330: Ask Bill! Buying “As Is” Properties and Protecting Personal Assets

SHOW NOTES FOR EPISODE 329: ASK BILL!  BUYING “AS IS” PROPERTIES AND PROTECTING PERSONAL ASSETS

This is our regular Fun Fact Friday “Ask Bill!” episode, where Bill answers specific real estate investing questions received during the month from e-mails, in-person conversations, phone calls or through online portals such as BiggerPockets.com and Quora.  In today’s episode, Bill answers listeners questions on buying “as is” properties, as well as discussing strategies to protect your personal assets from lawsuits.

One of our goals here at the Old Dawg’s REI Network is to help to educate and encourage fellow real estate investors, to share what little knowledge we have by answering your questions, and to help other investors to broaden their understanding of real estate investing and to, hopefully, avoid some of the mistakes that can cost you later.

Two Question from James

Bill – always love the show, the folks you interview and the info you give.  I have a couple of questions.  One is probably a quick answer but the second might be a short show topic (if not discussed before).

1) When you have made an offer for a property that is announced as “as is”, but you do have a home inspection (always), can the inspection results still be used to withdrawal an offer?  Or is it “you knew is was “as is” when you made the offer – so you’re stuck with going through with it” (assuming financing passes – since that would also be a stipulation in the offer).

2) One thing holding me back is the protection of my primary residence.  Best practice is to put rental properties in an entity of some type (LLC etc), but that may not be an option in the beginning – so I would like to know strategies on protecting primary residence.  I have read that personal residences can be put in some types of trusts and not trigger due-on-sale, but I don’t know how accurate that is or how well that would shield the personal residence from any negative action (lawsuit etc) from a rental property in your personal name.

Thank you for all you do – info – advice – engagement – etc.  James

Answers to Questions from James

Answer to Question #1

James,

Thanks for listening and for your kind words!

Before you entertain buying an “as is” property, you need to look at a number of things:

Consider hiring a home inspector to inspect the home first before signing a purchase contract.  You may find that the repairs needed to make the home habitable may be too expensive, and will likely have an adverse effect on securing the financing that you need to complete the purchase of the home.  The cost of a home inspection could be money well spent, especially if it helps the buyer recognize the costs associated with purchasing certain as-is homes in need of repair.

However, if you did already sign a purchase contract before a home inspection, consider using a purchase contract or amending the one you have to give you an out from having to purchase the home if the cost of the repairs exceeds a certain dollar amount.  If, for example, you only have $2000 to complete the repairs and the cost estimates for the repairs are over $2000, you may be able to put in a clause or adeddum that would allow you to negotiate with the seller for the difference, or simply opt out of the purchase agreement all together.

Purchasing a home in as-is condition requires special attention, especially when it comes to things like financing the purchase of a home in as-is condition with a bank or mortgage lender.  Recognizing the potential pitfalls with financing a home in as-is condition can save the buyer from needless headaches, costly repairs, and unnecessary mortgage loan denials.

Before you sign a purchase contract for a home in as-is condition, you should consider getting all of the facts upfront, especially on how a home purchased in as-is condition directly affects your loan approval.  Find out what your bank or mortgage lender considers ‘acceptable’ condition for a home that they would finance.  Again, most banks and mortgage lenders will require all necessary repairs to be completed prior to a loan closing.  If the repairs are extensive, you may want to discuss this with your real estate professional, as the sale of the property could hinge on the repairs being completed, and the seller may opt to complete those repairs just to get the sale completed.

When a buyer first makes application for a mortgage loan, it is critically important that they inform their loan officer what their intentions are in terms of the type of home they intend to purchase.  Your loan officer can address what types and conditions of homes are acceptable to their lending guidelines.  Homes in serious disrepair are less likely to get approval from most banks, and several mortgage lenders will likely consider financing a home in need of repairs, provided that escrows are set up to ensure vendors and contractors are compensated once the necessary repairs are completed.

Answer to Question #2

Before answering this question, let me first put in a disclaimer… I am not an attorney, CPA or insurance broker.  To get the best answer, contact a reliable attorney, CPA and insurance agent familiar with real estate law

First, this is a very good question and it’s good you are asking before you purchase rental property.

