Yield Compression – Why are rates in California for alternative real estate financing declining in a rising interest rate market?

By Edward Brown

 

The Prime Rate has been slowly increasing over the past six months, but real estate financing in the alternative sector in California has actually decreased. Why?

Competition between private lending companies in real estate [also known as hard money lenders] has increased over the past five years. This has led to brokers shopping around on behalf of their borrowers to get the lowest rates and points. Too many lenders have had a tremendous influx of capital from the private sector [investors] because of the low rates that banks pay on deposits as well as the volatility in the stock market that has spooked investors.

Prior to 2013, the difference in rates charged by private lenders and the Prime Rate was about 5%. Although the Prime Rate stayed stagnant up until 2018, the rate differential shrunk to about 3.5%. This yield compression was primarily due to the typical economics of supply and demand. There was too much of a supply of money pouring into California by investors, as these investors saw that real estate in California had not only stabilized [since The Great Recession], but had increased substantially, lowering the perceived risks of making private loans.

The default risk of making fairly conservative loans [less than 70% LTV of purchase] was minimized even further by an increasing real estate market. By the time the loan was eventually paid off due to refinance or sale of the underlying property, the LTV had gone down to as much as 40-50%. This was especially true in the fix and flip market for seasoned borrowers with good track records. Although real estate prices seem to have cooled off from the frenzy of buyers [especially those who continually paid over asking price], many of the larger lenders in the fix and flip market have gone as far as lending over 80% of purchase and up to 100% of the anticipated rehab. The amazing part is that these lenders are willing to lend their money out to these fix and flippers at rates as low as 7% and 1 point; this is unprecedented. Not only are these lenders taking more risk than in previous markets, but they are doing so at extremely favorable rates. One can only come to the conclusion that these lenders have a tremendous supply of capital that needs a home; especially those lenders who have investors who are promised a preferred return [usually in a Fund vehicle]. In these cases, idle money is a yield drag to the Fund and jeopardizes the payout to not only the investors but the profit to the manager as is typical in a mortgage pool Fund.

Idle money in a Fund is usually held in a low interest bearing account at a bank awaiting deployment. These deposits need to be liquid, as most private lenders market themselves as speedy – one of the advantages over a typical bank. In addition, their private placement memorandums dictate that idle funds be held in an FDIC insured account; thus, the low yield on these deposits to the Fund.

When borrowers shop around for California lenders, they may find two to five lenders willing to make them the loan they need at favorable terms. Most of the time, the borrowers enlist a mortgage broker who does the shopping for them. Although the mortgage broker may have favorite lenders he/she works with, the broker also knows that many sophisticated borrowers work with more than one broker, so it is the first one who can get the deal done who usually wins out. In addition, the broker realizes that some commission is better than none. Many times, these brokers quote lower than normal rates and points in order to secure the deal. What once might have been quoted as a 9.5% and 3 point deal is now hovering around 8.75% and 1.5 points. [As pointed out earlier, certain fix and flip lenders are charging even less.] The lender usually charges points, so both the broker and the lender are earning less on each transaction because of the lowering of the points that have to be shared between them. Most of the interest rate is earned by the lender’s Fund, but there is overhead that needs to be subtracted as well as the preferred return promised to the investors of the Fund. A 7% preferred return is not uncommon, but, the economics appear to dictate that a preferred return of closer to 6% may be on the horizon.

If interest rates paid by banks to depositors stay relatively low, then investors may not balk at a lower preferred yield; however, if the Prime Rate continues to rise, one might believe that interest rates on deposits at banks will follow. At some point, in order to attract investors, private lenders will have to increase the rates paid to their investors. The only way to do that would be for these lenders to start increasing the rates they charge borrowers, as profit margins to the lenders have been squeezed to its lowest level in many years. It will be those lenders who can run their companies “lean and mean” who will have the advantage in this market and the one to come.

Outside of California, lenders have enjoyed higher yields, but that comes with the potential instability of the real estate market. Many investors have chosen to take the path of least resistance – location, location, location, and stay conservative by earning less than other states may provide, but potentially reducing the risk. Generally, stable California markets have severely reduced the risk of loss of principal and, consequently, produced lower yields to investors/lenders. However, since a loss of 20% of principal in one year means that one has to make 25% the following year just to breakeven over the two year period, the prudent investor/lender might be wiser to accept a lower yield and not balk too much at a lower yield; thus the quandary of investing in California.


Edward Brown

Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.

 

Is the Secrecy of a Land Trust Lawful?

By Randy Hughes, Mr. Land Trust

Land Trusts have been used in the United States for over 100 years, primarily for privacy of ownership. Many people, for various reasons, want to own real estate without public knowledge. Perhaps they are a celebrity, politician (President Obama owns his house in the Chicago suburbs in a land trust) or an individual that just doesn’t want the general public to know their private business. Such persons might also fear the wrath of disgruntled tenants, vendors or building inspectors. Further, if it were public knowledge that the richest man/woman in town owned local rental property perhaps rent increases and maintenance requests would be perceived differently.

Since title to property ownership is public information many real estate owners and real estate investors opt to take title to their real estate investments in land trusts. Land trusts hold title in the name of a Trustee and the trust itself. The Beneficiaries of the Land Trust are not disclosed to the public and are only named in the Trust Agreement (a non-recorded contract between the Trustee and the Beneficiary). The Beneficial Owners can be individuals, a corporation, a Limited Liability Company or another trust. Consequently, the true beneficial holders can be buried deep for privacy and asset protection reasons (with no document on the public records indicating true ownership and control).

The beneficial interest holder of a land trust is liable for what happens on the property that is held in a land trust. Therefore, most real estate investors will own the beneficial interest via another entity (i.e. a corporation or limited liability company). Unfortunately, some land trust beneficiaries are unscrupulous and attempt to conceal ownership to avoid conflict of interest and/or building code violations. Consider for example, Chicago alderman, Thomas Keane, who owned an interest, through a land trust, in a corporation that obtained a lucrative parking lot with city owned O’Hare International Airport. The alderman did not reveal his ownership interest when he voted to grant the contract (see Land Trust Secrecy—Perhaps a Secret No More, 23 DePaul L. Rev. 509,511 n.10 (1973)).

The technique in using a land trust to hide ownership has been raised to an art form in Cook County, Illinois. It is estimated that over 90% of the property owned in Cook County is held in a land trust!

So, why is it important to record title in an individual’s name or the Trustee of a land trust? Everyone who owns property places in the public records some kind of document recording their interest. Failure to do so raises the risk that subsequent purchasers or creditors of a previous owner may deprive the present claimant of his title. But it is also true that the recorded title need not disclose the personal name or identify him/her in any way! Instead, a nominee, corporation, trustee or other entity may be interposed as legal title holder. Its relationship with the beneficial interest holder may be (as mentioned previously) represented by a private unrecorded document that is not disclosed to anyone without a court order or discovery process instituted.

Is it immoral to not reveal the true identity of the controlling party of a piece of real estate? Some would say yes but, once you own real estate in your own personal name and experience some of the inherent legal risks you might be more understanding of those who do not want to own title in their individual name. Real estate ownership carries risk and sometimes excessive oppressive risk. While it is true that real estate ownership should carry with it some responsibilities (i.e. to maintain, comply with building codes, meet minimum housing standards, etc.), it should not be a target source for contingency fee lawyers and other frivolous legal attacks.

Furthermore, some real estate investors are concerned about Federal and State government intrusion in their lives (read: Patriot Act). Since there is no requirement to itemize specific property ownership details on your IRS 1040,  holding real estate in a Land Trust keeps the investor’s name out of all city, county, state and federal databases.

