ju ne 2014 metro

Volume 17 Issue 6
GENERAL MEETING
June, 2014
Our Next General Meeting Monday June 16
6:30 pm. Registration; Pre-meetings
6:55 pm. Vendors Introduced
7:10 pm. Announcements from the Board.
7:30 pm "Tax Techniques the IRS Doesn't Want You To Know About"
How to "depreciate" land
Funding your kids college with IRS dollars
How to actually make money with charitable contributions
The ultimate estate planning strategy
JUNE 2014 METRO
Metropolitan Real Estate & Investor's Association
Non-cash charitable donations
Time will be allotted to answering your questions!
Our Featured Speaker: Jeff Schnepper, Esq., CPA
Member NY and NJ Bar, and U.S. Supreme Court Bar
Licensed by the NJ Board of Certified Public Accountants
Columnist for Microsoft's MoneyCentral – Microsoft’s MSN Tax Expert
Primary concentration in Federal Income, Gift & Estate Tax Planning, Wealth
Accumulation Strategies, and Tools and Techniques of Business and Financial
Planning. Attorney/Advisor for Prudential, John Hancock, Integon and
Transamerica Life Insurance Companies.
1978 – 1990 Professor of Accounting, Finance &Taxation Graduate School of
Financial at The American College, Bryn Mawr, PA 19010
1976 - Present Associate Economics Editor USA TODAY
CURRENT AND PAST ACTIVITIES: President, Garden State Rotary of NJ,
Participant in the U.S State Dept. Scholar-Diplomat Program; Associate Director of
NY Chapter of National Association of Accountants for Educational Projects;
Member of American Bar Association Committee on Tax Accounting Problems;
Member U.S. Supreme Court Bar, NY Bar Association, Camden County Bar
Association.
MREIA is
a Member of:
Inside This Issue
3 President’s Desk: A House and its Neighborhood by Dan Schwartz
4 Taxes: How to get your Property Tax Cut by Jeff Schnepper, Esq., CPA
6 Beginners: People are Getting Ripped Off Big Time!! by William Bronchick, Esq.
7 Contractors: So You Need to Hire a Contractor? by Robert Cain
10 Estate Planning: The High Cost of Dying Unprepared by Dyches Boddiford
11 Negotiating: Egos and Real Estate: a Bad Combo by Mark Wade
12 Investing: Time for New Year’s Resolutions by Phyllis Rockower
13 Options: Using Creative Options with and without Leases by Jack Miller
17 Financing: The Role of a Private Money Lender by Martin Goodman
20 Rehab: House Maintenance-How Much? By Joseph Neilson
24 Wholesaling: Flipping Houses does not make you a Pro Wholesaler by Duane Stephens
25 Asset Protection: Five Ways to use Personal Property Trusts by Alex Everest
LANDLORDING
26 Management Tips from Mrlandlord.com
28 Nondiscriminatory Rental and Sales Practice: a Fair Housing Guide
33 Criminal Records Check by Bradley Dornish, Esq.
34 Can I Run a Credit Report to Locate My Tenant who Owes me Money? by John Nuzzolese
35 Sponsor/Vendor Services & New/Renewing Members
41 Important Information about MREIA
42 Free Events-NJ Bar Foundation
43 Environmental: Verbal Environmental Assurances by Stuart Lieberman, Esq.
44 Credit: Ten Myths of Credit by Alison Feliciano
46 Beginners: Do a Good Job by Kevin Smith
48 Taxes: September 15-IRS Corporate and Partnership Deadline by Michael Plaks, E.A.
50 Entities: Is Your Corporation in Trouble? by William Bronchick, Esq.
51 Finding Deals: Calling Sellers from the Classifieds: a New Twist by Cameron Dunlap
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June 2014
FROM THE PRESIDENT’S DESK
A House and Its Neighborhood
The basic real estate courses always mention “location, location, location.” They usually do not
mention other factors such as price, terms and timing, which is beyond the scope of this column.
In order to determine market value, beginning investors are taught to compare houses:
similar style of construction (Cape Cod to Cape Cod, Colonial to Colonial, Split Level to Split level,
etc.), square footage, number of bedrooms and bathrooms, other rooms and the condition of the
kitchen and bathrooms.
The quality of the surrounding houses and the neighborhood should also be considered:
What kind of buildings and land comprise the neighborhood?
Is the house next to industrial property or a gas station?
Is the house located next to a surrounding town which is in decay?
What stage is the neighborhood in-going up, going down or stable?
How is the neighborhood zoned? Single family, multi family, industrial or mixed use ?
Have the surrounding properties been completely built up or are there empty lots?
What kind of image does the community have?
Are higher or lower income people moving in or out?
Are the surrounding houses mostly rental houses?
Are there nearby shopping, houses of worship and/or parks?
Are the schools within walking distance?
Is the neighborhood’s population transient?
Did you check out the quality of the school system?
Did you contact the local police department to check the crime rate?
Is there adequate police staffing and police protection?
Dan Schwartz
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June 2014
TAXES
How To Get Your Property Tax Cut
by Jeff Schnepper, Esq.
It was the worst of all times. And, it’s not getting better. The interest on your adjustable rate mortgage was adjusted
– surprise – upwards, and the value of your home has just cratered in the housing crash. To put the cherry on your
sundae of trouble and woe, the geniuses at your municipal tax office have just increased your taxes.
Enough!
You’re not taking it anymore. Here’s how to get that real estate tax increase wiped away and have your tax bill cut to
a more reasonable value.
What’s the Issue?
Before you can attack your tax slam, you have to understand the basis of your bill. Most real estate taxes are a
function of two elements, the tax rate and the value of your house.
The tax rate is the percent that’s assessed against the value of your house. So, if your home is assessed at say,
$200,000, and the rate is 2%, then your tax bill would be $4,000.
Your tax rate may be a combination of rates from different taxing authorities. For example, my municipality and my
county both independently set a rate to be applied to the value of my house. The rates don’t have to be the same
and they can even move in different directions.
For example, an efficient, well run municipality may reduce its rate because of increased revenues from a new retail
mall, while the county is forced to increase rates to fund urban pre-school programs.
There’s not much you can do about the rates, at least not until election time in November.
You should focus on refuting the value assigned to your house. Some authorities tax based on 100% of assessed
value while others use a lower percent. It’s really a con game played by politicians. They’re gonna want a given
amount of money. If they say, only tax 50% of your assessed value, then they’re gonna make up for it by doubling
the rate. The dollars sucked from your pockets are the same.
Plan of Attack
Start by filing an appeal of the valuation of your house. Each taxing authority has a Board of Real Estate Appeals.
Regardless of the percent applied, a reduction in the value will require a reduction in your tax.
The burden will be on you to prove they blew the valuation.
Gather your evidence. Begin with what’s known as a Comparative Market Analysis (CMA). That’s where you
compare what other houses sold for, in the same neighborhood, with the same basic structure and layout. Make
sure your comparables really are comparable. If the house next door sold for $250,000, its value as a comparable
would have to be discounted if it had an in-ground swimming pool and you blow yours up each summer.
Consider the condition of the houses, the landscaping, and extras such as built in saunas and hot tubs. A house with
four bedrooms upstairs should be worth more than one with only three bedrooms and a cathedral ceiling, especially
after considering the added costs to cool and heat the house. Look for anything that would arguably reduce the
value of your home.
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Did the taxing authority’s valuation agent go inside your house? If not, they probably missed the pealing wallpaper
and the banisters in need of repair. Without going inside, they may have missed the second floor leak that’s about to
deposit your shower in your kitchen sink. Pocket your pride for a while. This is the time to showcase the darker side
of your house. Bring blow up pictures of all the negatives.
Most real estate agents will do a Comparative Market Analysis for free, or for a minimal amount. They have a
computer database of houses sold and currently on the market. But, be careful. Real estate agents traditionally are
psychologically inclined to “overvalue” a property in an attempt to get a listing. Make sure they understand the
objective of the analysis and that you want true comparables.
The more recent the sale, the more weight the value has as a comparable. That’s why the real estate crash, while
hurting your net worth, may actually allow you to keep more current dollars in your pockets by reducing your real
estate tax.
Alternatively, if the dollars are worth it, you may consider getting a full professional valuation. Such valuations may
cost you $1,000 or more. But, you’ll get a professional presentation with lots of pictures and all the proper legal and
real estate jargon to impress your Board of Real Estate Appeals.
The professional job will also be based on comparables. So, your final number should be close to that from a simple
CMA. Personally, if the numbers justify it, I’d go with the professional valuation. Remember, you’re selling a lower
number to a Board that’s inclined to go for the higher value. Preparation is everything – but presentation counts!
Additional Considerations
Should you have an attorney represent you? Not absolutely necessary. But, again, my inclination is for professional
representation.
The appropriate attorney should be one who knows the members of the board making the appeals decision. It
should be one who has appeared before them before, understands what the board is looking for, and who has been
successful in the past. It also wouldn’t hurt if your attorney is part of a foursome golfing that afternoon with the
members of the Board.
Many attorneys will take real estate tax appeals on a contingent basis. Their fee is your tax savings for the first year.
If they lose, there’s no fee. If they win, your cost is just the dollars you would have spent in additional taxes anyway.
One final word on timing. Most taxing authorities have a limitations period during which you can appeal. Once that
time has passed, you have no right to challenge the bill for that year. Make sure your appeal is filed within the
allowed time, and on the proper forms. Miss it and you’ll have to wait till next year. It’s your money!
Reprinted by Permission. Jeff A. Schnepper, Esq., is the author of multiple books on finance and taxation,
including all 30 previous editions of How to Pay Zero Taxes. He is a financial, tax, and legal advisor for
Estate Planning of Delaware Valley and operates a tax, accounting, and legal practice in Cherry Hill, New
Jersey. Schnepper formerly was Microsoft's MSN MONEY tax expert and a professor of accounting,
finance, and taxation at the American College in Bryn Mawr, Pennsylvania. He currently is an economics
editor for USA Today and tax counsel for Haran, Watson & Company.
Jeff will be MREIA’s featured speaker at this month’s general meeting.
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June 2014
BEGINNER’S CORNER: REAL ESTATE SCAMS
People Are Getting Ripped Off Big Time
by William Bronchick, Esq.
"It has come to my attention that there are a number of “operators” out there scamming newer investors with what
they are representing as "wholesale" deals. Consider this a public service announcement and something to think
about..."
The following is a common scam I am seeing:
1. Scam-Investor makes a deal with a builder on thirty one new homes that are appraised at $215,000, but really worth
$200,000 (if they were worth $215,000, they'd be selling regularly at $215k). Investor can buy them "wholesale" from the
builder for $185k.
