and holds properties.

The following Worksheet for this Chapter is included in Appendix 1:

Worksheet 1: Entity Structuring • Checklist

page 19

Building A Powerful Structure For Buying And Holding 9

In the example shown in Figure 1-1, there are multiple LLC’s owned by John and Mary that own their real estate. One of the houses on the diagram is directly owned by John and Mary jointly with rights of survivorship. There are numerous problems with this entity structure.

First, there will be 4 separate multiple member LLC tax returns to deal with, and 8 K1’s that will flow to John and Mary’s personal tax returns (4 to John and 4 to Mary). There will also be the additional expense of operating 4 separate multiple member LLC’s. And the house that John and Mary own outside of an entity is not protected through any type of entity shield.

So let’s now go into more detail on the structure that we recommend with the single member LLC’s and the multiple member LLC. You will see how the structure we recommend can avoid the problems mentioned above.

As noted earlier, each property should be held in a single member LLC. The multiple member LLC should then own the units of membership in each of the single member LLC’s. The multiple member LLC can act as the management company as desired, or a separate entity can serve as the management

Figure 1-1


company. The latter provides even more protection and reduces some income tax concerns. An example of this structure is shown in Figure 1-2.

The one multiple member LLC will file the tax return with the Schedule E’s, and will just give you the K1’s on your personal tax returns. So this lowers audit risks by keeping your personal return simple. This also means that you have just one LLC tax return to file, and just 2 K1’s (one to John, and one to Mary).

The single member LLC’s are treated as disregarded/pass-through entities for taxation purposes, so there is not a separate company tax return to file for them. This structure also gives you the protection of the charging order with the multiple member LLC owning

Figure 1-2


the shares of the single member LLC’s. Since the single member LLCs that own the appreciating assets are treated as disregarded entities, the long term capital gains on the assets will be taxed at a lower rate to the owner of the single member LLC.

The biggest advantage to this scenario is that it is simpler to setup and maintain than the land trusts (discussed in a more complex example later). The biggest disadvantage to this scenario is that you lose out on the privacy benefits that the land trust gives.

If you use a separate entity for a property management company, you can still choose to use this approach involving multiple member LLC’s, or the more complex land trust scenario. You should consider electing Sub-Chapter S tax status for the other entity or multiple member LLC that serves as a property manager.

In the event that you need the additional benefits of a medical expense reimbursement plan (MERP), you may want to consider a C corporation instead of multiple member LLC electing Sub-Chapter S status for your property management company.

Essential Clauses To Include In Your LLC Operating Agreement Electing Sub-S Status

But it is really important that the Operating Agreement of your property management multiple member LLC that elects Sub-Chapter S status be modified to account for the S election.

Extensive details on how to modify the Operating Agreement to account for the Sub-Chapter S status were covered in the flipping module. But we are also including those recommendations again here in case you do not have the flipping module handy.

By default, operating agreements for multi-member LLCs are typically drafted with partnership taxation clauses. Partnership taxation is what you want for the multiple member LLC that owns the single member LLC’s in the above diagrams, since the income in that scenario would be primarily passive income.

However, if you use a separate multiple member LLC to serve as the property manager, then you would want to elect Sub-Chapter S status for the property management multiple member LLC, since the income would be mostly earned/active income. In such a scenario, several clauses in the Operating Agreement must be changed or the operation of the property management multiple member LLC will be in conflict with the Operating Agreement. If you have an LLC that has elected S corporation tax status and hasn’t changed your Operating Agreement to reflect it, then such a conflict could be exploited by opposing counsel in a lawsuit.


The following Clauses are the main areas of concern to address in your Operating Agreement. However, the Operating Agreement should be reviewed article by article to make sure all the areas are covered that are appropriate for your situation. An explanation of each clause is shown below in the normal font, and some sample verbiage is shown in italics.

Profit and Losses. The provisions in an LLC Agreement relating to profits and losses will no longer refer to partnership tax regulation IRC

§704(b) since the LLC will not be taxed as a partnership. There is no longer any need to provide for capital accounts.

A substitute clause may be:

NetProfitsandNetLosses.Netprofitsandnetlossesshallmean,foreachfiscalyearor otherperiod,anamountequaltotheCompany’sincomeorlossforsuchyearorperiod (includinganygainorlossrealizedonthesaleorotherdispositionofassets),determined inaccordancewiththeaccountingmethodselectedbytheCompany.

S Election. The Operating Agreement should show that the members have elected to have the LLC treated as an S corporation for tax purposes. If the members make this election at the formation of the LLC and reflect such in the Operating Agreement, separate meeting minutes or consent would not be necessary. This clause might read:

SElection.TheMembersherebyconsenttotheelectionoftheCompanytobetreated asanassociationtaxableasacorporationforfederalandstateincometaxpurposes inaccordancewithRegulationsSections301.7701-3andshallcooperateinthe Members’electiontotreattheCompanyasanSCorporationbyfilinganSElection onbehalfoftheCompanypursuanttoCodesection1362(a),whichelectionshallbe effectiveasofthedatetheelectiontobetreatedasanassociationtaxableasa corporationismade.FromandaftertheeffectivedateoftheSElection,theCompany shallbeanSCorporationforfederalandstatetaxpurposes.

Changes to Allocations. Once taxed as an S Corporation, allocations of profits and losses must be allocated based on the ownership interest. There can be no disproportionate allocations or other level of allocation, such as preferred return, since that may be treated as a second class of stock (thus terminating S status and having the LLC taxed as a C corporation). You should thus eliminate all of the language and reference to Treasury Regulations 1.704-1(b) through 1.704-4. You can replace it with language similar to that below:


AllocationsofNetProfitandNetLoss.

A.NetProfitandNetLoss.Netprofitandnetlossforeachfiscalyear(orportionthereof) shallbeallocatedamongtheMembersinaccordancewiththeMembers’percentage interestsintheCompany.

B.ChangeinPercentageInterests.IntheeventanyMember’sPercentageInterest changesduringafiscalyearforanyreason,includingwithoutlimitationthetransfer ofanyinterestintheCompany,suchallocationsoftaxableincomeorlossshallbe adjustedasnecessarytoreflectthevaryinginterestsoftheMembersduringsuchyear consistentwithSubchapterSofSubtitleAoftheInternalRevenueCode.