Since Land Trusts are not registered at the State or Federal level (unlike Limited Liability Companies –LLC’s and Corporations), they are the last useful non-entity entity available to owners of real property (land, improved property, commercial buildings, residential buildings, real estate options, real estate contracts, etc.). Yes, LLC’s and Corporations offer more direct asset protection benefits, but the Land Trust provides more privacy of ownership and indirect asset protection benefits. Therefore, it is best to link Land Trusts, LLC’s and Corporations together for the best of both worlds.

By structuring the Land Trust with an LLC or Corporation as the beneficiary, the real estate investor creates a unique structure with symbiotic benefits. For example, changing ownership of the beneficial interest (being held by an LLC), would effectively change the owner/control of the title holding Land Trust without public notice or knowledge. Not only would this be a deeply private transfer of ownership and control but taxing authorities would be left out of the loop resulting in substantial tax savings!

Some theorists contend that property should be owned only in individual names so the “public good” can be served by holding owners accountable for what occurs on property (liability for people and condition). At the Federal level some even refer to two statutes of importance: The Freedom of Information Act (1976) and the Privacy Act of 1974 as reasons to compel ownership in the name of individuals and not trusts (or at least limit the privacy of Land Trust’s through legislation).

In Arizona, for example, the fear of organized crime prompted action by its legislature (see New York Times, March 30th, 1976 at 20, col 4). The AZ legislature enacted, as an amendment to the recording statute, a provision requiring every conveyance to or from a Trustee to include the names and addresses of the beneficiary or persons representing the beneficiary. However, it is unclear under this law if the Trustee of another Trust (i.e. a personal property trust), a corporation, or a nominee can be listed as the beneficiary and still comply with the law.

In Illinois the land trust statutes seemed to have evolved from legislative apprehension over slum housing problems and corruption among public officials (as with the previously stated Thomas Keane case). A 1963 law enacted in Illinois requires full disclosure of a Land Trust beneficiary “within 10 days of receiving a notice or complaint of violation of any ordinance relating to condition or operations of real property affecting health or safety.” The apparent intent was to force disclosure of the “true owners” of buildings with housing code violations. While there is a $100.00 per day penalty for non-compliance of the law, no- where does it spell out specific procedures to compel disclosure.

Iowa’s primary concern when it comes to privacy of ownership is the possibility of hiding ownership of property by nonresident aliens. Under Iowa law (see Property Rights of Aliens under Iowa and Federal Law, 47 Iowa L. Rev. 105) a nonresident alien may not own more than 640 acres located outside the corporate limits of a town or city (see Iowa Code Ann. 567.1). However, the prohibition on nonresident alien ownership in Iowa speaks of “acquiring title to or holding” real estate. It is unclear whether indirect ownership (i.e. via a Land Trust or nominee) is prohibited. It is also interesting that the Iowa law mentions no penalty for non-compliance!

What is interesting about some states attempt to control Land Trust information (and force disclosure) are their statutes are event-based. The event that triggers disclosure is the transfer of title into or out of the trust. Occurrences after conveyance into the trust, such as beneficiary changes or amendments to the trust agreement, need not be disclosed.

There is an inherent conflict between those who want to own property privately and the interests of the general public (and some governmental agencies). While it is true that some nefarious characters will attempt to use a land trust to avoid code requirements, tax re-assessments or the due-on-sale clause, a vast majority will not. Most people who utilize a land trust do so with good intentions in mind. (i.e. estate planning, privacy concerns, asset protection, etc.).

Certainly public officials should not be allowed to use land trusts to defraud the public (and building code violators should be held accountable), but in the typical residential real estate sales transaction the buyer is protected via the seller disclosure laws, title companies and attorneys involved in the transaction (regardless of whether a land trust is used or not). Further, the liability for the property held inside a land trust flows through to the beneficiary. While an LLC or other entity can be the beneficiary to a land trust, ultimate liability is not avoided by using a land trust.

Because our American legal system has run amuck and contingency fee lawyers abound, I do not favor the free flow of information as it relates to property ownership. Since there is no Federal land trust law (only state-by-state), the likelihood of legally compelling land trust beneficiaries to disclose information voluntarily about the title or condition of their property is unlikely in most states, if at all.


P.S. If you want more information on Land Trusts, please text “reasons” to 206-203-2005 for my FREE booklet with over 50 reasons to use a Land Trust (title holding trust). You can also attend my FREE Land Trust webinar by going to: www.landtrustwebinar.com. Or, call me. I actually answer my own phone! 866-696-7347.

 

Free Money….. No, Really! It’s True!

By Reggie Brooks

Our Government makes hundreds of different programs available to distribute billions of dollars to us in the form of grants, low interest loans, and subsidies. The money is then appropriated by politicians who are smart enough to know that the best way to keep their jobs is by funneling Government money into the communities they serve. That’s where we can step up and reclaim our money.

It’s Our Money Anyway

I say reclaim because it’s our money in the first place. The Government takes the money from us in the form of taxes, then gives it back to us in the form of grants, low interest loans, and subsidies. Here’s the kicker…The Government only gives the money back to the people who learn how to get it. You have to learn how to ask for it! If you can follow instructions on an application, the chances are pretty good that you can get a grant for something.

Free Money For Almost Anything

Do you have an idea for a business? Want to invent something? Need help with living expenses? Want to change your career? Want to buy or fix up real estate? There is Government, Corporate or Foundation money that can help.

How about $30,000 to tag Grizzly Bears. Not that daring? How about $96,000 to study fish. Or $43,000 to become a French Chef. Or over $148,000 to rehab an apartment building. Sound too good to be true? Well, it’s not. There are far greater stories.

Uncle Sam Can Be Your Very Generous Partner!

You have to see the bigger picture. To us real estate investors, Uncle Sam is our best friend and a great financial supporter. If you’re a beginning investor, Uncle Sam’s going to help you by guaranteeing that you get a decent loan to buy your first house or apartment building. There are many first time homebuyer programs that were created for that purpose. If you’re having trouble coming up with enough money for a down payment, he makes it possible for you to buy with a 3% down payment (FHA), or a 0% down payment (VA). Then he makes the IRS give us a lot of tax breaks because we now own property. He even helps people in areas where people have trouble paying their rent under the Section 8 Subsidy Program. Our partner, the American Government encourages us to keep America strong by using these programs. When you learn how to use these programs, the financial rewards can be substantial.

Let The Government Help You To Make Money

Of the many different types of financial assistance available to us, I especially like the Rental Rehab Loan Program. Here how it worked for me. Several years ago, I purchased a four unit building that had my friends wondering if I had lost my mind. The units were one bedroom, one bathroom each, and were inhabited by four elderly ladies who had been living there from 21 to 24 years. The problem was that their rent had never been raised! The total income from that building was around $460 per month! FOR THE ENTIRE BUILDING!! No, I’m not crazy. I did my homework and I found a Government program called the Rental Rehab Loan Program. The program required that I borrow at least $5000 to be used for upgrades in the building. The benefit to me was that I received the money at a very low interest rate, and (much more importantly) the tenants would qualify to go on the Section 8 Government Subsidy Program!

A Great Win-Win-Win Deal

All four of my elderly tenants were existing on a very meager social security income. They lived in the fear that whoever buys the building will want to raise the rent. They knew that the market rent was around $625 per month, and they knew that they could not afford it. They all thought that they’d end up homeless on the streets. They had no idea that these wonderful Government programs existed. I borrowing as close to $5000 as I could (I wanted to maximize my cash flow), and started the work on the property. When it was all over, I ended up with a really nice building with 4 wonderful senior citizens as tenants. I increased the income from the building from $460 per month to around $2600 per month thanks to my partner, Uncle Sam.