2. Scam-Investor approaches newbie investor and says, "You can buy wholesale homes with no money down" - and I have
access to lots of them!
3. Scam-Investor buys home from builder at $185k and flips to newbie investor for $195k (almost retail). Using a charade of
fake down payments and passing money back to the buyer under the table (loan fraud), newbie investor ends up with a
property worth $200k, with a "no money down" loan for $195k.
4. Scam-Investor walks away with $10k, newbie investor has a house with $5k in equity, and he think he has $20k in equity.
5. Newbie investor can't rent house for breakeven cash flow, tries to sell it for $215k, and realizes property is only worth
$200k. Newbie investor dumps property for $180k, losing $15k.
This kind of activity is very profitable for the fast-talking scam artists who prey on the lazy, ignorant newbie
investors. I deplore these scammers who prey on people, but I also must warn the newbie - "Buyer Beware". There's no
shortcut to getting rich in real estate, and there's no substitute for hard work, education and doing your own homework. If you
are lazy and don't do your homework, you get stuck with crappy deals!
So, what's a wholesale deal? Well, wholesale means below retail. Before you can figure out whether a deal is wholesale, you
need to know what retail is. An appraisal is not retail. A tax assessment is not retail. Asking or listing price is not retail, and
neither is a computerized "guestimate" from a free online comp website like ZILLOW. Retail is what someone is willing to
pay for a property based on average time on the market for similar houses. So, you need to get access to the MLS or a paid
listing service to research similar houses in the neighborhood that have sold by ordinary means within the average time period
for the market. Seller concessions, owner financing, builder concessions, financing concessions, real estate broker kickbacks
and the like will skew the numbers, so look carefully.
Once you determine retail, then you can figure out wholesale. A house worth $200,000 retail is not a bargain at $192,000 in
today's market. In fact, it's not a deal at $188,000 or even $185,000. In this market, a true wholesale deal means at least 15%
off retail, closer to 20%. If the property needs repairs, then you need to get it EVEN CHEAPER.
Use your head and don't trust the values given to you by the person SELLING you the property! Do your own research and
your own comps. If a person is telling you they have access to an unlimited number of "wholesale" deals, ask yourself, "how is
this possible?" There's no shortcut to success -- as, Harvey Mackay says, "Beware of the Naked Man Who Offers You His
Shirt.". I say, "Beware of the homeless man who offers you his house... for wholesale."
Reprinted by Permission. Visit www.legalwiz.com or call 1-888-587-3253. The author, CEO of Legalwiz
Publications, is a nationally known attorney, author, entrepreneur and speaker. He has been practicing law since
1990, having been involved in over 700 transactions.
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June 2014
CONTRACTORS
So you need to hire a contractor?
by Robert Cain
Most of us hire people to do some kind of work on our properties, be it as small as an emergency drain fix or as large as
a building addition. Usually these workers are treated as independent contractors, paying them when the work is done.
We don’t withhold taxes, Social Security or pay their workman’s compensation insurance. We check their references or
use people we have used before. We also use a contract spelling out the scope of the job to be done.
Upwards of 90 percent of the time that will work without any problems. The job will get done to our satisfaction, we will
pay them, and we will have few or no problems with our tenants, other contractors or our actual employees.
The other 10 percent of the time, though, we can run up against issue with the IRS, liability and management that can
cost us a bundle.
In this article we will look at things we need to watch out for concerning whether or not the contractor should be treated
as an employee, how far our liability for contractor behavior and shoddy workmanship extends, and the biggest
advantage to hiring a contractor.
Contractor or Employee?
The Internal Revenue Service (IRS) provides specific rules about who is an independent contractor and who is an
employee. As we hire a contractor, we need to be aware of the differences.
In order to be considered an independent contractor, people we hire must meet all eight of the following criteria.
Control
Facts that provide evidence of the degree of control and independence fall into three categories:
1. Behavioral: Do we control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Do we control the business aspects of the worker’s job? (These include things such as how the worker is
paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Do we use written contracts or do we provide employee type benefits (i.e. pension plan,
insurance, vacation pay, etc.)? Does the relationship continue and is the work performed a key aspect of the business?
We must weigh all these factors when determining whether a worker is an employee or independent contractor. Some
factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent
contractor. There is no “magic” formula or set number of factors that “makes” the worker an employee or an
independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in
one situation may not irrelevant in another.
We need to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to
document each of the factors used in coming up with the determination.
Behavioral Control
The contractor must provide labor and services free from our or our employees’ direction and control over the means
and manner of providing the labor and service. That means we can’t stand over them and tell them what to do and when
to do it. It also means we can’t specify how the work is to be performed and when the contractor is to work.
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For example, if you hired a workman to get apartments ready to rent, you would be safe in providing a list of work to be
done and materials to be used, such as clean the carpets and paint the rooms off-white using the Glidden Paint you
provided. You could also provide a checklist of items that may or may not need dealing with.
But, how specific is too specific? Certainly we have the right to specify paint color, types of materials to be used, items
that must be repaired and a date by which it must be completed.
Then there is training. Employees receive specific training in their jobs, while independent contractors are expected to
know everything they need to know going in. If we provide contractors specific training, we may have suddenly
“converted” them into employees. What is the difference between instruction and specification? Good question.
If were to require and pay for a contractor to take a plumbing class before he could work on our properties, that would
obviously make him our employee. Other questions do not have such obvious answers.
On IRS Form SS-8, from which the IRS can determine the employment status of a worker, the question “What specific
training and/or instruction is the worker given by the firm?” appears.
What if you showed a contractor exactly how you wanted paint applied in your rental? Is that considered training that
would negate his or her status as an independent contractor? What if you showed a landscaper exactly how you wanted
the mulch put in? Is that considered training that would negate his or her status as an independent contractor? The fact
is, there is no objective definition of “training” as to how it differs from showing what you want done.
Webster’s Revised Unabridged Dictionary defines training as “The act or process of educating; the result of educating, as
determined by the knowledge skill. . .; also, the act or process of training by a prescribed or customary course of study or
discipline. . . .” That is so nebulous that specifying the rationale for paint color could be considered “training.”
Fortunately the IRS looks at other factors, as well, such as how much control the contracting party has over the hours
the contractor works. Of course, if you hire a maintenance company to get units ready, it can give its employees training
and direction and not affect your relationship with the maintenance company, since the company’s employees are not
your employees.
Financial Control
Do we control the business aspects of the worker’s (contractor’s) job? That would include, but not be limited to, things
such as how the contractor is paid, whether expenses are reimbursed, and who provides tools and supplies.
Independent contractors often have a significant investment in the facilities and equipment they use in performing work
for someone else. If you provide the tools the contractor uses to do the job, that could convert a contractor into an employee.
You may not reimburse a contractor for expenses. Those should be included in the contracted price of the job.
You also may not require that a contractor work exclusively for you. If a contractor works for other parties, or is
available to work for other parties, that is one indicator, but not a determiner, that he or she is a contractor and not an
employee.
Contractors are paid by the job, while employees are paid at regular intervals. You may pay a contractor at intervals that
have to do with the amount of work completed, but not, for example, every two weeks as you would an employee.
Type of relationship
Do you have a written contract or contracts, or pay employee type benefits (i.e. pension plan, insurance, vacation pay,
etc.)? Will your relationship continue? Is the work performed a key aspect of the business? That means is what the
contractor does part and parcel of your rental business, such as an ongoing relationship to handle tenant repairs.
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Answer “yes” to any of these questions, and you could have a grey area as to whether or not your contractor is a
contractor or an employee. You can, however, have a long-term contract with a maintenance company or handyman to
do work “as needed” on your properties.
Hiring someone to work on your property who does not meet the necessary criteria could mean you end up paying extra.
For example, if someone you hired who claimed to be an independent contractor files an unemployment or workman’s
comp claim, and the state determines that that person was not legally an independent contractor, you could be forced to
pay unemployment assessments, workman’s compensation premiums, unpaid employment taxes plus interest, or all
three.
The biggest issue
Tax and workman’s comp liabilities are not the only issue in the independent contractor/employee debate. There are also
liability advantages in dealing with in hiring independent contractors.
We have greater liability of the wrongful acts of employees than we do for those of an independent contractor, primarily
because of the greater control we have over how employees perform their work. Employers are liable for the wrongful
acts of their employees committed by employees in the scope of their employment. Under most circumstances,
independent contractors are liable for their own wrongful acts. That is in most circumstances.
As in everything in the law there are exceptions. In this case there are two. The first one is the “negligent hiring”
exception. Under this exception, the principal (the person who hired the contractor) may be held liable for the acts of an
independent contractor if the principal knew or should have known that the work begin performed by the contractor
was shoddy, and someone was injured as a result of that shoddy workmanship. An example would be one where a
contractor was hired to make repairs on the sidewalk in the common area of an apartment complex, did them improperly
leaving a trip hazard, and a tenant broke his leg after tripping on the faulty sidewalk. In that case, the property owner
should have known that the shoddy workmanship could obviously be a danger.
The second one is the “deep pockets” exception. All of us landlords are rich, of course, and it may be that the contractor
we hired, who repaired the deck on the balcony of one of the apartments was barely squeaking by financially, didn’t own
a home, drove a 14-year-old pickup with wobbly wheels, and had three judgments against him already. So when one of
your tenant’s guests falls through the balcony floor and files suit, the lawsuit will not be against the penniless contractor,
it will be against you. The tenant’s attorney will find a way to blame the property owner, since the contractor is nigh on
to broke, doesn’t have enough insurance to pay for anything, and has left the state.
The biggest advantage
One of the greatest advantages to hiring contractors rather than employees is that you don’t have to keep them if you
don’t need or want them anymore. You cannot be sued for such things as job discrimination or wrongful termination.
Those laws apply to employer/employee relationships, not contractor relationships.
The only way for a contractor to come back at the person who hired him would be to claim that he was really an
employee. That, of course, is another excellent reason to be sure that the contractor you hire is indeed a contractor. In
the works of Thomas Y. Mandler, partner in the Chicago law firm of Schwartz & Freeman, “the three most important
issues in real estate are ‘location, location, location’; the three most important factors in determining if a worker is an
independent contractor are ‘control, control, control.’”
Reprinted by Permission. Copyright © 2008 Cain Publications, Inc. Robert Cain is a nationally-recognized
speaker and writer on property management and real estate issues. For a free of the Rental Property
Reporter call 800-654-5456 or visit www.rentalprop.com.
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ESTATE PLANNING
The High Cost of Dying Unprepared
by Dyches Boddiford Posted October 9, 2013
So, with the estate tax exemption at $5.25 million per person, you don't think doing estate planning is
important anymore? Well, think again. Estate taxes were never the sole, or even primary, reason you need
an estate plan. Here are just a few other considerations:
Do you want to designate who cares for your minor children or just let the State decide?