C.IntentofAllocations.ItistheintentoftheCompanyandtheMembersthatthe allocationofNetIncomeandNetLosstotheMemberspursuanttothisAgreement shallbeconsistentwiththeprovisionsofInternalRevenueCodesection1366dealing withtheallocationofnetincomeandnetlosstoSCorporationshareholders.

DistributionProvisions.Distributionsmustbesharedbasedonownershipandall ownerdistributionsshouldbemadeatthesametime.

DistributionofAssetsbytheCompany.TheManagerswillmakedistributionsatsuch timesastheManagersagree,totheMembersinsuchamountsastheMembersfrom timetotimeagree.

A.Subjecttoapplicablelawandanylimitations containedelsewhereinthisAgreement,the Managersmayelect,fromtimetotime,to distributedistributablecashtotheMembers, whichdistributionsshallbemadeconcurrently totheMembersinproportiontotheirrespective percentageinterests.

B.Allsuchdistributionsshallbemadeonlytothe personswho,accordingtothebooksand recordsoftheCompany,aretheholdersofrecord ofthemembershipinterestsinrespectofwhich suchdistributionsaremadeontheactualdateof distribution.NeithertheCompanynor anyManagershallincuranyliabilityformaking distributionsinaccordancewiththisSection.

Limitations on Ownership. Whereas anyone can own interests in an LLC, only certain persons are eligible to be owners of an S corporation. This applies to an LLC which chooses to be taxed as an S Corporation as well. A prohibition on transfers to such ineligible persons (such as the one shown below) should be incorporated in the


operating agreement and any clauses to the contrary removed.

RestrictionsonTransfer.NoMemberorsuccessortheretomaytransfer,andnoperson mayacquire,thebeneficialownershipofanymembershipinterestifsuchtransferwould causetheCompany’sSElectiontoterminate.

Economic Rights. S Corporations can only have one class of stock. These shares have equal economic rights (that is, the rights to dividends and liquidation proceeds). This also means that the provision for distribution upon dissolution must be the same as the distribution provisions during operations. Here is an example:

OrderofPaymentofLiabilitiesUponDissolution.Afterdeterminingthatallknown debtsandliabilitiesoftheCompanyintheprocessofwindingup,including,without limitation,debtsandliabilitiestoMemberswhoarecreditorsoftheCompany,have beenpaidoradequatelyprovidedfor,theremainingassetsshallbedistributedtothe Membersconcurrentlyandinproportiontotheirpercentageinterests.Suchliquidating distributionsshallbemadeassoonaspracticalasdeterminedbytheManagersin goodfaith.

Another Suggested Entity Structure – Scenario 2: Land Trusts in Combination With Layered LLC’s

One of the best forms of protection for holding a lot of real estate is to use land trusts in combination with multiple member LLC’s and single member LLC’s. This is certainly a more complex entity structure than the first one we just discussed, but it provides the optimum amount of protection and privacy. Let’s walk through how that scenario works.

You would hold each property in a separate land trust. The land trust itself does not give you much asset protection, but gives you a lot of privacy. The real asset protection comes from the multiple member LLC discussed momentarily.

But what is great about a land trust is that the details about who the creators of the trust are, who the beneficiaries are, etc. are kept private (off the public record). The name of the initial trustee is often on public record, but the names of successor trustees may not be on public record.

A separate single member LLC serves as a beneficiary of each separate land trust. These single member LLCs are disregarded or pass through entities for taxation purposes. The owner of these single member LLC’s should be a multiple member LLC that you own.

The trustee of the land trusts would be an individual or a multiple member LLC that elects


partnership tax status. The trustee is responsible for the management of the trust property, which is legally distinct from the rental property.

To achieve the best possible protection, trustee(s) should hire an entity such as a multiple member LLC electing Sub S tax status (or a C corporation) to serve as the day to day property manager for purposes of dealing with tenants, contractors, collecting rent, and the renting out units, etc.

An example of this structure is shown in Figure 1-3.

Figure 1-3


Under this recommended structure, if a lawsuit arises from a tenant or anyone else regarding the property, they will be suing the property manager multiple member LLC, not the trustee. To make it harder to sue the land trust, which can only be sued through the trustee, the initial trustee can resign, and a successor trustee is not necessarily promptly appointed. This makes it very difficult to sue the land trust. The only remedy to pursue is against the property management multiple member LLC (or C corporation). By having the property manager separate from the trustee, it allows you to have an individual be the trustee.

By using the multiple member LLC’s, you gain the charging order protection that is necessary. As you may recall from other Modules, with a charging order, creditors cannot gain control of the company itself, but can simply just gain an interest in receiving any income distributions. This is unlike an S-Corporation or single member LLC, where creditors could take control of the shares or company and thus control the operations of the company.

A multiple member LLC is recommended for optimum charging order protection over a single member LLC, because in some jurisdictions, the courts have ignored the charging order for single member LLCs and allowed personal creditors of the single member owner to obtain control of the company and force the sale of its assets. In such cases, they specifically noted that if it had been a multiple member LLC, they could not have done so.

You have many choices of how complex you want to make things. But by separating management from ownership and by having both responsibilities handled by the right entity, you will be well on your way to achieving solid protection.

Let’s recap this strategy so far. The land trust owns the property and gives you privacy. The beneficiary of each land trust is a single member LLC. A multiple member LLC owns the single member LLC(s) and gives you asset protection. The separate multiple member LLC that manages the various rental properties should be sure that it has chosen Sub-Chapter S taxation status since all of the income flowing into it from property management services will be earned or active income.

To achieve the Sub-chapter S election for your property management multiple member LLC, you have to file Sub-chapter S election with IRS (Form 2553). You would need to make sure your entity meets the requirements for S election and that form is filed in time (within 2 months and 15 days of operation or tax year to take effect). You would also need to modify the Operating Agreement of your property manager multiple member LLC to contain the proper clauses for Sub-Chapter S tax status, as was discussed in detail in an earlier section of this Chapter.