Everyone Was A Winner

Everyone won in this deal. The Government won because they were able to get the money out into the community where it could do some good. The tenants won because they were able to stay in the homes they’ve been in for over 20 years. They actually ended up paying less toward their rent because of the Section 8 Subsidy. I obviously won because I was able to take a non-performing piece of property and turn it into a success. Thank you, Uncle Sam!

Do I Need To Have Good Credit?

That depends on which of the many programs you’re applying for. There are some programs that are project based. In other words, if your project fits a certain category, the project itself can qualify for the money. It could be the real estate, the area, the tenants, or the business that qualifies, not you personally. If it’s a program that requires you to personally qualify, then your credit can become a factor. But understand this. There are programs that are designed for people with bad credit. There are even programs that require you to be turned down by a bank before you can qualify for the money!

So, How Do I Go About Getting This Free Money?

I’m going to give you a thumbnail sketch of how to go about getting this free Money. My obvious limitation is that I don’t have a full day to teach you in great detail. My hope is that what I share with you in these pages begins your great adventure in getting this money. As you begin your wonderful journey, please understand that there is a degree of work that is necessary. You may find that many phone calls and follow up are required to nail down that particular grant you’ve been pursuing. Make the phone calls. Do your follow up work.

You may find that the program is no longer in existence. Don’t despair. There may be 2 or 3 other programs under different names that have replaced the cancelled program. So don’t quit. There are so many different Government programs. Thousands of ways to qualify under different application processes. There are thousands of different corporation grant funds, foundation grant programs and non-profit organizational grant programs. If you can’t qualify for 1 program, there might be 5, 10, 25, or 50 other programs that you can qualify for.

Use The Resources That Are At Your Fingertips

The first thing to do will be to make contact with the organizations that provide the money. One of the best sources to find these organization is your public library. Ask the librarian to help you locate Corporate and Foundation Grant Sources. There are literally thousands of corporations and foundations that give away money every year. Why? Because our system makes it very attractive for corporations who earn a lot of money to give it away and write it off rather than keep it and be taxed on it. And when you factor in the great PR they get for giving money away, it’s a pretty good win-win deal.

Your Project Should Be Within The Grant Giver’s Guidelines

Once you’ve made your initial contact with a potential funding source, ask them to send you all the information they have on their grant criteria. It will more than likely come to you in the form of applications and guidelines. These guidelines will usually lay out what it takes to get funding from them. Your project must fit their funding criteria. If it doesn’t, go and find another source for funding.

Requesting Your Grant

When you’re ready to request your grant you’ll need to do so using two documents. One is a Grant Proposal, and the other is the Letter of Appeal. The difference between the two documents is that the Letter of Appeal is a summary of the Grant Proposal. If you’re requesting a grant of $2,500 or less, you can usually accomplish that by using the Letter of Appeal only. If you’re looking for more, you’ll have to use the Grant Proposal and the Letter of Appeal.

When you find the right funding source for your project, this is when you write your proposal and your appeal letters. Submit your proposal to as many funding sources as you can find. There are not many restrictions on the number of grants that you can receive. Why not get five grants instead of one? Why not ten grants instead of five. Get the picture?

Remember, You Are Entitled To This Money!

As I mentioned before, these are your tax dollars at work. Do not feel guilty! It’s your money in the first place! Uncle Sam is a very generous partner who wants to keep America strong. He does this by making funds available to be used for specific purposes. Some of those “purposes” that Uncle Sam allocates billions of dollars for are in the area of real estate, small businesses, and education. I challenge you to learn about the programs that are available for you and take advantage of them. They are there for you to use, but only if you’re willing to learn how to use them. Have a grand – Grant Adventure!


 

Reggie Brooks

Reggie Brooks, is an international speaker, author and educator, dedicated to inspiring others to achieve personal success through real estate investment. He is also the #1 Vacant, Abandoned & Distressed Property Specialist in North America.

Having risen above a life of poverty, he has achieved what many people consider to be impossible. He went from making $36,000 per year at the local telephone company, to making over $40,000 per month in his real estate business. Today, Reggie delivers his personal philosophies for success at major business venues and expositions throughout the United States. Reggie attributes his success to faith, dedication to success, and to the invaluable coaches he has had along the way.

Texas Cash Cow Arrest — Beware of Real Estate Fraud

By Kathy Fettke


The arrest of a Texas developer, who’s well-known in the real estate industry, is a big reminder to thoroughly vet the people and deals you are working with. Phillip Carter of Frisco is accused of taking $17.5 million dollars from investors for development projects in North Texas but authorities say he used much of that money for his own personal needs. His wife, Shelley, and alleged accomplice, Richard Tilford, also face charges.The Texas State Securities Board lists almost a hundred victims, many of whom are reportedly elderly and probably trying to boost their retirement portfolio. Now they face financial loss, and are likely wondering where they went wrong.

Who is Phillip Carter?

Carter is the owner of Texas Cash Cow Investments, Inc., although the website for that company no longer exists. He’s also the owner of North 40 Developments, LLC, which does have a website. It doesn’t mention Carter’s name anywhere, however, but it is located in Frisco.

According to Texas authorities, Carter and Tilford told investors their money would be used for the development of commercial and residential properties. The indictment says Carter used at least some of those funds for unrelated purposes, including personal expenses and the payment of an IRS tax lien.

It also says that Carter lied about his personal background — that he falsely claimed to have a chemical engineering degree from the University of Virginia and had worked as a project manager for Texas Instruments. It also says he made up the story about working and traveling with “Rich Dad, Poor Dad” author Robert Kiyosaki.


Trouble Begin in Early 2016

The indictment lists the names of all the people who invested with Carter in early 2016. Some contributed as little as $12,000 while others gave Carter as much as $700,000. It says that Carter held the money as a fiduciary for the purpose of funding investment opportunities that would result in a profit for investors. Instead, Carter is accused of using the money for personal reasons that have now put those funds at “substantial risk.”

Carter was apparently attempting to move forward with the projects but came up short on funds. Authorities say a $6 million check for labor and materials bounced in December of 2016. He reportedly borrowed $32 million from a Seattle-based private equity firm more recently to pay for construction costs on two properties. But, as one news story points out, the lender holds the first lien, which means that investors will only get paid if there’s any money left over.

His wife is accused of money laundering and the misuse of investor funds. Investigators say his alleged accomplice, Tilford, raised $6 million from investors, who are listed in his indictment. They say the funds raised by Carter and Tillman were mostly in the form of promissory notes.

Red Flags for Real Wealth Network



Investing in real estate is one of the most stable ways to build wealth, but it can also be one of the fastest ways to lose money if you have the wrong property, and worse, the wrong team. Unfortunately, these Texas investors are finding out the hard way, what they should have done differently.

If you were a Real Wealth Network member during the Great Recession, then you probably heard of Texas Cash Cow and Phil Carter. Back then, he was one of the largest turnkey operators in the country. He would buy large tapes of REO property from banks at highly discounted prices, renovate to like new condition, and offer on-going property management.

Many of Real Wealth Network members purchased property from Texas Cash Cow, and initially, we received rave reviews. But then something changed and we started to get complaints about property management. At that time Phil came to us and said he was no longer focusing on single family rentals but instead was creating a new model. I don’t remember the details but it had something to do with buying or building apartments or condos and selling the individual units to investors. I told him that was something we would not endorse, and that was the last I heard from him.

It just didn’t make sense that a bunch of investors who don’t know each other could successfully own their own units in an apartment or condo complex — plus, I didn’t think any legitimate bank would finance it.

There are many lessons here that I would like to share to make sure investors don’t make similar mistakes.