How about who handles the children's money or should you let the Courts do that?
What happens should you become incapacitated? Who decides your medical care? Who will write your
checks?
What will happen to your property and business? Who will own and who will run?
What if your adult child is a spendthrift or has a substance-abuse problem?
How do you protect your assets now and after you are gone from frivolous suits?
I am sure you can think of many other questions.
You Already Have an Estate Plan - Whether you know it or not!
Whether you have spent the time to put one in place or you are depending on the State and the Courts to
determine what happens, you already have a plan. But there is a high cost in dying or even becoming
incapacitated if you haven't put your own plan into place.
So, how are you handling real estate in your estate plan.Very few attorneys or estate planners understand
these assets and how to deal with them in an effective estate plan.
Reprinted by Permission. Copyright 2013 Dyches Boddiford. All Rights Reserved. The Oaks
Group, PO Box 505, Marietta, GA 30061. Dyches is a National Speaker has been a MREIA
featured speaker at past meetings. Visit www.assets101.com for more information.
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June 2014
NEGOTIATING STRATEGIES
Egos And Real Estate: A Bad Combo
by Mark Wade October 10, 2009
Back in the 1960's, Tarryton Cigarettes had the saying "I'd Rather Fight Than Switch." Personally, I think I would
give up my specific brand of cigarettes than take a solid punch in the face. But fighting is what some folks like to
do, at least verbally, and this characteristic is often played out during the back and forth volleying of buying or
selling a home. Especially when Mr. Buyer or Mr. Seller don't have to face the opposition directly, and are allowed
to vent their frustrations through a third party- Their trusty Realtor®.
In a weakened real estate market, almost all transactions involve some kind of fighting between buyer and seller.
Rare are the times that everyone agrees upon value and terms. The seller always believes his home is worth more
than it actually is, and buyers always believe that they are overpaying for any given piece of real estate they may be
eyeing.
Evidently, sellers don't watch the evening news, and buyers swallow everything that comes out of a news anchor’s
mouth as gospel. Yes, the market is soft in Detroit and St. Louis, and of course Miami and Las Vegas are struggling,
but because all real estate is local, the true depth of our economic issues in any given part of the country cannot be
summed up by some Gloom and Doom story on the nightly news.
To sellers, the effects of the economy on their home value is slight, and to buyers, this downturn is the similar to
Chicken Little's forecast that the sky is falling. Somewhere between the two lies the truth. Hence, the initial conflict
in getting both parties to agree on value.
The real problem comes when the negotiating for the smaller issues arise. How much of a credit for issues
discovered during a home inspection is fair? Since both buyer and seller are now at their breaking point- who is
going to be the one to give the nearly nominal concession to allow the transaction to continue?
This scenario once played itself out, much to the detriment of one of my sellers. As a veteran real estate agent,
trying desperately to bring two parties together, the sticking point after a few weeks of negotiating was a washer and
dryer. A used washer and dryer...a Kenmore, I believe. The buyers wanted them, and so did the seller.
The seller decided that although the cost of moving the appliances out of his basement, and across the country to
his new home, was going to be borderline worthwhile, it was just the knife he was going to stick into the buyers
back. To hell with them, was his motto. “Take it or Leave it,” I recall him saying.
The buyers took option two, and walked away from the deal. The seller kept the home, along with his used white
Kenmore washer and dryer. His life was on hold for just over four months before we found a new buyer. And this
new buyer was smart: he let the seller keep his washer and dryer, and he paid $40,000 less than the first buyers who
walked away from the deal four months earlier.
Fighting, for the sake of fighting, is sometimes a costly event. Even if you love your washer and dryer a lot, it is
sometimes better to cut your losses and head for the hills, even if it means having to fork over a few dollars for a
new washer and dryer. Pinching a dime for a dollar is never a good idea, and usually an awful idea in a softening real
estate market.
Mark Wade is a veteran Philadelphia Real Estate agent with Prudential Fox and Roach Realtors, and
operates http://www.CenterCityCondos.com. Reprinted by Permission. Copyright © 2004-2014
BiggerPockets Inc. All Rights Reserved.
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June 2014
INVESTING PHILOSOPHIES
Time For New Year’s Resolutions
by Phyllis Rockower
This is the time to think about what you want to accomplish this year in real estate. If you have never done anything
before, make up your mind that this will be the year. I know that it has been hard to get into real estate without a lot
of risk in the last year. But I think that this year will provide some great opportunities as banks get real and the govt
gives great incentive for buyers. So if you have been sitting on the sidelines afraid to act, take heart. Your time is
coming. Please don't get discouraged. Take the time to get educated.
However, don't suffer from a paralysis of analysis. You are never going to have all the facts. Make sure that you
know what the house will sell for after repaired; know the fix up costs and MAKE OFFERS!!!! Remember, if you
are not embarrassed making the offer, it's too high.
Knowledge has never been more important. In a declining market, you have to set yourself aside from the many
beginners. Many people are going to over pay thinking that if prices have dropped so much they don't need to get
any discount from market value. Don't you be one of them.
If you have adjustable loans, GET RID OF THEM. Either fix and flip, or plan to hold for the next five years- at
least. It may not be a bad idea if you are looking towards holding for retirement. Real estate cycles go in about seven
year cycles. That means prices may go down more and then it will take years to come back up again. I remember
seeing a chart of prices in LA in 1990 and then in 2000. A lot of areas never even made it back to the 1990 levels
until 2003.
Set a monetary goal for yourself. Then decide what you are trying to accomplish. Do you want immediate cash?
Can you wait 3-6 mo.? Are you prepared to hold if you can't sell? Can you wait 2-3 years? How about a lease with an
option? Are you looking to build a retirement fund? Once you have done that, then you are ready to break the total
monetary goal into chunks: how many quick flips, how many rehabs, and how many to hold for long-term cash
flow.
Make a plan that will set the steps to accomplish those goals. Write it down!! Where are you going to get the needed
knowledge? Who do you have to talk to? What people do you need help from? Build a team! Attend meetings, join
REIC, get a mentor and GET GOING!!
You can make excuses or you can make money- you can't do both.
I encourage all of my students to find the training and hands- on experience that helps them get on their own path
to success. We are all at different levels and come from different backgrounds. You need to find the tools and the
team members that don't have what you have. Many times, things aren't as straight forward as they seem at these
boot camps and seminars. Having the resources in place so that you can find help when problems come up, is the
only way to make your real estate journey successful.
The author is the President and Founder of REIC of LA. Reprinted by Permission from the R.E.I.C. of L.A. News.
Published by the Real Estate Investors Club of Los Angeles. Phone: 310-792-6404 Visit www.realestateclubla.com
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OPTIONS
Using Creative Options With and Without Leases
by Jack Miller
It’s Time for You to JUMP IN to Learn More About Using Options.
In the final analysis, investment boils down to sacrificing income and assets today in order to enjoy them at a point in the
future. The less you invest for the higher return, the less sacrifice and. the sooner you can start enjoying the profits you
make. Several factors influence investment and net return. These are:
*Taxes
*Inflation
*Interest
*Leverage
*Amortization
To the extent you can use these factors to your own advantage, the higher your yield will be. Almost all real estate
investors and speculators use Debt Leverage to acquire and control assets, but this is risky and expensive. Let's review:
1.
Credit is usually obtained from institutional lenders at market interest rates and terms.
2. Borrowers have to guarantee payments personally, thereby placing all their assets at risk for each additional loan they
sign on personally.
3. When net market prices after costs of sale and taxes are rising at a rate in excess of the rate of interest, the use of
leverage is warranted, but .. .
4. Appreciating property values don't offset negative cash flow unless the property is sold, or re-leveraged.
5: Selling property to replace cash flow robs the seller of all future appreciation in a rising market.
6. Borrowing at higher and higher interest rates to increase cash reserves with which to repay debt on negative cash
flow property merely transfers equity to the lender.
7. Risk for the debt-leveraged owner is increased by external factors such as the EPA (Lead Paint, Asbestos,
Formaldehyde, Radon), Social legislation (Rent Controls), Down-Zoning and restricted use policies.
8. Control of a property through the use of leases + Options without ownership removes most of the risk associated
with real estate investing and speculation.
9. Leases and Options enable those without much money to leverage future profits without the need to qualify for, or
to guarantee, acquisition loans, or repayment of them.
An Option is a marvelous tool that reduces risk while passing on to the holder most of the benefits that can be obtained
from leveraged real estate. An Option can be used to pass on tax-free cash to a high-bracket seller, or to enable another
seller to be able to cash out a personal primary residence tax free.
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Options are ideal for building up tax free cash inside a Roth IRA which otherwise would be subject to tax if it invested in
conventional debt leveraged assets. An Option can be used to extend the 45 day period allowed to identify a replacement
property when doing a delayed tax free exchange. Options can also enable those who can't find loans with which to buy
property with a low down payment to nonetheless buy properties on the installment plan. Let's take a closer look:
Anyone who sells a property within one year of its purchase pays ordinary income tax on the profit. This can be as high
as 40% plus state tax. Suppose a seller had an opportunity to sell a property for a quick windfall profit after owning it
only 9 months. He wouldn't want to turn down the offer, but would want to reap the benefit of the 20% long term
capital gains taxes rather than pay 40+%.
Suppose, instead of selling the property itself, the seller sold an Option on it, then allowed the Optionee to close the
Option only after a full year had passed. In this instance, he'd be able to receive the money tax free until the Option was
exercised, and would only pay 20% tax on the sale. That could be a real plus for market traders and real estate investors
alike.
The same market timing strategy would apply to anyone who wanted to sell a primary personal residence that they had
only lived in and owned for a period less than 2 years out of the most recent five years. In such case, a buyer could buy
an Option, give them the Option money tax free; then complete the purchase and move in after the two year period had
elapsed.
In special situations, such as where a home owner is selling a residence that he has bought under a lease/Option, he
might have lived in the property for 2 years, but not actually owned it for two years. In this case, the owner might sell an
Option to a buyer for a significant sum, and let him move in on a lease until the two years had expired. Both the Option
consideration and the final payment would be tax free to the seller.
Pure Options can be purchased for cash or for management effort. They can be written to capture all or a portion of any
price appreciation as well as loan amortization. The trouble with Roth IRAs is that it is difficult to accumulate much
money from contributions and build up in values in any significant amount until several years have elapsed.