Here are the advantages to this scenario. You get the best asset protection (with charging order protection on the multiple member LLC(s). You get privacy (through the land trust). You


simultaneously minimize audit risks (through the multiple member LLC tax return with schedule E’s from the land trusts, and with only a K-1 passing through to the owner’s tax return). You get maximum tax benefits (through the sub-chapter S election on the management company, and with capital gains taxes on the sale of any of these rental properties being reduced because it is either a long term gain or deferred through a 1031 tax deferred exchange).

The biggest disadvantage to this scenario is that it is complex to setup and maintain.

Filing Recommendations: Consider Delaware or Wyoming for Optimum Advantages

You may wish to consider establishing your property management multiple member LLC in either Delaware or Wyoming and having it registered as a foreign entity in your respective state. Even though it will be subject to lawsuits in your home state, it will be a less tempting target and much harder to collect against by virtue of it being an out-of-state entity. Lawyers that sue your out of state entity may believe that the judgment that they may obtain in your home state actually has to be transferred to either Delaware or Wyoming in order to begin collection against that entity.

However, it is important to note that the use of out-of-state corporations or any other out-of-state entities for that matter is an advanced strategy that should only be undertaken when you have significant assets to protect and state income tax savings to realize. You must also be willing to maintain the proper formalities and bear the additional expense involved.

Form the Entities and Maintain Your Company in Good Standing

You learned in the other Modules that it is important to pick a name for your business that is available for use that has a lower probability of violating someone else’s existing trademark interests. You can use the 4-step process that is discussed in detail in Chapter 7 as a guide.

Once you have decided which state to form your entities in, and the other required details (such as what to name the entity and who to list as owners), you can then file the paperwork with the chosen Secretary of State or agency.

Once formed, you can then proceed with obtaining the Employer Identification Number from the IRS and opening bank accounts for the new entities. You then need to make sure you maintain the company record books, make sure tax payments and required entity filings are made, and that you follow the proper accounting procedures.

Another critically important part of maintaining your companies in good standing is to keep your business out of trouble with the FTC by complying with the latest regulations that govern advertising and other business practices. These topics were covered in detail in the Battle Tested Real Estate Strategies Module.

You also need to obtain the proper insurance to protect your companies. You can think of insurance as

Building A Powerful Structure For Buying And Holding18 Building A Powerful Structure For Buying And Holding

adding another layer of defense around your company, as well as providing a capital infusion to cover a loss that you otherwise couldn’t afford to pay for out of your own revenue.

As you may recall, a detailed discussion of the types of insurance to consider was provided in the Battle Tested Real Estate Strategies Module.

As a quick recap, here are some of the types of insurance that you may want to consider:• Property & Casualty (Slip & Fall) on the property itself• Personal Umbrella for you as an individual• Worker’s Compensation for any employees of the multiple member LLC• Commercial Liability insurance for the multiple member LLC• Commercial Umbrella policy for the multiple member LLC• Title Insurance

You also need to ensure that any contractors you work with have the appropriate insurance, which usually includes commercial liability and worker’s compensation insurance.

We have included an Entity Structuring Checklist in Appendix A to help you determine when some of the structuring options discussed in this Chapter are appropriate and when they are not.W


SUMMARYIn this Chapter, you learned how to choose the proper foundation for the businesses that will own the properties that you buy and hold.

For example, you learned how to use a separate single member LLC to hold each property, and a multiple member LLC (that elects partnership tax status) to own the single member LLCs.

You learned that you can also consider having a separate multiple member LLC act as the property manager.

In the event that you use a separate property management company, you learned the importance of electing Sub-Chapter S status for that property management multiple member LLC. You also learned the importance of updating your Operating Agreement for the entity to reflect that taxation status.

You also learned about a more complex entity structure that allows optimum protection and privacy by using land trusts in combination with multiple member LLC’s and single member LLC’s.

You were also reminded of the importance of maintaining your entities in good standing over time, such as filing ongoing paperwork with your Secretary of State, and following the proper accounting practices.

21

BUY AND HOLD RISKS/CONCERNS

In the Battle Tested Real Estate Strategies Module, you learned about several of the risks and concerns that impact any type of real estate company, such as to make sure you get the proper deed whenever you purchase real estate, to make sure you have a good project manager and estimating resources, and to make sure you are aware of any lender owner of record/seasoning requirements.

In this Chapter, we will look at a few examples of the risks and concerns that come up frequently for companies that buy and hold properties, such as leasing your properties quickly, selecting good tenants, dealing with evictions, and more.

Whenever you purchase a new property that you plan to hold, you will likely be doing some remodeling to the property so that it is easier to rent and can demand a higher rental value.

Whenever your project depends upon remodeling, make sure you get the building permits up front or you can jeopardize the whole project and get a stop work order from the city. Similarly, if you need any special zoning changes on the property, then make sure you understand what is involved in getting that zoning, or that you have added the extra time to get the zoning approved.

And again, you will want to make sure that your property taxes are always paid prior to a tax sale or you will incur huge penalties (above and beyond the normal penalties). You can even lose title to the property if you don’t pay the property taxes on time and if you then don’t redeem it during the redemption period after it sells at a tax sale.

Now let’s walk through some of the leasing strategies that will save you a ton of time and money if you follow them as we recommend.

Leasing/Cycling Properties Quickly

As a new property owner who desires to create a cash flow model of rental income, a major risk to be concerned about is the leasing or cycling of your property quickly. One way you can reduce your risk is to hire a good property manager to keep an eye on what is happening with the property and work with the tenants on a daily basis.

However, if you decide to do this function yourself, be sure that you routinely visit your property and speak with the tenants to make sure that they are not only paying their rent on time, but that they are not destroying the property. More importantly, by creating your own schedule to visit the property, you can make sure that a tenant doesn’t “move out” on you in the middle of the night and stiff you on rent. This behavior is quite frequent when a tenant gets behind on his monthly rent and can’t pay.

W WorksheetsVideo W

Buy And Hold Risks/Concerns22

ABOUT THIS CHAPTERIn this Chapter, we will explore the most common buy and hold risks and concerns that you should consider for your real estate business.