The reality is, we live in a litigious world and, unfortunately, too many people look for every opportunity to sue or extract money from people, especially landlords and property owners over the littlest things.  So, if you want to become a successful real estate investor, you need to put together a top your team of experts (see last week’s Fun Fact Friday podcast).  Here are just a few KEY team members you need:

• At the top of that list is a good real estate attorney. You need someone who can review all your legal documents, can give you solid council and someone who is watching out for your well-being and protection.
• Another key adviser is a good estate attorney. This attorney can help you to organize all your personal assets, real estate holdings, etc. so they are protected in the event of your death.
• Next, a good real estate CPA, preferably one who is also an investor and understands your tax needs as it pertains to your real estate holdings.
• A good insurance agent/broker who works extensively with real estate investors. A good insurance person can prevent frivolous lawsuits from even making it to your attorney

The right team is crucial.  This is not an area where you want to pinch pennies.  You want to get the best you can.

Regarding structure, I will share what I do to protect my personal assets.

• First, I set up a Living Trust. This insures that all my personal assets and real estate holdings will go directly to my wife in the event of my death.  It also includes a will that addresses the distribution of assets in the event of death.  This is a great tool because it protects my assets from going into probate and, especially because I live in California, estate taxes are ridiculous and I ‘ve heard of people losing near 50% to the state.  With a living trust, all your funds go straight to your wife or whoever you designate. No questions asked!
• Next, I set up, what I call, a “holding LLC.” Because I invest out-of-state, I have multiple LLCs.  Those LLCs are all go into my holding LLC.  The holding LLC is in Wyoming.  Why Wyoming?  Because Wyoming is a state where you are not required to list your name in the LLC.  Nevada and I think Delaware have similar LLCs.
• Now I have an LLC in each state I am in and my properties have the LLC for their state as the name listed on the deeds. Some people do separate LLCs or land trusts for each property and that can be effective too but I don’t.  If you have larger properties, like apartments, I would recommend separate LLCs.  Why?  Because if someone at the apartment slips and wants to sue you, if it’s structured right, they can’t take more than the…
• Insurance Policies. You should have a comprehensive insurance policy for each property to protect you from fires, floods, earthquakes, vandalism, etc.  But, equally important is an “Umbrella Policy.”  This is what protects you and your assets from those frivolous lawsuits – your first line of defense.  I would recommend a minimum $1 million, preferably $2 million umbrella policy.

So, taking all those into account, what happens if someone wants to sue you…

Now, I need to say, if you have done something wrong or did not repair something that could cause harm to your tenants, you are responsible and should do all you can to insure your tenants safety and well-being.

Most ambulance chaser or personal injury attorneys will want to find out who the owner is so they can go for the jugular.  If you have a property manager, the tenant will likely go to them to get the info they want.  My property managers know that they are never to give out my name because the owner of the property is the LLC, not me.  When attorneys find that out, they next ask for a contact name at your insurance company because they want to get what money they can anywhere they can.  Then, the negotiation is between the insurance company and the attorney.  Insurance companies don’t want to release any money so this is a great first line of defense.  9 times out of 10, they will not go any further.  If the tenant can get any money, it is through the insurance agent and it’s usually negotiated into a smaller amount.  Most tenants and attorneys are satisfied there.  But, if you have a more motivated attorney, and that is not enough, they could try to go after the LLC.

If they try to go after the assets held by the LLC, they will first need to find the managing member of the LLC or they could just sue the LLC and, at worse, you’ll lose that property.

If that’s not enough, they may try to go further.  If they try to track down the owner of the LLC, they will find it’s owned by another LLC (your state LLC) and when they look at who owns the state LLC, they will find the Wyoming LLC, which is anonymous, as the owner of your state LLC.  That will typically be the dead end.  You know that your Living Trust is the direct recipient of your Wyoming LLC and all the other LLCs under that but it would be pretty difficult for someone else to find that out.

You see, it can be an effective strategy to discourage someone who wants to go after your personal assets

If cost is a consideration, many of these things (LLCs, Living Trusts, etc.) can be done through LegalZoom.com but, like I said earlier, you want to get the best and a good attorney is your best bet.  Where to find one:

Bigger pocket forums, referrals from other investors, your local REI or meet-ups…

Well I hope that helps answer your questions.

There are a number of legal strategies when it comes to asset protection.  I would recommend checking out some of our previous podcasts on this subject:

• 011: Protecting Your Real Estate Assets  July 4, 2016

• 245: Series LLCs and Safeguarding Your Properties from Lawsuits  October 1, 2018

• 053: Why Real Estate Investors Use LLCs  November 28, 2016

Also, some good books:

• Asset Protection for Real Estate Investors by Clint Coons
• Start Your Own Corporation by Garrett Sutton
• How to Be Invisible: Protect Your Home, Your Children, Your Assets, and Your Life  by J.J. Luna

Again, I want to make it clear that I am not giving advice and I not an attorney, CPA or insurance agent.  You should contact one of those experts for good advice.

All your attorneys listening, feel free to use the comment section of the show notes to elaborate or correct any errors of my summary… haha

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