Suppose a Roth IRA custodian were to buy an Option on a house that was being rented by a non-related party in order
to induce the seller to lease the property rather than to sell it outright. The seller would receive tax-free Option
consideration plus rent. The tenant would be able to enjoy a residence that might otherwise have been unavailable. The
Roth IRA would have a highly leveraged investment with no risk. Let's quantify this:
Assume a Roth IRA paid $10,000 for a 2-year Option to buy a $150,000 house that had recently been received in a
property exchange by someone who didn't like management. The Option would be conditional on an unrelated party,
acceptable to the owner, paying $1200 per month rent for two years. Out of the rent, $100 per month would be credited
toward the $140,000 Option strike price.
Let's assume that house prices were rising at about 8% per year during this period. Each year the Roth IRA would see its
equity in the Option grow by $1200 by virtue of the rental credit, and by $8000 through property appreciation. At the
end of 2 years, the initial $10,000 investment would have grown to $18,400. That represents a 42% annual yield each year
for two years.
Negotiating leases and Options require different approaches from buying and selling. When leasing, the best lease targets
are people who have been unable to sell, or who are reluctant to place vacated properties on the market because of all the
hassle. A vacant house can be a real burr under the blanket when payments must be made on it. So, the potential lessee
would present himself or herself as a desirable, responsible long term tenant who would take good care of the property.
One might even agree to pay rent payments annually in advance in return for a high discount.
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Using the above $150,000 with a fair market rent of $1200 as an example, in a pure lease situation, the benefit to the
lessee is in a cash flow spread between rent that is being received from a sub-tenant and cash that must be paid out on
the lease. The benefit to the owner is a hassle free, vacancy free, maintenance free rental that he can write off while
getting all the appreciation.
In a typical situation, the potential tenant would try to get 10% discount for paying the rent one year in advance. It could
be pointed out to the owner that he could recover this discount easily in today's stock market. Next, perhaps 5% could
be negotiated for signing a five. year lease. Just one month's vacancy each year would be much more than that. Another
3% might be negotiated for taking care of all maintenance items under $100 per month, and as an override on any
maintenance arranged on larger items. If you add all this up, the tenant winds up renting this house for 18% under
market, or $984.00 per month.
Let's assume that market rents on the sub-lease could be increased by 5% per year; the first years net rental spread would
be $2592. The second year the annual rents would rise by $1200 and the spread would increase to $3312. The third year
the spread would be $4068; the fourth $4860, and the fifth year, the tenant would be receiving over $475 per month for
doing little more than managing one rental house.
Of course, in the real world, none of these numbers would work out. There would be expenses, vacancies, etc. On the
other hand, if, as is spelled out in the rental agreement previously covered, if many of these expenses were passed along
to the tenant, it would be a very worthwhile endeavor for someone trying to find cash to feed a highly leveraged cash
flow property. The monthly cash flow could pay for several Options too.
Options without leases are an ideal tool for relieving an owner's cash flow squeeze when he doesn't want to sell his
property, or wants to move out and rent it. Using the above $150,000 house again, suppose the original loan several years
ago had been for $100,000 at 8% for 30 years and the current monthly payments were $733.36 plus taxes and insurance.
Suddenly, the breadwinner is laid off and there's no money in reserve to make the payments to protect the $75,000
equity.
A reasonable proposition would be to provide one third of the total payment each month for two years in return for one
third of the equity. thus, for about $300 per month for 24 months, or $7200, the Optionee would, using an Option
strategy, be able to leverage into a $25,000 net equity without any management chores at all. Not a bad spot for the Roth
IRA at all.
When you combine a lease/sub-lease sandwich with an Option in which a credit is given against the Option price for
each payment, then the sub-lessee is actually buying the Option for you. There is a negative cost in this investment.
There is nothing quite like this anywhere else in the investment world. Each payment that is credited against the ultimate
cost has the same effect as any principal loan payment made to amortize a mortgage, but with a major difference. Option
payments "amortize" at a much faster pace. Here's what I mean:
Options are the ultimate OPM strategy. If you were to buy a $150,000 house with a 10% down payment, it would cost
$15,000 down, plus closing costs. Payments on the $135,000 balance over 30 years would be $990.58 plus taxes and
insurance. At the end of 5 years, you would still owe $128,344 on your loan after having paid in a total of about $59,435.
On the other hand, suppose you had made exactly the same payment on a lease/Option, but had negotiated a credit
equal to 25% of each rental payment? First of all, other than your lease deposit, you would have made no down payment
at all. Secondly, almost $15,000 would have been credited against the purchase price. Best of all, this would have been
paid by your tenant, not by you.
The only problem with this arithmetic is that the rental market could weaken; leaving you with a $990.58 payment to
make each month you experienced a vacancy. Over 5 years, you could wind up paying a lot of money for this lease out of
your own pockets. One way to limit your risk is to write your lease/Option for one year, with an Option to renew it each
year for the next four successive years.
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This way, you would only be liable for vacancies that occurred in each year that you elected to renew the lease/Option.
Of course, anytime you tired of leasing the property, you could either sell the lease based upon the growing cash flow
spread generated by rent raises; or sell the Option based upon the growing equity; or exercise the Option and
simultaneously sell the house itself to capture your growing equity.
Lease terms can transfer negative cash flow and risk from the owner to the lessee, while using the tax code to help both
of you. A person who is already experiencing negative cash flow because he can't or won't manage a rental would be
desperate to have another person come along and alleviate the problem. His only cost would be a share of future sale
proceeds, and that wouldn't seem very important weighed against current cash flow needs.
He'd have no vacancy, no management, all the tax benefits, and cash from the rents to help him make his payments. On
the other hand, the lease/Option presents an outstanding opportunity for the entrepreneur who is able to garner equity
through both the appreciation of the property and rental credits given against the Option price. It would be difficult to
come up with a better arrangement.
Where do you find house owners who would be motivated to enter into this kind of arrangement? To locate motivated
sellers, mine the newspaper ads for people willing to carry back installment payments and convert them to
lease/Options. Prowl the neighborhoods looking for vacant houses. Scour the courthouse for eviction notices. The
owner of a rental who has to evict a tenant is about as disenchanted with the rental house business as he'll ever be, and as
willing as he'll ever be to hear your proposition.
If you've already got a source of cash for payments, you can offer additional cash flow in return for a much greater
Option credit to solve cash flow problems for an owner who needs money. In the above illustration on the $150,000
house with a $75,000 balance, instead of simply making the loan $990.58 payments for the owner, suppose you offered
$1500 per month with an Option credit equal to 125% of the payment?
Let's suppose that you were only able to rent this property for $1200 per month. Each month, you would be paying out
$300 in negative cash flow, but getting a credit of $1875. This translates to a return of $22,500 each year against the
purchase price at a cost to you of $3600. That boils down to a yield of 625% on your invested cash, taxed as capital gain,
that you would realize when you sold the Option after a couple of years.
Divorces present a rich source of Option opportunities. In a typical situation, when a household breaks up, the equity in
the house is divided in such a way that the mother keeps possession while the father pays alimony and child support.
Quite often, there simply isn't enough money to provide much of a life style for either party, thus, alimony payments to
the mother become very unreliable.
By getting both parties to agree to an Option in which tax-free payments will be received by the mother with which to
make house payments, and credited against the purchase price in lieu of alimony or child support payments, it solves a
real problem for both spouses, as well as their children. And, with an appropriate percentage credited by the Optionee
against the purchase price, it can be extremely profitable for him or her.
Another kind of distress situation in which a lease/Option is welcomed with open arms occurs when a would-be
investor is either burned out from management, or unable to cope with it. As you swoop in with a lease/Option offer,
you'll look a lot more like an angel than a vulture to these people for the simple reason that you will be fulfilling a real
need in a way that nobody else can. Options: Try ‘em; you'll like 'em.
Reprinted by Permission. Visit www.CashFlowDepot.com or call (972) 496-4500. Jack Miller passed away in October 2009. A
few of us were fortunate to be able to attend some of his outstanding seminars and also to get to know him as a wonderful
person. Jack appeared at MREIA meetings and was an international speaker and active investor, specializing in single family
houses. He wrote a monthly investment newsletter and conducted seminars on Exchanging, Management, Portfolio Strategies
and Options.
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FINANCING
The Role Of A Private Money Lender
by Martin Goodman
November 17 2010
Private Money Lenders (PMLs) is a relatively new term which we will use to refer to a loan professional
specializing in private money loans. Over the years, there have been a multitude of labels used including
"private hard money lender", "hard money lender", and "hard money private lender".
You will also hear PMLs called by names such as: Agents, Brokers, Loan Officers, Loan Brokers, or
Mortgage Bankers. Knowing the players, and the role they play is critical to getting the right loan, and
getting it funded quickly. If you decide you need a private money loan, you want to be working with a loan
professional who specializes in this arena.
In traditional lending, the loan officer's primary role is on the front-end of the transaction. Taking the
application, discussing loan programs and their qualifying criteria, and gathering the income and asset
documentation from the borrower makes up the majority of their responsibilities. The loan file is then
passed on to processing, underwriting and closing staff that see it through to settlement. Lenders or funding
sources are provided to the loan professional by the company or bank the loan officer works for.
For private money lenders, the front end of the transaction is just the tip of the iceberg. These highly skilled
entrepreneurs orchestrate the entire transaction from start to finish and in some cases are funding your loan
with their own money. While they may re-sell your loan quickly to another investor to liquidate their funds,
or to secure the funds for your loan through an outside pool of investors, their skills and relationships with
funding sources is vital to providing you with the money you need.
Your private money lender manages and often personally performs all of the following processes required to
get your loan closed:
Creating your loan package, including the application, income, credit, and asset documents you provide.
Gathering and reviewing title information as required.
Ordering payoff and loan reinstatements as needed.
Advising you on the best available loan program they offer which will fill your need.
Providing you with all applicable federal and state disclosures.
Ordering and reviewing an appraisal or other asset valuation on the property.
Coordinating title and escrow services.
Underwriting and approving your file.
Providing a source of money (investor/lender) to fund your loan.
Determining the loan servicer (where you make your monthly payment) of your loan.
Creating final loan documents and coordinating loan settlement or closing.
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Let's take a closer look at what's involved with each step.
Creating your loan package
A well-documented and detailed loan package is key to finding a private investor willing to fund your loan. Expect
to have the PML run a credit report, and ask you for tax returns for multiple years, financial statements, bank and
investment statements along with a variety of other documents that provide proof of assets and liabilities. The PML
will help you complete a loan application (frequently referred to as the 1003), as well as a document called a
Statement of Information (SI). The SI assists the title company as they research the title of the property for liens
and judgments. The documents required are unique to the type of loan and to each borrower's personal financial
situation. What separates a great private money lender from a novice or a lender inexperienced in private money
lending is that they will intimately know which documents their investor will need to approve the deal.