Buy and Hold Risks/Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Leasing/Cycling Properties Quickly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Selecting Good Tenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Dealing with Collections/Evictions When Things Go Wrong• . . . . . . . . . . . . . . . .

The Eviction Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Summary• . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

page 21

page 21

The training videos for Chapter 2 will discuss the most common risks and concerns that are likely to arise when you are buying and holding properties. This includes leasing procedures, eviction procedures, etc.

The following Worksheet for this Chapter is included in Appendix B:

Worksheet 1: Tenant Selection • Checklist

page 23

page 24

page 25

page 31

Buy And Hold Risks/Concerns 23

There are a number of software systems that can help make your life easier when it comes to leasing/cycling of your property quickly.

A great example is the web-based property management software that some of the authors use is called PropertyWare (http://www.propertyware.com). This software is great for landlords and property management companies, since it can be used for web site creation, tenant relations, marketing purposes, as well as maintenance tracking. What’s even better is that Propertyware integrates with Quickbooks to make your accounting simple and easy.

Selecting Good Tenants

One of the most common mistakes, and usually the most costly, is when property owners do not select good tenants. Here are several strategies you should use to make sure you select good tenants:

Require a Complete Application – Make sure that the entire application is filled in all sections. Do not allow the tenant to skip the most critical parts under any circumstances, such as income, banking information, prior landlords and addresses, and references.

Perform Background Checks – Complete a background check on the potential tenant, especially criminal background checks and prior evictions. Remember that criminal and civil background checks are different so you want to do both.

Perform Credit Checks – Know how financially sound your potential tenant is by checking the credit of the applicant. Remember, you can’t get “blood from a turnip.” Make sure that the tenant can afford the rent and has a good job or some means of income to pay you as stated in your rental agreement.

Perform Reference Checks – Require 2-3 reference checks so you can speak with prior landlords. Be thorough about this. You can learn a lot as to who your prospective tenant is and whether they will be a good tenant or not.

Require An Application Fee – Consider charging a nominal amount of money, such as $25-$50 to ensure that the tenant is serious.

Require a Pet Deposit – If you allow pets, then charge a non-refundable pet deposit. Make sure the tenant pays the pet deposit before the tenant takes possession of the property.


Collect a Non-Refundable Deposit to Hold Property – If a prospective tenant wants to rent the property, but isn’t yet ready for the property, then you should charge a non-refundable deposit to hold the property for them. Many times, this arrangement will go bad and tenant will never move in on time or will never move in at all.

Require Security Deposit and First Month’s Rent – You need to make sure and collect a security deposit and the first month’s rent from the tenant on day 1 before you ever give them possession. Stick to your guns here. NO compromise here.

Written Executed Lease Agreement – Make sure that any terms and conditions between you and the tenant are documented within a written and executed lease agreement between the parties. Never make any modifications verbally or state anything may be implied later as a change to the written executed lease agreement.

Uphold Any Laws Regarding Tenant Screening – Comply with any laws for the selection of tenants. Do not discriminate against the tenant regarding to race, age, gender, sexual orientation.

W We have included a Tenant Selection Checklist in Appendix B to guide you through the best practices that will help you select the best tenants possible.

Dealing with Collections/Evictions When Things Go Wrong

As the old saying goes, “when things go wrong, they go really wrong!” The same is true in the life of a property owner. Let’s admit that you will not have a 100% batting average with your tenants. You will have a bad apple or two, especially if you are a long-term property owner. So, when things go wrong, it is important that you understand how to handle the collections and eviction process.

First, if your tenant is behind on his rent, send them one or two demand letters stating that they are past due and you hereby demand that they pay the past due rental amount and late fees, if applicable, by an exact date or you are going to file an eviction.

Most of the time, the tenant will immediately respond to you and pay any and all past due amounts. However, if this is not the case and you plan to proceed with the eviction, then don’t accept a partial payment for any of the past due amounts. Some courts will not let you proceed with the eviction if you have a habit of always accepting late payments.

Also, some courts will not let you evict a tenant if the tenant is not more than one month past due in their rent. So, make sure you know what the law is in your local jurisdiction for the eviction process and associated filing fees, court costs, and attorneys’ fees.

Most of the time, you will file your claim in Small Claims Court, which will allow for attorneys’ fees


to be included in any judgment that you are awarded. Also, make sure you know whether or not you need to have an attorney represent you in such eviction process.

In many jurisdictions, an attorney is required to represent a business or if a certain dollar amount is being requested above the fixed court’s amount. For example, some courts require that an attorney represent the landlord if the landlord is seeking damages more than $1,500. Other jurisdictions require an attorney to represent the landlord if the landlord if an LLC or corporation regardless of the amount of the claim.

Remember that even though you file for eviction with the court, you can always dismiss the eviction case if the tenant pays in full while the case is pending to be scheduled on the court’s docket for a hearing. However, you need to remember that you should always add court costs and attorney fees to the amount owed and collect them from the tenant before letting the tenant stay in the property and dismissing the eviction action.

If the tenant doesn’t comply and pay the past due rent and associated late fees, if any, then proceed forward with the eviction action. Again, remember in most cases, the eviction process may take 3-4 weeks to just get on the court’s docket for the hearing. You may be able to get a hearing sooner if you request emergency possession of the real estate where you can argue to the court that you have extenuating circumstances where the tenant needs to be immediately evicted because they are causing harm to the property.

These circumstances may consist of criminal activities occurring on the property, tampering with the safety of the home, like with the electrical, that may cause the home to catch fire, etc. If the judge grants your request for an emergency possession of the real estate, the court will usually docket your case to be heard within a week or so, or at the first opportune time.

In most cases, a judge will not grant an emergency possession hearing, unless you really can make your case that the health, safety and well being of your property or surrounding community is in jeopardy. Remember that the eviction process can take a lot longer than what you anticipate.

So you will usually just have to wait the 3-4 weeks for the normal eviction hearing, which means that the tenant will owe you even more in past due rent before you ever go to court. If the court upholds your arguments during the hearing, your tenant will then usually only have 3-4 days to vacate the premises. If the tenant does not vacate the premises as ordered by the court, then you may have rights to have the tenant physically removed by your local law enforcement.