  1. If something doesn’t make sense, don’t do it. Just because you don’t understand it doesn’t mean you’re dumb. It might mean the deal just doesn’t make sense!
  2. If someone is trying to do something new, something they’ve never done before — don’t let them use your money to figure it out. 
  3. When you lend money to a developer, make sure your funds are recorded in first lien position. Do not sign a promissory note that is not tied to property.
  4. When someone is raising money from investors, they must file with the S.E.C. even if it’s for a promissory note. I recently saw an email go out from another turnkey company in Texas saying that they were now doing syndications. I called them to find out more, and they told me they had a new opportunity, where investors could earn a flat return by investing as a private lender on their commercial property in Houston. I asked if they had filed with the S.E.C. They said they had not because it was a note and therefore they didn’t have to. I told them that was illegal. Apparently they didn’t trust my opinion as I saw another email go out with the same message.
  5. When you buy rental property, you can get inspections and appraisals to verify that what you are buying is indeed what you thought you were getting. It’s pretty straight forward. When a turnkey company starts doing something different than normal real estate, question it. Just because someone is an expert at one thing does not make them an expert at another. I heard that some investors bought property from a turnkey company in Chicago and closed on the property before the repairs were done, and the seller gave them a promissory note. That note was never paid when the company folded. Now why would anyone do that? Why would you close on a property before the work is done? Never pay any contractor before the work is done!
  6. Finally, if you do invest in a syndication, make sure the Use of Funds section is spelled out clearly. 

Links:

https://www.ssb.texas.gov/news-publications/north-texas-developer-indicted-alleged-17-million-real-estate-fraud

https://www.ssb.texas.gov/documents-carters-tilford

https://smcorridornews.com/texas-developer-indicted-for-alleged-17-million-real-estate-fraud-from-elderly/

https://www.yelp.com/biz/texas-cash-cow-investments-frisco

http://www.northfortydevelopment.com/about/


 

Kathy Fettke

Kathy Fettke is Co-CEO of Real Wealth Network and best selling author of Retire Rich with Rentals. She is an active real estate investor, licensed real estate agent, and former mortgage broker, specializing in helping people build multi-million dollar real estate portfolios that generate passive monthly cash flow for life.

With a passion for researching real estate market cycles, Kathy is a frequent guest expert on CNN, CNBC, Fox, Bloomberg, NPR, CBS MarketWatch and the Wall Street Journal. She was also named among the “Top 100 Most Intriguing Entrepreneurs” by Goldman Sachs two years in a row.

Kathy hosts two podcasts, The Real Wealth Show and Real Estate News for Investors — both top ten podcasts on iTunes with listeners in 27 different countries. Her company, Real Wealth Network, offers free resources and cutting edge education for beginning and experienced real estate investors. Kathy is passionate about teaching others how to create “real wealth,” which she defines as having both the time and the money to live life on your terms.

 

 

Should You Foreclose After a Charging Order?

By Garrett Sutton

The charging order is a key to LLC asset protection. If you are sued in a car wreck and the victim wants to get at your assets, the charging order (n many states, including Wyoming and Nevada) is the victim’s only relief. It provides for a lien on distributions, meaning the victim can only get what is distributed to you from the LLC.

But in some states (including California and Utah), if not enough money is forthcoming to pay off the claim, the victim can foreclose on your LLC interest. To do so, they go back to court and argue that the charging order is not enough. They aren’t satisfied with distributions. They want the LLC interest itself.

IS IT A GOOD IDEA TO FORECLOSE ON AN LLC INTEREST?

If a judgment creditor (the car wreck victim) successfully forecloses upon the LLC membership interest of a judgment debtor, then the judgment creditor acquires a permanent (as opposed to a temporary) right to receive all distributions made by the LLC to the judgment debtor, including any liquidating distributions when the LLC is dissolved. In other words, prior to foreclosure, the judgment creditor has only a temporary right to receive distributions until the judgment is satisfied. After a foreclosure, however, the judgment creditor has a permanent right to receive all distributions irrespective of whether the judgment is satisfied.

With a single member (one owner) LLC, this may be a suitable outcome. You get it all. But in a multiple owner LLC, you should definitely think twice about foreclosing. Consider that:

  1. There are cogent tax reasons why a judgment creditor should not foreclose upon the membership interest of an LLC member. If a judgment creditor only has a charging order against the membership interest of an LLC member, then for tax purposes, the judgment creditor is merely the holder of a lien, and does not receive a K-1Form from the LLC. See, Revenue Ruling 77-137 and IRS General Counsel Memorandum 36960 (1977). On the other hand, if the judgment creditor elects to foreclose upon the membership interest of an LLC member, the judgment creditor becomes a transferee of a transferrable interest, and, as such, is potentially liable for the distributive share of the LLC member. Thus, as a transferee of a transferrable interest, the judgment creditor who forecloses upon the membership interest of an LLC member runs the risk that income from the LLC may be passed through to the judgment creditor on a Form K-1 from the LLC (on which taxes must be paid), irrespective of whether the LLC distributes any cash to the judgment creditor to pay the taxes.
  2. A judgment creditor generally stands to gain very little by foreclosing. The judgment creditor already has a charging order against the interest of the LLC member. If the LLC is making distributions to the judgment creditor, then the judgment creditor will have little incentive to foreclose. On the other hand, if the LLC is not making distributions to the judgment creditor, then an auction of the interest of the LLC member will not draw much interest, and will incur attorney’s fees and costs.
  3. If the underlying purpose of obtaining the charging order was to prevent the LLC member from obtaining distributions, then there is little need to foreclose upon the interest of the LLC member, because the charging order will already serve much the same purpose.

Even in the minority of states where a judgment creditor can ask the court to foreclose upon the LLC membership interest of a judgment debtor member of the LLC, the judgment creditor should think twice before doing so, at least with multiple member LLCs, because there is very little to gain, and much to lose, by doing so.


 

Garrett Sutton

Garrett Sutton is an attorney, speaker and best selling author. As part of Robert Kiyosaki’s Rich Dad’s Advisor group he has written six books which have been translated into 11 languages. Garrett focuses on corporate and asset protection law and speaks to audiences on the importance of asset protection. His advice is pertinent, timely and valuable.

Garrett received his Juris Doctor Law Degree in 1978 from Hastings College of the Law, the University of California’s law school in San Francisco. He received a B.S. in Business Administration from the University of California, Berkeley, in 1975. He is licensed to practice in Nevada and California.

Website: http://www.corporatedirect.com/

Underwriting a Loan Transaction where the Borrower is a Family Trust

By Dan Harkey

A property owner may choose to hold title to a property by creating a family trust. The “JQSmith” Trust dated February 31, 2020 will become a separate entity similar in nature to any other entity, Corp, LLC, or partnership, but with different rules, regulations, and standards of care.  “John Quincy Smith, as trustee” will sign loan documents on behalf of the family trust. The body of law that governs family trust is the California Probate Code, Division 9, Trust law (15000-19403), and Division 11, Construction of Wills, Trust, and other Instruments (21101-21700). States in the USA treat issues relating to family trust somewhat differently.

Establishing a family trust creates entity that is beneficial for estate & tax planning purposes, including distribution of assets to designated Heirs/persons/beneficiaries upon death of the trustor/trustee. The existence of a trust was intended to provide certain liability protections, but I have observed judges making the decision that disregard their existence. Many judges interpret the law to achieve their own ideological or political objective(s), rather than to apply the law as written and intended by the applicable legislature.

There is no government agency that requires registration for the activation of a family trust. However, a notarized certification will be required to obtain title insurance for a real property loan transaction.