Gathering and reviewing title information
A preliminary title report is an offer to insure your transaction by the title company and includes a summary of the
existing liens, judgments, easements and other encumbrances on your property. It may be updated several times as
well as immediately before closing. Title companies extend an offer to insure your transaction subject to the
information in this report. Title insurance is a mandatory requirement of any investor. Filling out the SI form along
with the application will give the title company and your PML the information they need to get your loan processed
quickly. Your PML reviews this report and will discuss with you any detrimental or unexpected items that may
prevent your loan from funding.
Ordering Payoffs and Reinstatements
Ordering payoffs and reinstatements for a loan is trickier than it sounds. A payoff is a document from a lienholder
specifying the exact amount to payoff the lien entirely where a reinstatement is a statement from the lienholder
(typically a mortgage or trust deed) which gives an exact amount to bring a delinquent loan current. Depending on
the type of lien, the payoff may be obtainable in a few days, or it make take several weeks. In a conventional
transaction, this function is typically handled by escrow. But a good private money lender knows that last minute
problems often arise because of inaccuracies in these documents and the PML will often have their office obtain
these documents on your behalf to make sure they are accurate. Private money loans are very loan-to-value sensitive
and an unexpectedly high payoff can derail the loan at the last moment.
Advising you on the loan
Loans available to you will depend upon the PML, their specialty, and their investors available to fund the loan.
Don't expect a formal list and brochure of the loan programs like you would see at a bank. Everything is negotiable
and the benefit of a PML is that the loan can be customized to meet the needs of the borrower and the investor.
The key is to find the happy medium between the amount of profit required by the PML and the investor (realized
through fees, interest rate, loan term, etc) to get the deal done.
Providing disclosures
Federal and state disclosures differ depending on the type loan. These disclosures provide you with key information
about the loan you've applied for and are designed to inform and protect the borrower. A first mortgage loan on a
residential property requires different disclosures than a commercial loan against a warehouse. The PML provides
the necessary forms within the required time frames and reviews them with you.
Ordering and reviewing a property valuation
Property values will make or break a private money deal because the investor relies heavily on the collateral as
security for the loan. Value can be determined many different ways, and the PML will know what method their
investor(s) prefers. Many private investors prefer to visit the property themselves to determine value. The PML will
almost always want an appraisal report performed by a licensed appraiser in addition to any other method preferred
by the investor. A few investors will also use a Broker Price Opinion (BPO) to determine value or supplement other
valuations.
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The report is provided by a licensed real estate broker, is substantially less detailed than an appraisal, and gives the
investor a sense of what the property would list for in the current market environment. Automated Valuation Model
(AVM) are reports that rely upon public records and special modeling software to arrive at a value. Whatever the
method, or combination of methods required by an investor, your PML will order the reports, and coordinate
access to the property.
Coordinating title and escrow
At the same time a PML orders a title report for the purposes of title insurance, escrow services are also engaged. In
some states the same company will provide both the escrow and title services. In others, a separate company or
possibly an attorney will oversee the process. The escrow services company will obtain any payoffs needed on the
subject property, handle the disbursement of funds , conduct the loan closing, and record all applicable deeds and
documents with the county. The PML also coordinates the transfer of the loan funds from the investor to the
escrow company handling your transaction.
Underwriting and loan approval
In many cases the PML underwrites and approves your file based on the criteria requirements of the selected
investor. Prudent review and documentation is required to justify a loan approval. The PMLs professional
reputation and potential future business with investors will be impacted by the performance of your loan. Some
investors may want to personally review the file or have their own designated underwriters review the loan package.
Providing the loan funds
The PML establishes relationships with investors or pools of investors that provide the money you need. You are
matched with an investor willing to provide funds based on your loan package and the PML arranges for the those
funds to arrive at the escrow company so settlement can be finalized. In some cases PMLs will use their own money
to fund a loan and keep the loan for their own account, keep the loan in a mortgage pool they may operate, or they
may sell the loan to another investor.
Determining the loan servicer
The loan servicer is the entity or individual that collects your monthly payment, provide periodic loan statements,
year-end tax documents, and manage your escrow account for taxes and insurance if that was part of your loan
agreement. The PML will typically also service your loan. Servicing loans is how most PMLs earn their living, and
cover their office overhead. Servicing a loan also gives the PML the ability to communicate more quickly with their
investor about the status of a loan. If the PML is not the servicer, the PML will transfer the loan documents to the
designated servicer and make sure that you know where your first payment is made.
Final documents and closing
All of the required final deeds/mortgages and loan documents must be prepared by the PML , an attorney, or by a
designated document preparation company.
The actual closing and signing of loan documents process varies by state. Sometimes the PML will have a notary on
staff and will supervise the signing of the loan documents, and in other states, an attorney, escrow or title company
will coordinate the signing. The signing location and supervising entity will also vary based on the type of
transaction. In many cases, the PML will be with you to make sure everything is in order and there are no questions
about the final documents.
Martin Goodman http://www.PrivateMoneyLendingGuide.com http://www.LoanMLS.com. Reprinted
by Permission. Copyright © 2004-2014 BiggerPockets Inc. All Rights Reserved.
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REHAB 101
House Maintenance – How Much?
by Joseph Neilson Posted September 27, 2013
Nobody Know Nuthin’
Would you agree that the average monthly or annual cost of house maintenance is central to an investor's profit?
Yes, of course. Therefore, let's survey the available information on this most important subject.
Professional Management
"How much does an average row house, 1100 square feet, cost to maintain a month?" I asked a self-described
expert of residential management at his booth during a landlording exhibition.
He looked puzzled, then smiled, "We can replace a hot water heater for $650."
"But, I'm asking for a monthly average for all maintenance for an 1100 square feet row house."
"Well....we're very inexpensive - have our own handymen - and each house is different."
"What about a general ballpark average?"
He frowned; then shook his head. "I'll ask around." He was soon back with a gray-haired guy in a stylish suit from
1920.
"I'm the owner. What was it that you wanted to know? No such thing as average maintenance. No, I've been doing
this for forty years and there's nothing like that. Everything's different." He nodded. He smiled. He was missing two
teeth.
Investor Newsletters
The various real estate newsletters I receive have no discussions, no articles, and project no numbers on the average
cost of house maintenance.
Investor Websites
The various real estate investing websites have no discussion, no articles, and project no numbers on the average
cost of house maintenance.
Real Estate Investor Books
My 80 real estate investing books have little discussion (just generalities; i.e., keep expenses low) but no projected
numbers on the average cost of house maintenance.
Real Estate Gurus
The various real estate guru's I have listened to on CDs and during presentations, seminars, web seminars, and
countless REIA's monthly meetings have never addressed the average cost of house maintenance. Very strange,
because house maintenance is central to making money, central to surviving.
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Google House Maintenance, Average Cost
On the website Houselogic.com, they quote Directors Credit Union and Lending Tree.com as saying the average
cost is 1% to 3% of initial house price. For a $200,000 house, that's $2,000 to $6,000 - much too broad to be
helpful. And did they say initial house price? From what year? 1940? And a $200,000 house in southern California
may be 900 square feet on a slab, but in Maine it's a 2500 square feet colonial with a basement. Earth to Experts!
Hello!
Coldwell Banker's site has an article estimating annual home maintenance as 1.5% to 4% of initial cost. What's with
this INITIAL cost concept? The "experts" must be reading each other's articles. Worthless.
About.com - "A popular rule of thumb says that one percent of the purchase (initial cost again!) price. Of course,
this popular rule of thumb isn't totally valid." Eliminate "totally" and we have a starting point.
The average cost of house maintenance is not a matter of fuzzy rules of thumb and vague bracket guesses, but a
matter of systems, condition, life expectancy and the dollar costs of repair and replacement.
To build a house of a certain type, square footage and location (1850 sq. ft. ranch in PA, or a 2450 sq. ft. colonial in
VT) there is an industry-accepted cost per square foot, such as $100-$125 per sq. ft. This is accepted by all parties,
even experts.
Houses are made of SYSTEMS. To maintain a house of a certain type, square footage and location there is a
corresponding cost per square foot according to various factors such as the age and condition of the systems. These
systems have a LIFE EXPECTANCY, like us homo sapiens, which depends on a variety of factors. Make sense?
Good. We'll now list some of a house's systems and their life expectancy taken from various websites.
1. Plumbing - suggest PEX, PVC
Moen faucets/diverter/showerhead, etc.
50 years
2. Electrical wiring
Panel, service
50 years+
3. Walls
25 years
4. Hardwood flooring
Lifetime
5. Roof
25 years
6. HVAC
a) Gas furnace
b) Gas boiler
c) AC
7. Kitchen
25 years
50 years+
15 years
25 years
8. Bathrooms
30 years
9. Appliances
10 years
10. Ceramic
75 years+
11. Doors (6-panel)
20 years
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WHOLESALING
Sorry, Flipping Houses Does Not Make You A Professional Wholesaler
by Duane Stephens
July 10 2009
I have been in the business of Real Estate Wholesaling for over two decades and have met many people who refer
to themselves as professional wholesalers. They flip houses for a living, but that is all they do. They use various
means to locate a house and then their determination of the value is usually wrong.
Many of them call me and ask if I have a buyer for the property. In almost every case, they want to split their
assignment fee for me to provide an investor. They rarely have a database of investors to buy their contract. Of
course, this will cost you a considerable part of your assignment fee.
I do understand that there are situations where they may just be getting started or they may be a person you are
networking with. In some cases you use other wholesalers that you network with to get a contract bought. You may
not have any investors that would be interested in the property and one of your networking partners does have one.
This is an important part of the wholesaling business: making money using different marketing and networking
strategies.
After many conversations with people that refer to themselves as wholesalers, I recognize very quickly that they
have very little knowledge and have a game plan of exactly zero. No investor database, no marketing plan, no
networking plan, no business plan and just no plan. They are people that are just trying to make a fast buck and that
is perfectly okay.
But they are not professional wholesalers. I would refer to them as a Bird Dog. Bird Dogs are finders and locaters
of distressed property with a possibly motivated seller. In most cases they are very inexperienced and have very little
skill in closing the deal. That is also just fine. You have to start somewhere. Even people that have spent excessive
amounts of money with so called gurus seem to have very little skills and are confused as to how they build a good
solid business wholesaling real estate properties.
Do you know about Hard Money, Rehabbing, Buy, Hold to Rent, Buy , Hold to Sell, Rental Management, Vacant
Houses and their absentee owners, advertising campaigns, farming, networking, marketing, negotiating, title
companies, contracts? These are skills that a good professional wholesaler would be able to implement on a case by
case basis.
This is a professional business and you need to decide if you want to be well rounded and skillful or just very
limited in the deals you can put together and very limited in the amount of money you can make. Experienced
investors respect knowledge and they rely on your skills to make transactions go smoothly and give them good
sound options when purchasing wholesale property. You also need these skills to determine the exit strategies you
use to hold property for your long term wealth or rehabbing houses for tremendous profits.