The Eviction Process

Let’s walk through the eviction process in more detail. As the landlord who wants to evict a tenant, you must follow the relevant state and local laws to the letter, dotting every i and crossing every t.


The process of eviction is usually a very fast one compared to other kinds of legal actions. However, the landlord must do everything exactly right. If the landlord makes mistakes in giving eviction notices, for example, the eviction case will be thrown out and the landlord will have to begin again.

The eviction process traditionally consists of three hearings: (1) Eviction Hearing; (2) Damages Hearing; and (3) Collection Hearing.

1. Eviction Hearing

The first thing a landlord has to do to begin an eviction is to end the tenancy. This is done by giving an eviction notice. There are several kinds of notices a landlord might use:

• Nonpayment of rent: If the tenant doesn’t pay the rent when it’s due, the landlord can serve a notice that the rent is due and give the tenant a certain time (usually 3–5 days) in which to pay the rent (and any late fees specifically listed in a written rental agreement) or move out. If the tenant pays the full amount in the time stated, there can be no eviction on that notice.

• Fixing a violation: In some states a landlord can give a tenant a notice to fix some violation of a rental agreement, such as a junk car in the front yard, a pet that’s forbidden by the lease, or more people living in the unit than is allowed in the agreement. The notice must state the amount of time the tenant has to correct this. For example, state law may give the tenant 5 or 10 days. If the tenant corrects the violation within the time, there can be no eviction on that notice.

• Unconditional notice: In some states, a landlord may give a notice for a tenant to move without any possibility of correcting something. In most places this can only be done if the tenant has seriously violated the rental agreement. For example, if the tenant has repeatedly been late with the rent, is growing marijuana in the back room, or has caused major damage to the premises. The time given to move depends on state law. If the tenant has done what the landlord claims, he or she must move or be evicted.

• 30-day or 60-day notices: In most states, a landlord can give an eviction notice for a tenant to move without giving any reason. The time allowed under state law for such a notice is usually 30 or 60 days, but it may be as short as 20 days or as long as 90 days. There may be different time periods if the tenant has lived in the unit for a long time, is a senior citizen or disabled, is receiving federal housing assistance, or if the reason for the eviction is a condo conversion. A landlord can’t give this kind of notice to a tenant with a lease until the lease period is over. He or she also can’t give such a notice for illegal reasons such as discrimination or retaliation against a tenant for reporting violations or insisting on repairs. This kind of notice may also be forbidden in places with rent control or rent stabilization laws. Some states or cities require landlords to pay relocation expenses in some circumstances, such as to senior citizen or disabled tenants or for units that are being converted to condos.

At the end of a notice period, if the tenant hasn’t corrected the problem (like paying the rent or finding a new home for the cat) or moved out, the landlord can file an eviction action in the local court. The eviction action has to be served on the tenant in a way defined by the local laws by someone other than the landlord. Check the local laws of your jurisdiction to make sure papers are served properly. If they


aren’t, the court won’t allow an eviction.

After receiving eviction papers, the tenant is given a chance to answer. The time for the tenant to answer will be indicated on the papers that are served.

An answer must be in the form required by the local court rules and state law, so a tenant might get help with drafting an answer. In many small claims court actions, the tenant appears in person during the eviction hearing and can give his answers.

At either the eviction hearing, or the other means that the court indicates the tenant should answer, the tenant can raise defenses such as that no rent is owed because the tenant properly deducted the amount of necessary repairs from the rent, the landlord didn’t give proper notice of a rent increase, a rent increase was for the purpose of illegal discrimination, or a 30-day notice was given because the tenant reported a health code violation in the unit.

If the tenant doesn’t answer with the court in the means indicated, the court will enter what is called a default judgment for eviction if the landlord can show that the court papers were served properly on the tenant.

The tenant may have a default judgment set aside if there was a good reason why he or she wasn’t able to answer on time. If the tenant raises a valid defense, the case will be set for a hearing or trial on the facts. This is the time for the tenant to produce proof, including inadequate notices given by the landlord and letters written by the tenant.

If the court rules that the landlord can evict the tenant, then the Court will give the tenant a specified number of days to vacate. The landlord cannot change the locks and take possession of the property until that period has passed. If the tenant has not vacated by the ordered date and time, the landlord may need to take a court order to the sheriff and the sheriff will come and post a notice, usually on the tenant’s door, telling the tenant that if she or he does not move out by the date and time given, the sheriff will come and remove the tenant and the tenant’s belongings from the unit.

During the eviction hearing, the court will schedule a damages hearing where you can come back and present evidence of how much the tenant owes. So during the eviction hearing, you will just get the court to order that the lease is terminated and that the tenant must move out by a certain date. During the later damages hearing, the court will enter a judgment against the tenant for the amount they owe you.

In cases where the tenant has already moved out of the property, you would file an action for damages instead of the eviction action. In this situation, you would basically bypass the first of 3 hearings because the tenant has already vacated the premises and you now just need to get the judgment against them. Let’s walk through the damages hearing next.


2. Damages Hearing

During the Damages Hearing, which traditionally is the second hearing after the initial hearing of the possession of real estate, make sure you are well prepared to present evidence to the judge of any and all damages to the property. For example, take pictures of the damages that the tenant made to the property to show the judge as proof of what damages you are claiming.

Do not use video recordings as evidence, since some courts cannot play back the video recordings as they do not have the appropriate equipment in the courtroom or in some jurisdictions video recordings are not allowed. So, always take pictures but remember that once you offer the pictures to the judge, you are offering them as evidence to the court for their files. So, make sure that you have a duplicate copy of the pictures for your files.

In addition, keep receipts of any monies you had to spend beyond normal wear and tear of the property.

Remember even the most conscientious tenant will cause some minor damage over the course of a rental agreement. This minimal damage is typically referred to as “normal wear and tear.” This can include small scratches on the walls or paint, worn or slightly stained carpeting, broken hinges, or other insignificant damage.

While you may not appreciate having to repaint your property after each tenant moves out, normal wear and tear usually makes this necessary. And a few scuffs on the wall or the odd nail hole does not constitute damage, and you will not be able to charge your tenants for this paint job if that is the extent of the damage.