A family trust usually requires three parties:

  • Trustor(s)– The person(s) who creates the family living trust, either revocable, or irrevocable. There may be one or more trustor(s), such as husband and wife. There are many forms of trusts, for example, a children’s remainder trust or a trust representing some group. The intent of a trust is usually to protect accumulating assets such as cash, real estate, stocks, bonds, businesses, and other valuables, from excessive taxation and perseveration of capital.  The purpose of a trust may also include an attempt to protect assets from certain liens or creditors during life or upon death of the trustor. Although the trustor(s) conveys title into the trust, the trustor(s) will usually reserve some or all the benefits of owning the property placed in the trust during his/her/their life. The added purpose is to preserve some of the benefits for future beneficiaries.
  • Trustee(s)- The person who is authorized by the trust document to perform certain acts and sign the loan documentation for the trust. There may be one or more trustee(s). For, example husband and wife becoming trustees. This person(s) is/are considered the trust manager(s) with rights and obligations that are stated in the trust document. The trust document contains delegated rights, responsibilities and establishes who possess authority to act.
  • Beneficiaries- Are those whom the trustor designates to receive some future benefits of the trust assets as defined in the trust document. There may be one or more beneficiaries. The benefits are usually based upon the investment performance of the trust assets, and the distributions resulting from the trust, now and sometime in the future. Beneficiaries may be the children, relatives, or some designated organization, such as a religious group, foundation, education entity, or benevolent group, such as The American Cancer Society, or The Make A Wish Foundation.

A Trust Deed Document contains 3 Parties:

A deed of trust is a security instrument that a borrower will sign and record which will reflect a lien on a subject property. Terminology in deed of trust has similar words, but entirely different meaning or definitions.  A totally different conversation as a matter of understanding the process is that there is a trustor, trustee, and beneficiary in the language of a deed of trust.   Consider that a property owner who desired to obtain a loan and encumber real property.  Consider that they take title as an individual(s), not a family trust. We can use husband and wife, as joint tenant with right of survivor-ship.

  • Trustor(s) – Is the person(s) or entity who owns the property. The trustor is sometimes referred to as the grantor. The owner/trustor/grantor decides to borrow money and use the property as collateral for a loan. An encumbrance called a deed of trust will be drawn, signed and recorded against the property at the county recorder’s office. A deed of trust is also referred to as a security instrument. Public records will then reflect notice of that lien.
  • Trustee (s) – A deed of trust requires a third-party entity, generally a title company, to hold what is referred to as a bare equitable title on behalf of the beneficiaries, or investors in the loan transaction. The trustee is given three powers; 1) to foreclose 2) to re-convey and 3) to modify the trust deed per agreement. The trustee cannot benefit from the ownership but is hired only as a place holder in states that use trust deeds as recordable security instrument. The trustee is an intermediary that has a fiduciary responsibility to the stated beneficiaries. His/her job is to protect the beneficiary’s rights, and in the event of default, act in their best interest. Also, when a borrower/trustor pays off the loan, the trustee will re-convey, meaning remove the lien from public records, and return full ownership back to the borrower/trustor.

Some states use a security instrument called a mortgage, rather than a deed of trust.  A mortgage document only requires 2 parties.  One is the borrower/trustor, and the other is the lender/beneficiary.  There is no trustee required.

  • Beneficiaries – Are the investor/lenders/bankers who invest capital and receive a recorded deed of trust or mortgage document and promissory note signed by the borrower/trustor to hold as collateral for the consideration of the loan.

One family trust who owns the property may decide to borrow money using their property as collateral.  Another unrelated family trust may decide to become an investor/lender and use their capital to lend out to the property owner.

The investor/ lender family trust will become the beneficiary of the deed of trust. If the beneficiary of the trust deed also demanded to become the trustee under the deed of trust, would the person sign as an individual, or would the person sign as trustee on behalf of the family trust?

I would personally discourage this because this may alter the servicing relationship between the parties. The trustee of the deed of trust and the trustee of the family trust would have to sign the servicing agreement or an addendum wherein trustee under the deed of trust will take no actions that will alter the terms of the servicing agreement. The complexity here is not worth the bother.

In a court of law, either of the above parties will claim that they did not understand the ramifications. The tight-rope action should only be undertaken with the advice of their counsel and paid for by them.

The only practical solution is to have the title company who issued the policy of title insurance for the closed loan transaction to become the trustee under the deed of trust.

I chose to deviate of explaining the differences between the parties, property owners, and the lenders in a different context, but the underwriter must be aware of the separate-ness and the ramifications of dealing with each.

All the following conversation relates to the property owner as a family trust.

Loan Origination – Loan Application Process

The application package sent to the borrower/trustor/trustee will contain forms related to an individual or an entity depending upon whether the loan is for consumer purpose, or for business purpose. In most cases the individual(s) who create the trust is both the trustor and the trustee of the family trust. Your underwriting is almost like a hybrid of the two.

The question about consumer purpose vs business purpose arises.  If the occupant is a home owner who is the trustor and trustee, consumer laws prevails. The above is a broad statement.  Each circumstance is different.  Also, when a trustor creates a family trust and conveys/transfers title of the property into the trust, there is are California Revenue & Taxation Code, Transfer Tax Exemptions, R&T 11911 to 11930 relates to documentary transfer fees.  The code relating to transferring into or out of a trust is 11930. The exemption to avoid property tax reassessment for related parties is R&T Code 62(d), and 61(h). Consult your accountant or attorney for advice of this issue. Do not rely on this article for making your final decision.

  1. Business Entity Loan Application-in circumstances where the property is non-owner, and the loan is for business purpose.
  2. Personal loan application-in circumstances where the property is occupied by the trustor/trustee and the loan is for consumer purpose.
  3. Business Credit Authorization for the Trust-In most cases this requirement will be waived-applies as (1) above.
  4. Personal Credit Authorization for the Trustee-applies to (2) above.
  5. Bank Statements of the trust, or as an alternative the trustor/trustee as an individual.
  6. Year to Date Profit & Loss of the trust, or as an alternative the trustor/trustee as an individual.
  7. Current Balance Sheet-same as above.
  8. Disclosure regarding insurance requirement, authorization for the insurance agent or representative to communicate and provide the lender with requested information regarding coverage.
  9. 8821 Tax Information Authorization.
  10. 8821 tax information authorization, if required. This form authorizes the IRS to disclose your confidential tax information to the person that is appointed, usually the lender representative. The completion of the form may be voluntary be the borrower but required by the lender. The completed form with be sent to the IRS, who will in turn send the tax return to the appointed party. Certain lenders may have this requirement.
  11. 4506-T request for copy of tax return. The purpose is to allow the lender to retrieve past tax transcripts. The document must be signed and dated by the taxpayer or managing member that will give a third-party lender permission to retrieve requested data. Certain lenders may have this requirement.