You can make a great living in this business, but there are dues to pay. If some so called guru tells you that it is "so
easy," he must be talking about how to hit the PayPal Button.
Professional Real Estate Wholesaler and Author of "Learn To Wholesale Houses". 25 years of
experience/contracted over 200 properties. Expert author of many articles published on various websites.
and Syndicated Columnist Former Securities Broker with over 25 million dollars in Venture Capital raised.
Mentor to over 100 real estate wholesalers. http://www.learntowholesalehouses.com/. Reprinted by
Permission. Copyright © 2004-2013 BiggerPockets Inc. All Rights Reserved
Volume 17 Issue 6
24 of 51
June 2014
ASSET PROTECTION
Five Ways To Use Personal Property Trusts
by Alex Everest March 31, 2011
Personal property trusts are effective tools for savvy real estate investors seeking privacy of their business affairs. A personal
property trust (similar to a land trust) is simply a revocable, living trust. The primary purpose of a personal property trust is
similar to a land trust to ensure privacy, to appear broke to the public, and to discourage meritless litigation.
A trust is simply an arrangement in which someone (Trustee) holds something of value for the benefit of another party
(Beneficiary). The trustee actually has no duties except to sign documents at the direction of the beneficiaries. The trustee
holds legal and equitable title while the beneficiary has the right to the proceeds of the trust. The beneficiary is considered the
true owner for tax purposes.
Here are five ways savvy real estate investors can use personal property trusts to their advantage:
1) Mortgages
If you lend money secured by real estate, the mortgage is considered an asset. Because mortgages are recorded in public
records, the information they contain is available for the world to see. Instead of holding a mortgage in your name (or your
company name), hold it in the name of a personal property trust. You may even want to hold each mortgage in a different
personal property trust.
Another great trick is to create and record mortgages against real estate you own. To the outside world, your real estate
appears encumbered - which makes you a much less appealing financial target. In reality, it’s just a smoke screen for anyone
looking to size you up.
2) Purchase Options
If you record an option against a property, then you are again making this information available to the world. When you list
the Optionee as a personal property trust instead of your name (or your company name), then you ensure your privacy. Real
estate developers and builders often use this trick when seeking to control large tracts of land. This helps eliminate the chance
that prices will begin to skyrocket on them if people find out who is buying up property.
3) Other Publicly Recorded Assets (cars, boats, etc.)
Any other assets (such as cars, boats, or other vehicles) that are titled and recorded in public records, are available for the
world to see. Almost every state DMV allows you to use a personal property trust to hold title to these assets.
4) Non-Publicly Recorded Assets (bank accounts, securities, etc.)
Assets that are not recorded in public records (such as bank accounts and securities) can also be held in a personal property
trust. If a judgment is ever entered against you, the creditor would be unable to attach the judgment to any personal property
not in your name.
5) Trust Embedding
Land trusts are excellent tools to hold title to real estate. However, a handful of states may require public disclosure of the
beneficiary. In other cases, some title companies or lenders may request the disclosure of the beneficiary before insuring title
or funding your loan. In these cases, you can use the trust embedding method to ensure that the beneficiaries are not revealed.
You simply create a personal property trust (for which you are the grantor and beneficiary) for the sole purpose of being the
beneficiary of the land trust. You are in essence "embedding" one trust into another trust. As a result, even when you do reveal
the beneficiary, it's simply another trust which you created.
Alex Everest, Founder and President of Deal Maker Library (http://www.dealmakerlibrary.com), is a
nationally known real estate investor, author, speaker, and advisor from Minneapolis, Minnesota. He
specializes in the areas of wholesaling, rehabbing, owner financing, and land trusts for residential real
estate. Reprinted by Permission. Copyright © 2004-2014 BiggerPockets Inc. All Rights Reserved.
Volume 17 Issue 6
25 of 51
June 2014
LANDLORDING: RENT INCREASES
Raising Rents Painlessly
Author Unknown
Here are two classic-methods which work to solve that 'problem' painlessly.
Let Residents Choose the Amount of Rent Increase
When a lease is up, if the resident is good, I like to renew it for as long a term as possible. I have had great
success offering residents multiple renewal options. The longer the term - the lower the increase. Below would
be a typical renewal for a two bedroom:
Present rent - $565/mo.
Renewal term
Renewal Rate
18-24 months
12-17 months
7-11 months
0-6 months
$585
$595
$605
$610
This allows the resident to lock in whatever rental rate they choose. If they choose less than six months, you
get a fairly healthy increase. If the resident chooses the longest term - you have a good resident, a fair increase
and no turnover. When they choose a higher rental rate (for a shorter term) they are less inclined to argue over
the increase. With those choosing the 0-6 months term, my experience is that about half the time they stay
longer than they planned.
Q. I need to raise my tenant's rents, but I'm worried that if I raise the rent, I'll lose good tenants. What
can I do? [Editor’s Note-this question is from an old issue of the newsletter]
A: So you are afraid to raise the rents on your tenants because you worry about turnover? About losing that really
good tenant? Do you know what not raising rents is costing you each year or each month, or in the value of your
property?
Well, here's a method that I've used for some time which I learned from Nick Koon. With this, you will never
again be afraid to ask for more money!
Here's how: first, determine how much more rent you want to get. As an example, let's say $30 is the
increase that you want. In your letter notifying your tenants of an increase, you do NOT state the desired
amount ($30) as the new increase amount. Instead, you state an amount greater, up to double the actual
amount needed. So, you would state $60 in your letter to the tenants as the proposed increase.
Now here's the trick: in the same letter, you inform the tenant that "if the stated rental increase ($60) is too much,
or more than you can handle because of your personal circumstances, or financial difficulties, please contact the
office within the next five days."
What are all your tenants going to do after they get the letter? They may call you and say, "It's too much for me to
handle." What do you say now?
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You may also discover, that more prospective residents than you think, volunteer that they have their own
appliances, which allows you to use your appliances for another rental and not have to worry about the maintenance
of their own appliances.
Again, by simply asking the magic question, it offers opportunity for you to "customize" your rental offer to best
meet the needs of the prospective rental. The way you "present what you have to offer" can greatly affect your
effectiveness in leasing your property and can increase your cash flow. How you present your rentals is often
more important than what you actually offer.
Ten Guidelines for Landlords to Follow When Rent is Not Paid
1. We get what we allow.
2. Be businesslike and professional, even with just one rental.
3. It has nothing to do with respect. If you're in this for respect, you're in the wrong business! Residents don't pay
rent out of respect, they pay to avoid the pain of late fees or eviction.
4. No pain, no gain! Just like our kids, residents won't do what you want until there is some kind of pain to avoid or
eliminate - not until Mom says, "No Supper until your room's cleaned!" Set a deadline with a consequence.
5. Our judge was VERY clear and even emphatic at our landlord association meeting last month:
"Standard practice" overrides any lease clause. If there are no late fees, dropping fees, accepting late, five days grace,
etc., then HE must allow the same in court. His example: five days grace by the landlord forces him to allow five
extra free days for the evictee. (I still cannot understand why landlords give grace periods!)
6. Residents lie. And landlords tend to be gullible. We want to believe in people.
7. In the end, they didn't pay because they flat out didn't have the money. You cannot get blood from a stone. No
amount of letters, talk, chest puffing, threats, etc., will make a hill o' beans difference. If they can't pay, they can't
and they need to go. No hatred or harsh words - just time to work something out or have the judge tell them that
they gotta go.
8. Stick with the system. Rent, late fees, eviction...Both your life and the resident's lives will have less stress. Don't
re-invent the wheel for every resident excuse. We adapt the system to unusual situations, but the system stays in
place.
9. Landlords play games with grace periods, unenforced late fees, let rent slide, etc. then get upset when the resident
blurs the lines.
10. Stay in control. The landlord is in charge, not the resident.
Reprinted by Permission. (c) 2011 MrLandlord.com. All Rights Reserved. The above tips are shared on the
MrLandlord.com website and in the Mr. Landlord newsletter from website contributors, Jeffrey Taylor
(founder) and real estate authors featured in our newsletter. To receive a free sample of Mr. Landlord
newsletter, call 800-950-2250 or visit the Q&A Forum at MrLandlord.com, where you can ask landlording
questions and seek the advice of other rental owners 24 hours a day.
Volume 17 Issue 6
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June 2014
LANDLORDING: FAIR HOUSING LAWS
Nondiscriminatory Rental and Sales Practices: A Fair Housing Guide for Landlords, Real
Estate Professionals and Other Housing Providers
Author Unknown
Fair housing law makes it illegal to discriminate in any type of housing related transaction on the basis of race, color,
religion, national origin, gender, familial status, disability and age.
This guide was developed to assist landlords, real estate professionals and other housing providers in understanding
their requirements under the law. Regardless of its cause, discrimination in housing is both illegal and bad business
practice.
If you have further questions or would like to learn more about compliance, contact the Council at 267-419-8918 or
visit our website at www.fhcsp.com.
Fair Housing Law
The Fair Housing Act
Title VIII of the federal Civil Rights Act of 1968, as amended, is known as the Fair Housing Act. The Fair Housing
Act makes it illegal to discriminate in any type of housing related transaction on the basis of:
•
•
•
•
•
•
•
Race
Color
Religion
National Origin
Gender
Disability
Familial Status (the presence of children under the age of 18 in the household)
The Pennsylvania Human Relations Act
The Pennsylvania Human Relations Act is a state law that also makes it illegal to discriminate in any type of housing
related transaction on the basis of age, above the age of 40.
Advertising Guidelines
Section 804(c) of the Fair Housing Act addresses advertising guidelines. It is illegal to print or publish a
discriminatory advertisement with respect to the sale or rental of a dwelling that indicates any preference, limitation
or discrimination based on any of the protected classes mentioned above.
Generally, a housing advertisement should describe the property itself, and not the potential occupant. For example,
an advertisement for a housing unit stating "no children" would be considered discriminatory, as it limits families
from children from occupying that unit and therefore violates the familial status provision of the Fair Housing Act.
If it is found that an advertisement is indeed discriminatory, both the publisher and the advertiser can be held liable.