Actual damage to a property goes beyond normal wear and tear. For example, instead of small scuffs on the walls or a few nail holes, large holes in the wall would definitely be considered damage. If the carpet is completely stained, ripped, or otherwise ruined, this can be construed as damage. Pet stains can also be referred to as an actual damage, particularly if you do not allow pets on your rental property. In this case, since you have not received a pet deposit to cover this damage, the security deposit can be used to repair the damage and restore the property to its original condition.

Also, don’t forget to include any unpaid rent and associated late fees as part of your damages, as well as any unpaid utility bills or other bills that you may have. In many jurisdictions, a landlord will be held liable for any unpaid utility bills and a lien will be placed on the property to force payment and/or the utility company will not turn on the utilities to the next tenant until the balance owed is paid in full.

And, last but not least, don’t forget to include any filing fees, court costs and attorney fees in your


damages request. Make sure you are thorough in your damage request so that you are not short changing yourself for any monies that you should be asking for to make the property habitable for the next tenant.

Remember that you may need to properly serve the tenant with the appropriate court papers whereby providing notice for the tenant to appear before the court to rebut any damages being presented to the court by you in such damage hearing. If the tenant does not appear, the court may enter a default judgment determining that the tenant owes you a certain sum of money and court costs. Your judgment will then be recorded with the court and valid for a number of years. In most jurisdictions your judgment is valid for ten years but can be renewed thereafter by following a certain legal process.

3. Collection Hearing

The third hearing in the eviction process is the Collection Hearing. The length of time it will take to collect your judgment will depend upon both your diligence and the tenant’s ability to pay. Just because you received a judgment against your tenant doesn’t mean that you will be able to collect any monies, especially if the tenant doesn’t have the ability to pay, or or if you cannot even serve the proper legal notice to appear in court for the collection hearing. Most times, tenants will disappear after they are evicted, and it will be difficult for you to find them to try to collect on your judgment.

When a damage judgment was entered, the court may have ordered the tenant to make payment in full or by installments. If payment is not made, you have several legal methods of collection. Any additional costs it takes you for collection may be added to your judgment.

In most jurisdictions the filing of a Proceedings Supplemental is the first step in the collections process. When a Proceedings Supplemental is filed, the former tenant is ordered to appear in court and answer questions under oath about his ability to pay, his income, assets, liabilities, family situation, etc.

If you know that the former tenant has a job and know the address of his employer, you may ask the court to issue interrogatories to the employer when you file the Proceedings Supplemental. The court can then determine from the answers to the interrogatories whether the former tenant is garnishable. Garnishable means that the former tenant has an employer who can be ordered to take payments out of the former tenant’s pay check to pay what is owed to you.

At the Collection Hearing, you will have the opportunity to ask your former tenant, or inform the court, about the former tenant’s ability to pay. At the hearing, the court may order any of the following:

• The former tenant to pay the judgment in full or installments (the installments may be modified at any time in the future) • The former tenant to supply the court with current information regarding his employment

Buy And Hold Risks/Concerns30 Buy And Hold Risks/Concerns

status and address • The former tenant to reappear sometime in the future to provide additional information • A garnishment of the former tenant’s earning (assuming there is something to garnish); or • Execution against the former tenant’s personal property (i.e. possibly forcing the sale of personal assets).

At any time that the former tenant fails to follow a court order, or if you have reason to believe his ability to pay has improved, you can usually ask that the former tenant be ordered to reappear before the court.

Unfortunately, in almost every jurisdiction, the former tenant must be notified of any court action before the court can proceed. So, this is the tricky part, especially if your tenant has disappeared on you or, as we call it, has gone underground. If you can’t find the tenant, you can’t serve them the proper legal notice required by your jurisdiction so you can’t try to collect on them any monies owed as sanctioned by the judgment.

In many cases, the court will allow you to notify the former tenant at the last address provided. However, always make sure you know what the proper legal notice requirements are before you proceed so that the court does not throw out your request for such collection hearing.

If a former tenant fails to appear after having been properly notified of the collection hearing, the court may issue a Writ of Attachment directing the court to take the former tenant into custody. The court usually requires identifying information, such as date of birth, social security number or driver’s license number in order for this to occur.

If the former tenant is working or has some means of income, you can usually garnish the former tenant’s wages. However, there are usually limits as to the amounts of garnishments and the types of income in which you may be allowed to garnish.

As a rule of thumb, most jurisdictions will have a mathematical formula to calculate exactly how much can be garnished as to what income may be exempt versus the maximum amount that may be taken from disposable income. It is important to note that you may need to “get in line” because garnishment orders are usually paid in the order that they are received by an employer. If the former tenant changes jobs, you will have to ask for a new garnishment order. If you cannot garnish income from the former tenant, you may be able to execute against the former tenant’s personal property. This means that the personal property of the former tenant can be attached and sold, such as at an auction. This means that the collection process may be controlled by state laws and subject to many exemptions. However, this may be an option for you the landlord to collect.

If a former tenant dies before you collect the entire judgment, in most cases, you will need to file a claim against the deceased estate. If the former tenant files bankruptcy and your judgment is listed in the bankruptcy petition, the court is required by federal law to stop collection proceedings. In this case, your only remedy is in the bankruptcy court and through its proceedings.


SUMMARYIn this Chapter, you learned several of the risks and concerns that come up frequently for companies that buy and hold properties, such as leasing your properties quickly, selecting good tenants, dealing with evictions, and more.

You learned several strategies to use to make sure you select good tenants:Require a Complete Application• – Make sure that the entire application is filled in all sections. Perform Background Checks• – Complete a background check on the potential tenant.Perform Credit Checks• – Know how financially sound your potential tenant is by checking the credit of the applicant. Perform Reference Checks• – Require 2-3 reference checks so you can speak with prior landlords.Require An Application Fee• – Consider charging a nominal amount of money, such as $25-$50 to ensure that the tenant is serious. Require a Pet Deposit• – If you allow pets, then charge a non-refundable pet deposit. Collect a Non-Refundable Deposit to Hold Property• – If a prospective tenant wants to rent the property, but isn’t yet ready for the property, then you should charge a non-refundable deposit to hold the property for them.Require Security Deposit and First Month’s Rent• – You need to make sure and collect a security deposit and the first month’s rent from the tenant on day 1 before you ever give them possession.Written Executed Lease Agreement• – Make sure that any terms and conditions between you and the tenant are documented within a written and executed lease agreement between the parties.Uphold Any Laws Regarding Tenant Screening• – Comply with any laws for the selection of tenants. Do not discriminate against the tenant regarding to race, age, gender, sexual orientation.