Original Trust document and all related Amendments

  1. There are differing views on whether the complete trust should be obtained and read as part of the loan approval decision, or whether the statutorily authorized Certificate of Trust (discussed below) should be the sole source of information. My view is that the entire trust should be read to determine who are the trustors, trustees and beneficiaries. This gives the lender the contact information for all parties. If the trustor/trustee dies, then the lender can contact the beneficiaries, to continue.
  2. Does the trust give authority for one or more trustees to borrow, submit information on behalf of and sign the related documents encumbering the subject property? The purpose in reading the trust document, and especially the amendments, is that the trustor, trustee, and/or beneficiary might have changed.  The powers may have changed, and successor trustees may have replaced deceased trustees.
  3. Title Page, Trustee Identification Page, Signature Page, Powers Page, Any Amendments Thereto. Some Lenders will only request these three pages. This is suggested by some as incomplete.
  4. Trust certification (Probate Code section 18100.5) A trust certification may be prepared by the lender, the trustee or an independent source such as a title company and can be recorded. It certifies who are the trustor, trustee, and beneficiaries.  It establishes the authority to borrow and encumber, provide information and sign loan documents.  As part of Probate Code section 18100.5, the certification provides protection for lenders who rely on the information it contains.  However, a lender cannot rely on the trust certification if the lender has actual knowledge that the matters set forth in the certification are incorrect.  Therefore, some lenders believe it is best to not even get a copy of the trust itself.  However, the statute itself provides that simple possession of the entire trust document itself without more is not enough to prove that the lender has “actual knowledge”.
  5. The certification itself can, but is not required to, include excerpts from the original trust documents, any amendments thereto, and any other documents evidencing or pertaining to the succession of successor trustees. Dispositive provisions of the trust need not be attached.
  6. A lender may ask for copies of excerpts from the original, any amendments, thereto, and any other documents which designate, evidence, or pertain to the succession of the trustee or confer upon the trustee the power to act in the pending transaction, or both.
  7. Some borrowers are secretive and become irritated about all the contents of their trusts. If a lender requires a copy of a full trust rather than a trust certification there may be some offsetting liability with the lenders gained knowledge of issues within the trust document. Lender parties may be liable for damages, including attorney’s fees, incurred because of the refusal to accept the certification of trust in lieu of the request for full trust documents. The court may determine that the lender acted in bad faith in requesting the full trust documents.
  8. Federal Tax Returns for the trust.
  9. Attorney authority and enforceability letter-some lenders may wave this requirement. An attorney authority and enforceability letter is a letter addressed to the lender assuring the lender that the trustee has the authority he/she claims and has the power to undertake the loan process and obtain the loan. This letter can be obtained in addition to a Trust Certificate but is not necessary if the Trust Certificate is properly obtained and the lender has no actual knowledge contrary to the facts stated in the Trust Certificate.
  10. Some lenders may require that the Trustee as an individual, or another separate party, to sign a personal guarantee when the family trust holds a single or limited amount of assets.
  11. The title insurance company will require the trust document, or portions as explained above to document the authority of the trustee to act on behalf of the trust.

Dan Harkey

Business and Private Money Finance Consultant

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©2018 Dan Harkey

 

Making Money and Understanding Tax Lien Certificates

By Ted Thomas

The simplest way to understand tax lien certificates is to realize all real estate is taxed by the county and sometimes the county and municipality. Property taxes are collected to provide many different benefits to citizens of the county, for example property taxes pay for schools, they pay the sheriff’s department, they pay for firefighters, of course the roads have maintenance, they also pay to help the hospitals and libraries, these are just a few.

Every property owner is assessed property tax one or more times a year. In many states if the property owner does not pay the property taxes the county or municipality will issue a tax lien certificate. Anyone can purchase a tax lien certificate, they could be valued at only $50 or they could be $5,000. The county will auction the certificates. The reward for purchasing a tax certificate is the counties pay a high rate of interest on those certificates.

The rates could be as high as 16%,18%, 24%, all the way up to 36%. When the property owner finally pays the property taxes, they will recover the certificate, in other words they will pay you whatever you paid for the certificate plus the outrageously high interest rate.

So, to summarize this process, you the investor, will invest directly with the county and you will receive a check back from the county when the property owner pays the taxes. The check will be the full amount of your investment plus the high interest rate.

The objective in selling tax lien certificates is to allow investors to generate money but more importantly the county now has revenue to pay for county employees plus police and fire departments, schools, roads, libraries, and hospitals.

Tax lien certificates are a winner for the county, they get revenue, tax lien certificates are winners for the investors because they earn a high rate of interest and they are a good deal for the homeowner or property owner because it gives them time to pay their taxes.

The sales for delinquent property taxes occur in approxim ately half of the counties in the United States. Tax sales are announced by the county, sometimes in the newspaper, sometimes online, many times both. This is a very formal process, it has been in effect for over 100 years.

Most investors have no idea about the tax system. Once you learn this process and learn how to honorably and ethically take advantage of it, you can earn money for the rest of your life.

Tax lien certificates are a safe, secure investment. The property sec ures the tax lien certificate. For example, if you purchased a tax lien certificate and paid the county and the property owner never redeemed, that is comes forward and pays you back your money and the high interest, the defaulting property owner will lose the property to you.

Let me repeat that. You will invest your money with the county, your investment is secured by the real estate, the interest rate on your certificate is guaranteed. However, if the property owner fails to pay the principle and the interest the owner will default and you, the owner of the tax certificate, will be awarded the property mortgage free. Of course, this sounds way to be good to be true. However, this system has been in effect for well over 100 years.

Unfortunately, tax lien certificates and the processes and procedures are not uniform and they’re different from county to county. This will require some study on behalf on the investor.

Here is a perfect example from recent students of mine. Drew and Recia, a young couple, attended my training and followed it step by step. They purchased a tax lien certificate in the amount of $11,000. The property owner failed to redeem, that is failed to pay their taxes. The law allows Drew and Recia to become the new owners of that property, they now own the property without a mortgage. The value according to the tax assessor, the MLS system and Zillow was $180,000.

As you can see, you can make money with interest rates 16%,18%,24%,36% and every once in a while, a property owner fails to pay, and you get the property without a mortgage, that’s pretty amazing but it’s the law in all counties. Watch for my next article and I will have more about the 3,000 plus counties that sell tax lien certificates and tax defaulted properties.

Here is a couple of most frequently asked questions, I’ll have hundreds of these which I’ll make a gift to you in future articles:

  1. Q: Who can buy a tax certificate?

A: Anyone who has cash to pay the local county government (auctioneer)

  1. Q: Why don’t people pay their property taxes…?

A: Numerous answers, People pass on (die) and no one pays the property tax in many instances Heirs do not understand taxes are due. People run out of money… they become unemployed and have temporary money problems. Family crisis, hurricane blows off the roof, car accident no insurance.


Many people know Ted Thomas© as Americas tax lien certificate and tax defaulted property authority. For more than 25 years Ted has been the information source. More information and free videos go to www.TedThomas.com

The Secret Sauce to Managing Your Wealth…Do You Have One?

By Anita Cooper

“To say that I was a failed investor is putting it mildly…”

Steve Rozenberg, founder of Empire Industries, LLC and full time commercial airline pilot, knows what it’s like to have your property investing aspirations crash and burn.

After 911, the airline industry was very shaky…he wasn’t sure he’d have a career or be able to enjoy a retirement, so he started looking for other ways to grow his wealth.

Enter real estate investing…

Like many new investors, he bought a lot of wrong properties…properties that management companies didn’t want to touch because they were low income.

Empire Industries, LLC was born out of the need to manage his own properties to keep his business intact.

Using the procedures and processes he’d learned as a pilot, Steve and his business partner – an IT whiz – created their property management company for their own preservation so that they could keep their properties afloat.

Self management vs property management

“I’m often asked if it’s smarter to self manage your properties instead of hiring a property manager and my answer is always that it depends on your end goal.

“So you know, many people focus so much on the acquisition of the deal they never think about how they’re going to get the return month after month, year after year. And normally, managing the asset is an afterthought, when it’s actually the most important part of the puzzle. This is because it’s what actually gets you the return.

“If you’re willing to commit and put the time in and learn the laws and regulations and create all of these procedures and structure, then yes, you can certainly self manage.

“But if it’s not something you want to commit to and if you don’t have a plan to succeed, then you’re planning to fail. That is why landlords are among the highest sued individuals in real estate, because they don’t go into this with a business plan of how to succeed year after year. They’re so focused on the purchase they never think about the month to month…they always look at the ROI and the cash on cash return and look at all of these big numbers, but what they never think about is how do I get those numbers in my pocket?”