Illegal Activities under the Law
It is against the law to do any of the following because of race color, national origin, religion, gender, familial status,
disability or age:
•
•
•
Refuse to rent or sell housing
Refuse to negotiate for housing
Make housing unavailable or deny that housing is available
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(Continued from Previous Page)
•
•
•
Set different terms, conditions or privileges for the sale or rental of housing, a mortgage, home loan, home
insurance or any other real estate transaction
Advertise in a discriminatory way
Threaten, coerce or intimidate anyone exercising a fair housing right or assisting others in exercising those
rights
Permissible Standards and Activities under the Law
•
•
•
•
Fair Housing Laws do not guarantee any person a right to housing they cannot afford
Property owners may set rents at whatever the market will bear
An agent or property owner can adopt and apply uniform, objective and nondiscriminatory criteria designed
to evaluate a prospective occupant's credit worthiness, such as setting income standards, imposing a credit
check or criminal background check
An agent or property owner is not required to rent to users and dealers of illegal drugs
Exemptions
•
•
•
"Mrs. Murphy's exemption": If the dwelling has four or less units, the owner lives in one of the units and
does not use the services of a real estate agent
Qualified senior housing, which is exempt only from the familial status provision of the Act. To be a
qualified senior community you must meet the following standards:
o 100% of the community is 62 years or older, or
o 80% of the households have at least one resident 55 years or older
Housing run by religious organizations and private clubs that limit occupancy solely to members, as long as
the organization does not discriminate based on race
In addition, no housing is exempt from section 804(c) of the Act, which states that you cannot make, print or
publish a discriminatory statement. Any exempt housing that violates 804(c) has lost that exemption and can be held
liable under the Act.
Technical Fair Housing Issues
Disability Issues
Under the law, a disability is defined as a physical or mental impairment that substantially limits one or more of a
person's major life activities. This includes wheelchair users, those who are visually impaired, those limited by
emotional problems, mental illness, or retardation, recovering alcoholics, recovering drug addicts, difficulties
associated with aging, or those suffering from HIV/AIDS. It does not apply to the illegal use of drugs, but does
protect those who are currently in or have successfully completed a recovery program.
The Act requires housing providers to make reasonable accommodations, which are changes in the "rules, policies,
practices, or services, when such accommodations may be necessary to afford such person equal opportunity to use
and enjoy a dwelling." A simple example of a reasonable accommodation would be to waive a "no pet" policy for a
visually impaired person who has a guide dog.
The Act also requires housing providers to allow a tenant to make reasonable modifications to their housing unit.
Housing modifications are made at the tenant's expense. A housing provider may require a tenant to escrow the
cost of returning the property to its original condition as well as require that alterations be made by a certified
contractor. One example of a modification would be to allow a tenant to build a ramp or widen the doorways for
wheelchair access.
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What is Reasonable?
According to fair housing law, "reasonable" means that the action requested by the individual with the disability:
•
•
•
•
Does not cause an undue financial and administrative burden to the housing provider
Does not cause a basic change in the nature of the housing program available
Will not cause harm or damage to others
Is technologically possible
When a current or potential tenant raises a disability issue, the housing provider has a duty to attempt to
accommodate the request. Typically, accommodations will be a matter of negotiating what will serve both the
housing provider and the disabled person best. Since every disabled person's needs and abilities vary substantially, it
is impossible to list all the possible examples of accommodations in this booklet. If a situation arises in which you
have a question or concern, do not hesitate to contact us for assistance.
Accessibility and New Construction
Under the Fair Housing Act, single story units in new multifamily housing built for first occupancy after March 13,
1991 must be built in an accessible manner if the buildings contain four or more dwelling units and if the units are
either located on the first floor or are served by an elevator. To comply with the accessibility requirements of the
Fair Housing Act, the housing must include the following features:
•
•
•
•
•
•
•
An accessible building entrance on an accessible route
Accessible public and common-use areas
Doors that allow passage by a person in a wheelchair
Accessible route into and through the dwelling unit
Light switches, power outlets and environmental controls in accessible locations
Reinforcements in bathroom walls for future installation of grab bars
Kitchens and bathrooms that allow a wheelchair to maneuver about the space
Familial Status Issues
Under the Fair Housing Act, it is illegal to discriminate against families with children. Examples of illegal practices
include policies that state "no children" or segregating housing so that children are only allowed in particular areas.
It is also illegal to attempt to restrict children because of "unsafe conditions," state that parents and children cannot
share a bedroom, or force children of opposite sexes to have separate bedrooms. These types of decisions are the
parent's choice to make and cannot be a housing provider's imposition.
The U.S. Department of Housing & Urban Development (HUD) states that an occupancy policy of two persons in
a bedroom, as a general rule, is reasonable under the Fair Housing Act. However, reasonableness of any occupancy
policy is disputable, implying that each case may be evaluated individually and also be based on factors such as the
number and size of sleeping areas or bedrooms and the overall size of the dwelling unit. Other factors HUD will
consider include the configuration of the unit (for example the presence of a den or small extra room), the overall
size of the dwelling, capacity of septic, sewer or other building systems, or the existence of state or local zoning
laws.
Per-Capita Charges and Fees
The Fair Housing Act requires an examination of "the totality of the circumstances" to determine a discriminatory
impact against a protected class. Per capita charges more readily affect families with children since, in the typical
case, differences in the number of individuals in a household will be related to the number of children in the family.
Thus, in most cases, a per capita charge will have a disparate impact on families with children and therefore violate
the Fair Housing Act. However, if a housing provider can offer a legitimate nondiscriminatory justification for the
policy, then it may be permissible.
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Lead-Based Paint Hazards and Other "Unsafe" Living Conditions
So, what is a housing provider's responsibility regarding this issue? First, it is illegal under the Fair Housing Act to
not rent to families with children. Case law has stated that a landlord cannot discourage a potential tenant or
determine for them that a property is safe or unsafe for their children. Examples include: steep stairways, steep
balconies, busy streets and the presence of dangerous equipment. Case law has determined that it is up to the parent
to determine if a situation is appropriate for their children, not for the landlord to make that determination for
them. The presence of lead based paint is a similar situation.
Recommendations for Avoiding Discriminatory Treatment
Any person involved in a housing transaction is responsible for following and upholding the fair housing laws. This
includes such people as owners of property, on site managers, rental agents, mortgage lenders, real estate brokers,
and agents. In addition, neighbors who harass and providers who do not ensure a safe living environment may also
be liable. As a housing provider, you should establish a program to ensure equal opportunity for all.
Develop Standard Procedures
To avoid discrimination in the form of differential treatment, you should develop standard procedures for dealing
with all consumers. Train any employees to follow the procedures your company establishes and to obey the fair
housing laws, and make sure employees and the public are aware of the non-discrimination policy. Determine
exactly how your employees will deal with prospective tenants. The crucial requirement is that all persons who
inquire about available housing, mortgage products or insurance be treated in the same manner and that the
sequence in which they are told about availability, shown available housing, asked for credit references, etc. be
identical for all, and that the information given by the employee be the same in every case.
Your own procedures may vary from this example, provided you use them uniformly
for of
all Bernie’s
applicants.
All decisions
Shana
Mountain
on whether to accept or reject applicants must be based on identical criteria. Therefore, it is important to establish
written criteria by which you will qualify prospective tenants and be available to all applicants. Applicants who are
rejected should be notified within a reasonable period of time and should be told why they have been rejected. The
Equal Credit Opportunity Act (ECOA) states that if you deny an applicant for a credit related transaction, they
must be informed why.
Make It Known That You Obey Fair Housing Laws
•
•
•
•
•
Display a fair housing poster in a clearly visible location in the room where rental business occurs. Standard
Fair Housing posters can be acquired by calling the HUD Distribution Center at (800) 767-7468 and
requesting publication HUD-928.1.
Use an equal opportunity logo or statement on all brochures and pamphlets.
Use an equal opportunity statement on all applications
Avoid advertising that could be construed as an attempt to select or discourage persons on the basis of any
of the protected classes, and display an equal opportunity statement or logo
Maintain a list of available housing units to ensure that all applicants are given the same information, and
include on this list such things as the apartment number, the rent, utilities, security deposit, date of
availability, and deposit required
Penalties for Violating Fair Housing Laws
Legal Remedies Available to Complainants
Fair housing complaints can be filed with HUD for up to one year from the incident, or with the Pennsylvania
Human Relations Commission for up to 180 days from the incident. In addition, suit can be filed in Federal Court
for up to two years from the incident.
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If HUD processes the complaint:
•
•
•
•
•
•
•
HUD will initiate an investigation to find evidence of discrimination or will attempt to conciliate the
complaint with both parties. If conciliation fails, HUD will determine whether "reasonable cause" exists to
believe that a discriminatory housing practice has taken place. If HUD finds "no reasonable cause", the
Department dismisses the complaint.
HUD will file a charge if the investigation finds "reasonable cause", or evidence of discrimination, and a
hearing will be scheduled before a HUD Administrative Law Judge (ALJ).
If either party elects to proceed with the case in federal court, then the U.S. Department of Justice will
pursue the case on behalf of the complainant. The decisions of the ALJ and the federal district court are
subject to review by the U.S. Court of Appeals.
The complainant may be awarded compensatory damages. These may include any out-of-pocket costs the
plaintiff spent while obtaining alternative housing and any additional costs, including rent, associated with
that housing. Non-economic damages such as humiliation, mental anguish or other psychological injuries
may be levied and are in addition to out-of-pocket losses.
In cases tried before an ALJ, a civil penalty of up to $16,000 for a first violation, increasing to $65,000 for
third violations, may be imposed. In cases brought by the Justice Department, civil penalties up to $100,000
may be imposed.
The federal court may award punitive damages. Punitive damages do not reimburse the plaintiff for losses
actually suffered; instead, they punish the wrongdoer. Punitive damages are awarded only if the plaintiff
shows "willful, wanton, or malicious" conduct, by the defendant, specifically motivated by intent to exclude
the plaintiff for discriminatory reasons.
Attorney's fees may be awarded to the prevailing party.
Courts may issue injunctions if they feel prompt action is necessary to prevent immediate and irreparable
harm.
Further Reading
•
The Fair Housing Act
•
Advertising Guidelines Under the Fair Housing Act
•
HUD/DOJ Joint Memo on Reasonable Accommodations Under the Fair Housing Act
•
Occupancy Standards Under the Fair Housing Act - The Keating Memo
•
Housing for Older Persons Act
Reprinted courtesy of Fair Housing Council of Suburban Philadelphia. Visit www.fhcsp.com
Volume 17 Issue 6
32 of 51
June 2014
LANDLORDING: TENANT SCREENING
Criminal Records Check
by Bradley S. Dornish, Esq.
Posted on May 1, 2008
Last week, we were showing apartments and taking rental applications. A woman came to see the units, made a good
impression, filled out the rental application, and paid the seventeen dollars we charge for a credit report. Looking over the
application, her earnings, job history, rental history and other items looked good, and we thought she might be a good
potential tenant.
We informed her, as we inform all of our applicants, that we would also be running a criminal records check on her before we
even ran her credit, and that was the first indication of a problem. She told us she had a single, minor item on her record,
which was not her fault.