Even when you have the proper practices in place to screen tenants, there will still be times when you need to evict a tenant for non-payment of rent or some other reason. The process of eviction is usually a very fast one compared to other kinds of legal actions.

The eviction process traditionally consists of three hearings: (1) Eviction Hearing; (2) Damages Hearing; and (3) Collection Hearing. During the eviction hearing, the judge orders the tenant to vacate by a certain date. During the damages hearing, a judgment is entered for any damages that are owed to you by the tenant. Then, during the collection hearing, you can have the court help you work out payment arrangements with the tenant so they can pay off the judgment that was awarded during the damages hearing.

When you buy and hold properties, there are also several other issues you will have to deal with from time to time. For example, you also need to deal with building permits when you are remodeling or performing new construction.

And you also need to make sure and pay your property taxes before a tax sale or your will incur huge penalties (above and beyond the normal penalties). You can even lose title to the property if you don’t pay the property taxes on time and if you then don’t redeem it during the redemption period after it sells at a tax sale.

33

SAMPLE AGREEMENTS TO USE FOR YOUR ENTITIES THAT BUY AND HOLD PROPERTIES

The Battle Tested Real Estate Strategies Module covered numerous types of agreements that you will likely need for any type of real estate business. So we are not going to review all of them again here. However, in your Agreements Workbook, we have included samples for you of all of the agreements mentioned in this training program.

In this section, we are going to point you to some of the sample agreements that we have included which are most relevant to the buy and hold scenario. We will also discuss a few variations that you may want to consider making to the agreements to best cover the buy and hold scenario.

Purchase Agreements

Whenever a property is being sold (whether you are the buyer or the seller), a Purchase Agreement is used to specify the terms of how the purchase will be completed. Your Agreements Workbook comes with two sample Purchase Agreements. One of them is called “Purchase Agreement”, and is a balanced purchase agreement that is drafted to be equally fair to both the buyer and the seller.

The second sample Purchase Agreement we have included is called “Standard Purchase and Sales Agreement”, and is designed to be customizable to either the buy situation or the sell situation. Either of these agreements can be used for your situation, depending on which one you like best.

Regardless of which sample purchase and sales agreement you choose to use, it is important for tax purposes that you clearly spell out in the purchase and sales agreement how much money you are offering to purchase the property for and how much of the money is being used to buy the personal property inside the rental property. The amount of money you are paying to buy the pieces of personal property such as stoves, refrigerators, washers, dryers, air conditioning units, etc. will then give you a baseline value for these items to establish your depreciation schedules.

If possible, you can also use the same tactic to set out how much you are paying for the underlying land and how much you are paying for the structure attached or built on the land. This will then give you a number for the depreciation of the structure using your chosen depreciation method.

Land Contracts

We have included a few sample agreements that you can use if you are purchasing or selling a property on land contract. As you are aware, a good strategy to use for acquiring properties to buy and hold is by purchasing the properties on land contract. This way, you get to use the income from the tenants to pay the payments to the current owner until you can pay off the land contract in full.

W WorksheetsVideo W

Sample Agreements To Use For Your Entities That Buy And Hold Properties34

ABOUT THIS CHAPTERIn this Chapter, we will review some of the most common agreements that you may need to use when buying and holding real estate. More specifically, this Chapter will cover:

Purchase Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Land Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Lease Option To Buy Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

Options To Buy Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .•

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . •

page 33

page 33

page 35

The training videos for Chapter 3 will teach you what agreements you should use for your entity that buys and holds real estate.

All of the sample agreements that are mentioned in this Chapter are included in the separate Agreements Workbook.

page 35

page 37

Sample Agreements To Use For Your Entities That Buy And Hold Properties 35

The first sample agreement we have included is called “Land Contract”, and the second one is called “Land Installment Contract”. Depending on the jurisdiction, your Land Contract may need to be called either “Land Contract”, “Installment Contract”, or “Contract for Deed”. You should consult an attorney in your state or the applicable state’s laws for more details.

An important provision to include in a Land Contract (whatever you call it) is one that specifies that the Vendor/Seller will be listed as a loss payee or as a lien holder. Most people typically just add the Seller as an additional named insured.

The problem with listing the land contract seller as an additional named insured is in the case of arson, the primary and additional named insured entities under the policy are not usually entitled to collect any money. However, if you instead list the Seller as a loss payee, then even in the case of arson by the Buyer, most insurance companies will still pay the loss payee or lien holder (which in this example would be the seller).

A sample clause that you can include in your land contracts to cover this situation is included in the Insurance section of the sample “Land Contract”.

If you are the Vendee/Purchaser of a property, then you would also want to modify the Default and Acceleration provision of XI(A)(1) of the sample “Land Contract” we included to specify 90 days instead of the 30. The reason is because if you are the purchaser on land contract, you would want more time to correct a missed payment before they can foreclose on the land contract. But if you are the seller, you would want it to be less time so you could get your property back faster.

If you are buying or selling a property on land contract that has natural resources, such as oil, gas, minerals, trees, etc., then you should consider adding adequate provisions in your land contract to specify what are acceptable uses of those resources and what are not.

For example, if you are the current owner of the property who is selling it on land contract, you would not likely want to allow a buyer to come in and only pay you some of the land contract installment payments but totally sell off the natural resources that are on the land before they finish paying you the full contract amount. This would drastically affect the value of your property, but if your agreement does not specify that they cannot totally exploit these resources, they may not have done anything “legally” wrong.

Another important consideration whenever you enter into a land contract is to make sure that you get a title binder at the time when you sign the land contract. Many people overlook the fact that title insurance is also important and necessary in the instances where you are signing a land contract. You want to make sure that the Seller actually can pass good title to you for the purchase at the time you enter into the Land Contract, even though you will not have completed the payments yet at that time.