Whether you have one or one hundred plus properties, Steve says it all boils down to one thing…treating your property investing efforts like a business.

“If you have one property or you have 50 properties, you own a business.”

“It has profit, loss, income, expenses, legal obligations…and you know the tenants that live in your property have rights. And as an owner, you are obligated to protect, to make sure that you’re working within the confines of the law. So yes, you could manage your own property as long as you’re willing to commit the time to educate yourself on the laws and regulations, fair housing , discrimination, etc.

“Here in Texas, we have Texas property code, so these are all the things you need to think about if you’re going to self manage one…50…100 properties, it doesn’t matter…a business is a business.”

What to look for in a property manager

Having a conversation with a prospective property manager is one of the best ways to zero in on the company that will be your partner in success.

“I would first make sure that your business model aligns with the property manager’s business model,” said Steve. “By that I mean, do they manage prices in the same price point that you own a property in?

“If you want to be a “hands-off” property owner, do they want you to be “hands-on?”

“I think it’s very important to have an initial meeting with the property management company and set the proper expectations with them, meaning what is it I can expect of you and what is it you expect of me?”

“A lot of times people go with the cheapest property management company and then they end up realizing that cheaper isn’t cheaper…it actually becomes more expensive because the company may be cutting corners, cutting costs, when for an extra dollar or two dollars a day you could of had a reputable property management company that is aligned with your business goals.”

Moving forward

Although Steve experienced great success managing his own properties, he and his business partner knew they could do even more to help other investors, so they sought the help of a business coach.

“We went to a business coach – Doug Winnie of Action Coach – five years ago, who told us that yes, we have a business because we have opportunity, scalability and marketability. However, based on what we’d done so far, we probably wouldn’t succeed as a business. So we hired him on the spot.

Then we attracted the founder of Action Coach, Brad Sugars and went from zero to about 850 properties in 5 years. In fact, we’ve won the North American Marketing Campaign Award from Business Excellence, with 1471% return for our efforts,” said Steve.

“Brad is the founder of the whole coaching franchise and he became a partner of ours in the business and he is now the one [who’s] helping us grow this nationally, with his guidance,” Steve continued. “So because of him we are now in Houston, Dallas and Ft. Worth…and now we’re starting to open up more cities this year; Austin and Ft. Hood/Killeen.

“We’re going to keep opening offices and continuing to grow under his mentorship and his strategy as we start the licensing model.”

What does this mean for you as a property investor?

As the fastest growing property management company in Texas, with offices in multiple cities, Steve and his team have proven that their property management process works…and works well.

That’s why they’ve decided to begin duplicating their process under a license or franchise model…so that other investors can do what they’ve done.

“We are spanning across Texas…we’ll be in almost every city in the next 5 years. This means we’ll be able to help even more investors succeed in growing their business.

“Our goal is to have your business succeed…for you to become wealthy through real estate. You need more than someone ringing the cash register and collecting the rent…you need someone on your team…like Empire to help ensure that success.”


Anita Cooper is the founder of Northwoods Writer, a marketing resource for real estate professionals. She lives with her family in the beautiful Northwoods of Wisconsin when they’re not cruising the highways and byways on the lookout for something new and interesting or at least calm and relaxing.

 

Cogo Capital: Still Dishing Out the Dollars to Fund Property Deals

By Tim Houghten

Cogo Capital’s founder, Lee Arnold, reveals his unique approach to funding real estate entrepreneurs, and how millions of dollars are being poured into nationwide deals through Cogo Capital.

This is Your Moment & Cogo Capital Wants to Fund it

Lee Arnold says Cogo is attracting a windfall of new loan requests from real estate investors. Many requests are coming from other lenders who are starting to throttle their funding, revise their appraisals downwards, and turn away all but the most experienced investors.

Meanwhile, Cogo Capital says it is funding 99% of all the incoming applications that meet its parameters. It certainly helps that Lee’s firm is willing to loan up to 90% LTV and 100% of rehab costs, and still beat any competitor’s offer. As a direct lending solution, they also have the ability to fund fast and make common sense underwriting decisions.

Cogo makes loans on:

  • Non-owner occupied residential properties
  • Commercial real estate
  • Land development deals
  • Fix and flips
  • Wholesale and ‘wholetail’ deals
  • Rental properties

While Cogo helps others grow their real estate portfolios, it is also making strides and growing too. Cogo just added ID and AZ to its markets, leaving very little territory unserved — they even offer loans in Alaska and Hawaii.

In our exclusive interview with Lee, he mentioned that while there is no question the US real estate market is going through a correction, he does not see a crash coming like we experienced in 2008. He says “there is too little inventory, and too much demand.”

And he should know a thing or two about market cycles. Because he started investing in 1996, he’s been through 3 major dips already. Through strategic and purposeful action, and a whole lot of grit, he is still in business. As a result of these experiences, Lee looks at correcting and declining markets with optimism. He points out that even a modest correction is great news for serious real estate investors. It weeds out the looky-loos, allowing the actual, hard-working real estate investors more room to buy and sell and/or buy and hold.

He commented that for years the serious investors have “been tolerating the HGTV wannabes,” who have driven up prices by overbidding on properties. He believes many of these “fly-by-night” investors will become stuck in the months and years to come because they don’t know how to operate in a normal or declining market. Serious investors do.

If you’ve been waiting for better value deals, this is your moment, and this lender wants to fund your deals.

Enter The Circle of Wealth

Cogo Capital is just one of the group of companies in Lee Arnold’s portfolio.

His other companies include:

The Lee Arnold System of Real Estate Investing, which trains real estate investors on how to find and purchase profitable deals

  1. Secured Investment Corp, which provides a platform for lenders looking to earn double digit returns in one-off loans or through one of its long running funds
  2. Lake City Servicing, which gives lenders peace of mind and true passive income by servicing their private loans for them

While Cogo Capital is open to any investor, Lee says those who have gone through the Lee Arnold System often enjoy an 1,800% increase in their chance of getting funding. Because they have gone through the comprehensive educational arm of the company, these clients know what to look for, how to make the right offers, and how to structure their transactions.

Through this methodically designed system, Lee has been involved in more than $1B worth of real estate transactions. That includes flips, fund transactions, and making private mortgage loans. From this viewpoint, this industry veteran noticeably sees things very differently than the average newcomer, bank loan officer, or infomercial guru.

He believes in only making loans to investors who can be successful. He’s more interested in the client’s success than the possible equity grab should the loan go into default. Therefore he’s not afraid to tell you when you are taking on a lot of risk for less-than ideal reward, even if your loan request checks all the boxes.

And even if you come to Cogo, and you don’t quite make the cut, or you are taking on a new project you really don’t have experience in, Lee says he can introduce you to other experienced investors in your area who you can partner up with. That way you can secure the funding and get the deal done.

Lee Has Lofty Goals for His Clients

Lee encourages all his clients to begin building their wealth and real estate portfolio with wholesales and fix-and-flip projects before they venture into the realm of rentals. Why? Because when buying rentals too early, they won’t have the bankroll to weather any of the potential challenges common to rentals. One AC unit blown, one roof lost in a storm, one non-performing tenant or drawn out eviction, and you can end up in foreclosure yourself.

Instead, Lee teaches his clients to take a very different and intentional approach to real estate investing. He has two stated goals for them:

  1. Get up to $250k liquid cash in the bank as fast as possible with flips or wholesaling
  2. Then get to $1M in net worth to become accredited investors. At this point they can qualify to participate in more exclusive investments like one of the Secured Investment High Yield Funds, which historically pays out 12% returns over the last five years straight.