Lease Option To Buy Real Estate

In some cases, you may want to lease a property first (such as one you live in), and have the right to buy

Sample Agreements To Use For Your Entities That Buy And Hold Properties36 Sample Agreements To Use For Your Entities That Buy And Hold Properties

it later and rent it out. You can use a Lease Option to Buy Real Estate as the contract vehicle that gives you a leasehold interest in the beginning, with the rights to buy the property later for the specified terms.

We have included two sample lease option agreements in your Agreements Workbook. The one called “Residential Lease Agreement With Option To Purchase Real Estate” is a good version to start with when you are the tenant/buyer. The one called “Lease With Option To Buy” is a good version to start with if you are the landlord/seller.

Options to Buy Real Estate

One great way to purchase property that you later hold can be through an Option to Buy real estate. As you learned in earlier modules, with an Option to Buy real estate, you can obtain the right to purchase the property from a seller for a certain amount of money for a certain amount of time.

You basically pay a premium for the right to buy the property at that price. If you don’t end up buying the property, then the owner gets to keep the option money as payment for having giving you that right to begin with.

Options can also be a great way for you to obtain a right to buy a property at a desired price while you are still working out certain details that you need answered before you complete the purchase.

For example, you may want to obtain an option to buy real estate when you are planning on requesting a variance or zoning change that you are unsure if it will be passed, and you don’t want to close on the property until you know if you can obtain approval for your project.

Sample Agreements To Use For Your Entities That Buy And Hold Properties 37

SUMMARYIn this Chapter, you learned that whenever a property is being sold (whether you are the buyer or the seller), a Purchase Agreement is used to specify the terms of how the purchase will be completed. Your Agreements Workbook comes with two sample Purchase Agreements.

Regardless of which sample purchase and sales agreement you choose to use, it is important for tax purposes that you clearly spell out in the purchase and sales agreement how much money you are offering to purchase the property for and how much of the money is being used to buy the personal property inside the rental property.

You also learned about Land Contracts and how they can be a good strategy to use for acquiring properties to buy and hold. This way, you get to use the income from the tenants to pay the payments to the current owner until you can pay off the land contract in full. Your Agreements Workbook has some sample Land Contracts.

An important provision to include in a Land Contract (whatever you call it) is one that specifies that the Vendor/Seller will be listed as a loss payee or as a lien holder. Most people typically just add the Seller as an additional named insured. If you instead list the Seller as a loss payee, then even in the case of arson by the Buyer, most insurance companies will still pay the loss payee or lien holder (which in this example would be the seller).

If you are the Vendee/Purchaser of a property, then you would also want to modify the Default and Acceleration provision of XI(A)(1) of the sample “Land Contract” we included to specify 90 days instead of the 30. The reason is because if you are the purchaser on land contract, you would want more time to correct a missed payment before they can foreclose on the land contract. But if you are the seller, you would want it to be less time so you could get your property back faster.

If you are buying or selling a property on land contract that has natural resources, such as oil, gas, minerals, trees, etc., then you should consider adding adequate provisions in your land contract to specify what are acceptable uses of those resources and what are not.

You learned how you can use a Lease Option to Buy Real Estate as the contract vehicle that gives you a lease in the beginning, with the rights to buy the property later for the specified terms. You also learned how Options to Buy real estate work, thereby giving you the right to purchase a property from a seller for a certain amount of money for a certain amount of time (but without entering into a lease).

Appendix A 39

TABLE OF CONTENTS

Worksheet 1: Entity Structuring Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

Appendix A40

Entity Structuring Checklist

Use this worksheet to help you determine what entity and/or taxation structure may suit one scenario over another (for your business that buys and holds properties).

Which is more important to you: privacy of what properties are owned, or the simplicity of your entity structure? If privacy is a greater concern than simplicity, then consider putting each property into a separate land trust, as described in Chapter 1. If simplicity is more important, then consider putting each property into a separate single member LLC that is owned by a multiple member LLC, as described in Chapter 1.

Do you expect to have excessive out of pocket medical expenses that are not covered by your medical insurance company? If YES, then consider forming a C Corporation that serves as the property manager. You can then be an employee of the C Corporation, and setup a Medical Expense Reimbursement Plan (MERP) for the employees. This allows you to get reimbursement for excessive medical expenses with pre-tax dollars.

Are you electing Sub-Chapter S status for any of your multiple member LLC’s? If so, make sure that you have the proper clauses in your Operating Agreement that are tailored to that tax status. See Chapter 1 for examples of those clauses.

Appendix A 41

[This page intentionally left blank]

Appendix B 43

TABLE OF CONTENTS

Worksheet 1: Tenant Selection Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Appendix B44

Tenant Selection Checklist

This worksheet is designed to serve as a checklist of items to consider when considering a tenant for one of your properties.

THE INITIAL APPLICATION:

___ Did The Tenant Complete The Application In Its Entirety (Including Income, References, And Prior Landlords?) ___ Is The Tenant Asking You To Hold The Property Because They Like It But Are Not Ready For It Yet? If So, Also Collect A Non-Refundable Deposit To Hold The Property

EVALUATING WHETHER TO RENT TO THIS TENANT:

Research The Tenant’s Background Thoroughly To Make Sure They Have A Good History ___ Perform Background Checks ___ Perform Credit Checks ___ Perform Reference Checks With Employer and Former Landlords

RENTING TO THE TENANT:

When You Move Forward With Renting The Property To The Tenant, Make Sure You Do The Following:

___ Have The Tenant Review and Sign The Lease Agreement ___ Obtain The Security Deposit and First Month’s Rent ___ Get A Copy Of The Tenant’s Driver’s License ___ If Pets Are Being Allowed, Obtain A Non-Refundable Pet Deposit ___ Upon Completion Of The Above Items (And Other Proper Items), Give The Tenant The Key(s) To The Property

Appendix B 45

[This page intentionally left blank]

TERMS AND DISCLAIMERS - Amazon Web Servicesomegawealthprotection.s3.amazonaws.com/Omega... ·...

Documents

Transcript of TERMS AND DISCLAIMERS - Amazon Web Servicesomegawealthprotection.s3.amazonaws.com/Omega... ·...