You Can Keep Your Skin at Cogo Capital

One of the big things that separates Cogo Capital from the rest of the pack is its favorable terms on funding.

Historically, most private money lenders demand more ‘skin in the game’ from borrowers. Lee says Cogo would rather you keep more money in your pocket so that you can go out and do more deals.

Cogo loans up to 90% LTV and 100% financing for rehab and repair costs. So, as a flipper, you just need 10% of the purchase price down, your closing costs, and enough cash to get you through the first renovation milestone.

For a quick way to estimate how much you should really be paying for a property, how much you should be budgeting in rehab, and what you can expect to borrow or pay out of pocket, CogoCapital.com offers a simple, easy-to-use tool. It will take your ARV and the level of rehab needed (light, medium or heavy) and base it on the living square footage of the home. This tool will then give you your MAO (Maximum Allowable Offer) and a clear insight on how to plan your investment.

There are three other factors impacting rate and terms:

  1. Credit
  2. Experience
  3. Cash in bank

Although Cogo does look at credit, they love helping new investors and accept borrowers with bad credit and inexperience. That being said, if you come to the table with good credit and experience, you do get a bump up in terms. Average funding time is just 72 hours, depending on the project and how quickly you provide the needed details on the deal.

Need Some Education?

Take Him Up on His Offer to Pay for Your Funding Tour Tickets

For those that want to meet the team in person and learn more about how to profitably do real estate deals in this market, Lee highly recommends getting out to one of the upcoming live Funding Tours.

These 3-day events show you how to find deals and discounted properties, put you on a bus to tour opportunities so you know what to watch out for in the field, teach you how to write offers, and even get you funded live.

Find out the event dates near you at www.FundingTour.com.

This year the $497 tuition fee is even being paid for by Lee’s fund company, so you can attend absolutely free!

It All Starts with the First Deal…

…And Cogo is ready to fund it for you!

Get started at CogoCapital.com, run your deal scenarios, get your proof of funds letter so you can make stronger offers, and discover a new partner for fueling your investment goals with Lee Arnold and Cogo Capital.

 

 

 

HEADLINE: California Investors BEWARE: ADUs

By Aaron Norris

In September of 2018, The Norris Group created a two-hour session for our TNG Academy Subscribers that covered ADUs (accessory dwelling units). It took months of preparation to understand the rules, regulations, politics, and the future of this interesting opportunity.

The Norris Group launched all new hard money rates in California and Florida in 2019. We have been funding ADUs in a variety of ways via our flip program and our hold program. Our new 9.9% flip program goes up to 70% of after repair value (up to 90% LTC and 100% repairs). Some investors are financing rehabs of the primary and including construction of the new ADU as part of the project.

Another way we can accomplish this is the 6.9%, 3-year hold program. If you have a free and clear rental property, we do a loan on the primary property only. You can take the proceeds to and construct the new ADU. You’ll have to build, rent, and get the property stabilized to chase standard financing or enjoy more cash flow.

The bonus here is it’s a three-year term and that is going to come in handy for important reasons. Flipping with ADUs has caused some challenges so I wanted to share some of our research on ADUs and some of the biggest market moves we’re seeing in the ADU space.

The ADU Opportunity

In 2017, the State of California pushed through regulation on ADUs (granny flats, casitas, mother-in-law suites, etc.). It went into effect in 1/2018. There are even rules that allow former illegal spaces like converted garages (JADUs) or backyard pool houses to become legal for the sake of becoming rentals. Cool, right?!

Well, it is, but there are some things we think you should know so you don’t make them. Or, at least, see it coming to plan ahead. When investors apply for loans with ADUs in mind, we’ll be asking you these questions to make sure you don’t get stuck and lose money.

5 Thing Investors Need to Know About ADUs and Avoiding Costly Mistakes

  1. Timelines. As the economy improves, so does the workload in planning departments. We’re hearing timeframes for planning, permits, and inspections that are taking upwards of a year or more in some markets. Planning department turnover, lack of clarity on the ADU laws, and just being backed up is attributing to extended timelines which means higher holding costs. Plan for it (thank goodness we have some lower hard money rates).
  2. Fees. In an interview we did with Senator Wieckowski (see radio show #618) behind the California ADU regulation, we learned they aren’t done regulating just yet. One of their frustrations is the fees cities are charging like additional school fees, utility fees, sidewalks, etc. Some of these come with hefty five-figure numbers and varies city-by-city and project-by-project (yep, even within the same city limits)!  It’s one of the reasons more regulation is likely coming.
  3. Short-term rentals. Assume that short-term rentals will be banned or heavily regulated at a minimum. The intent behind new ADU rules is to create more affordable housing. Vacation rentals do not fit within that vision and the State is allowing cities to make that decision locally. ADUs will likely bring short-term rental regulation to the forefront for many municipalities. Buying properties based solely on expected short-term rental income is always risky. If you get stuck doing this, you may be forced to convert to a long-term rental or sell at a loss (gross). However, you might consider co-living (See radio #619 and #579 on coliving, see #629 on vacation rentals).
  4. Surprises. Expect surprises. Ordinances can change mid-project and surprises can completely squash your deal. As an example, ADUs with powerlines overhead can hold up your project months in planning and in the utility department. It’s a fight between the city and the utility as to the safety of the inhabitants and the ruling may not go in your favor. You might have the right-sized lot in a city that allows ADUs, but it might be the utility that kills your deal.
  5. Appraisal and lending issues.  ADUs are new and very few comparable sales exist, for now. Flip investors should expect an appraiser to have a difficult time placing a value on the ADU. Start collecting comparable sales whenever you can. You’ll want to be hyper-aware of appraisal issues because lenders are not understanding what to do with ADUs. We’ve heard multiple flip investors having this issue. The projects are beautiful, the consumer wants it, but lenders have not caught up with the trend. Do your homework and find local lenders in your market that have experience getting these funded.

Bottom line: Before you buy, do your homework every time because things are changing and will continue to do so into 2019 as more regulation comes out. Regulation at the state level and ordinance changes at the local level.

The recent lawsuit from the State against California against Huntington Beach could mean municipalities may be forced to relax ADU regulations since the State could take away funding or fine cities for not meeting required affordable housing goals. This would be amazing news for investors if it is one of the side benefits of this lawsuit.

ADUs would be the fastest way to mitigate fines for these municipalities and Huntington Beach isn’t the only city very behind on their housing goals.

Check with the local planning department, planning commission, and/or a city council member in the area you want to build. In addition, talk to local Realtors and general contractors to get find out:

  1. City position on ADUs and current and expected ordinances (are they for or against?)
  2. Realistic timeframes and process for approvals in planning departments
  3. Other similar projects in the area (success, surprises and horror stories)

ADUs are one way the state is addressing the shortage of housing and it appears it is here to stay. I’m even more excited to hear how 3D printed homes might come into play and expect to hear more about 3D printing and the companies making it happen starting this year.

The Norris Group is following this trend closely. Most investors still aren’t fully aware of some of the regulations including ADUs are not just for lots zoned R1. ADUs can be built on lots zoned for single-family and multi-family properties. Yes, investors can have an ADU added to an existing fourplex! Some don’t know manufactured housing and prefab housing can work as an ADU.

We’ll continue covering this important housing trend in California, so be sure to visit our website regularly, at TheNorrisGroup.com, for additional information.

 

ARTICLE BY:

Aaron Norris

Aaron Norris, MBA, APR, CSPG
The Norris Group
1845 Chicago Avenue, Ste. C

Riverside, CA 92507
CA: (951) 780-5856 x108
FL: (407) 706-9700
Fax: (951) 780-9827
www.thenorrisgroup.com