I sat down at the computer, went to the clerk of courts’ website, and entered her name, social security number, and clicked to
search all counties in Pennsylvania for any pending or decided cases in which she was a defendant. In seconds, the reports
came up, including aggravated assault, simple assault, reckless endangerment, two DUI convictions, possession of drug
paraphernalia, and possession of illicit drugs, among assorted other charges and convictions.
We sent back her application fee, with a rejection letter listing the various convictions and charges, and indicating that she
failed to meet our guidelines for approval of tenants.
In contrast to the above story, a client of mine failed to run a criminal check on a tenant he took in December. After the bank
statements provided by the tenant showed over ten thousand dollars, but the tenant explained that the money was tied up for
a few days, the landlord took and agreed to hold a check for several thousand dollars, and gave the tenant the keys.
After over a week of changing stories on large sums of money being moved around, the landlord had received no money, the
tenant was completely moved in with an elderly mother in a wheelchair, had installed a stair glide and a therapeutic whirlpool
bathtub in the house, and had claimed his mother fell down the two step front stairs, advising the landlord that the fall was
due to the lack of a handrail.
An eviction action was started in December, and the landlord had good attorneys at the Magisterial District, Arbitration, and a
Non-jury Trial, winning possession and money judgments at every level. Yet the tenant is still in possession of the property as
of the middle of May, and on the Friday before Mothers’ Day, a lenient judge postponed the tenant’s eviction until the end of
the month, mentioning that he wouldn’t kick an elderly, disabled mother out of her home on Mothers’ Day.
The landlord is out thousands of dollars in rent, any damage to the property from the improvements made by the tenant, and
the legal fees and court costs he has incurred in trying to get the tenant out.
When we ran a criminal check on the tenant, we found convictions for 51 counts of writing bad checks, theft by deception
and related criminal charges and convictions. Surely, the landlord would not have turned over the keys to the worst tenant I
have seen this decade if he knew then what was on the tenant’s record. And the process of checking the criminal records is so
easy and free, that you should not only run it on prospective tenants, but on prospective contractors, employees and buyers of
your properties, too.
Some companies charge five dollars or more for a statewide search, and this method can save you time and money. Other
companies do a national search, which we can’t do online for free. However, I find that if someone lives in Pennsylvania for a
while, their criminal records are also in Pennsylvania. If you are searching someone from out of state, you may have to use a
national service for a fee.
Reprinted by Permission. The author, Bradley S. Dornish, is a licensed attorney, title insurance agent and
real estate instructor in Pennsylvania. Visit www.dornish.net or email bdornish@dornish.net
Volume 17 Issue 6
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June 2014
LANDLORDING: SKIP TRACING
Can I Run A Credit Report To Locate My Tenant Who Owes Me Money?
by John Nuzzolese
A common misconception landlords have is that they can run a credit report on a tenant if they have the tenant's
social security number. You must have the applicant's written authorization explicitly for running a credit report. It
is illegal to pull a credit report without the tenant's written authorization according to the FCRA (Fair Credit
Reporting Act). There could be very serious ramifications if you order credit reports without written authorization.
So, what if you have written authorization on your tenant's rental application to run a credit check?
As you know, it is illegal to pull a credit report on a rental applicant without his or her expressed written
authorization. The same is true for banks and credit card companies, only they have you sign an authorization that
allows them to continue to check your credit report.
Most lending institutions run credit reports from time to time on their borrowers for various reasons. Sometimes
lenders run credit reports to determine eligibility for credit line increases or account renewals, and also to track
down delinquent debtors.
Why can't landlords do the same thing? They can, but most landlords are not legally prepared to do it.
Here is the clause to insert into your LPA Rental Application, so that if in the future you have to chase down a
tenant by checking his credit report for a forwarding address or employer.
I H EREBY AUTHORIZE LANDLORD/AGENT TO VERIFY THE VALIDITY OF ALL THE ABOVE
INFORMATION, AND TO INQUIRE NOW OR PERIODICALLY WITH MY EMPLOYERS, FINANCIAL
INSTITUTIONS, AND ANY OF THE CREDIT REPORTING BUREAUS AVAILABLE TO HIM. I AGREE
TO SUPPLY ANY ADDITIONAL INFORMATION NEEDED BY OWNER/AGENT TO PROCESS THIS
APPLICATION AND I ACKNOWLEDGE THAT MY DEPOSIT WILL BE FORFEITED IF I DO NOT
COMPLY WITH ANY SUCH REQUEST. I AGREE THAT MY SCREENING FEE OF $ _______________
IS NON-REFUNDABLE.
Just copy and paste the above updated clause into your LPA Rental Application over the original.
Even with the permission to run ongoing credit reports on your tenant, you should keep in mind that each report
you pull will show up on the credit report as an inquiry. Excessive inquiries on a credit report are harmful to the
subject's credit rating. The landlord must be responsible with this privilege which is only intended to protect the
landlord in collection or renewal evaluation circumstances.
Disclaimer: State and local laws may vary, so The LPA recommends you seek an attorney's advice before ordering additional credit
reports on tenants.
Copyright © 2000-2011 The Landlord Protection Agency, Inc. All Rights Reserved. Reprinted by Permission.
Visit www.thelpa.com, email info@thelpa.com or call (516) 483-4785
As a Real Estate broker / investor in New York, John Nuzzolese has been involved with rentals and
investment property since 1979. Besides owning and operating two real estate businesses, he is president
and founder of The Landlord Protection Agency, Inc., an organization specializing in helping landlords
and property managers avoid the hurdles and pitfalls and expensive blunders common when dealing with
tenants.
(ARTICLES CONTINUE ON PAGE 43)
Volume 17 Issue 6
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June 2014
Vendor/Sponsor Table of Contents
Accounting Services
Samuel S. Fisher
PG
Construction & Renovations
37 911 Restoration – David Oknin
Financing Services
Residential Home Funding 38
Home Staging
Staging Inside and Out
Pest Control Services
Pest Plus Pest Elimination
Telecommunications
No Current Vendors
Home Buyers
No Current Vendors
Insurance/IRA
37 Metro Homes & Insurance
Investment Services
No Current Vendors
Legal Services
Fein Such Law, Harry Fieland, Esq.
36
PG
n/a
Real Estate Agencies
No Current Vendors
Energy Services
No Current Vendors
PG
Home Inspections
No Current Vendors
37
Internet/Computer
Services
No Current Vendors
Member Discounts
37 Kiuken Brothers
Ricciardi Brothers
Paints & Supplies
PC Richard & Sons
Sherwin-Williams:
Paints & Supplies
40
40
39
36
Residential Screening
No Current Vendors
Title Agencies
No Current Vendors
Our Vendors & Sponsors support us and help us maintain our low membership dues.
Please contact them first when you need a product or service.
MAY 2014 NEW AND RENEWING MEMBERS
Burke, Thomas
Cates, Laura
Cates, Dean
Fede, Peter
Forray, Francois
Goncalves, Joseph
Harris, Gladys
O'Keefe, John
Pogrebinsky, Joseph
Volume 17 Issue 6
Pratt, Javon
Reiter, Frances
Robinson, Beth
Rodriguez, Fabiola
Song, Jin
Swiader, Alicia
Thomas, Wendel
Zombori, Andrew
35 of 51
June 2014
Volume 17 Issue 6
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June 2014
Do We have Your Current E-Mail Address?
We may need to contact you on short notice because a general meeting may have to be cancelled because of
dangerous weather conditions.
We may also want to notify you to alert you to new legislation that affects real estate in New Jersey. Also, from
time to time we will inform you that the latest Metro is available on line or about an important upcoming seminar.
Please note: it is MREIA’s policy NEVER to share your personal information with anyone, including
other MREIA members. You may update your personal information yourself by signing into Member Sign-In
on the MREIA Home page, or send to changes to membership@mreia.com
Did You Forget To Renew?
Everyone agrees that times are tough! Some people are trying to cut expenses. However, the one
thing you should do is to renew your MREIA
membership. We offer survival techniques and industry information to help you stay current, competitive and in business!
Don’t be penny wise and pound foolish!
Harry Frieland, Esq.
Fein Such Law Group
www.FEINSUCH.com
Email Address:
hfrieland@feinsuch.com
Samuel S. Fisher & Associates
Certified Public Accountants, LLC
100 Bayard St, Ste 311
New Brunswick, NJ 08901
Tel: (732) 846-1700
Fax: (732) 846-1788
Website: www.samfishercpa.com
Volume 17 Issue 6
Mailing Address
7 Century Drive
Parsippany, NJ 07054
Telephone Number:
37 of 51
(973) 538-4700 ext. 3394
June 2014
For More Information please call Mark Kapsky at: (201) 602-9488
Residential Home Funding
100 Lanidex Plaza, 2nd Floor
Parsippany, NJ 07054
Telephone Number: (201) 602-9488
Email Address: mkapsky@rhfunding.com
Volume 17 Issue 6
38 of 51
June 2014
Our 102 Years of
New Store Location: Route 70, Brick, NJ
PC Richard & Son offers discounts on appliances to MREIA members.
Please contact Nick Zampetti at (201) 343-8629 for complete details,
or e-mail Secretary@MREIA.com and request additional information.
At the MREIA General Meetings
there is a Wealth of Information
That is worth even more than
The cost of Your Membership
Volume 17 Issue 6
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June 2014
Volume 17 Issue 6
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June 2014
Your Board of Directors
President
Vice President
Secretary/Past President
Treasurer
Editor
Past President
Audio/Visual Chair
Legislative Awareness Chair
Lending Library Chair
Meeting Site Chair
Membership Chair
Registration Chair
Vendor Chair
Webmaster/Publications
Dan Schwartz
Murray Kane
Nick Zampetti
Bob Lee
Dan Schwartz
Frank Barillari
David Leidy
David Corsi.
Angela Fan
Nick Zampetti
Peggy Martini
Chuck Martini
Scott Linde
Roger Faulds
(201) 791-4639
(973) 476-9528
(201) 343-8629
(908) 272-9491
(201) 791-4639
(732) 240-2050
(201) 965-3288
(732) 923-1410
(201) 889-9026
(201) 343-8269
(201) 410-5017
(201) 410-5017
(732) 777-6857
unavailable
President@mreia.com
VicePresident@mreia.com
Secretary@mreia.com
Treasurer@mreia.com
Editor@mreia.com
PastPresident@mreia.com
AudioVisualChair@mreia.com
dcorsi3119@gmail.com
LendingLibraryChair@mreia.com
Secretary@mreia.com
Membership@mreia.com
chuckmartini@usa.net
Vendor@mreia.com
Webmaster@mreia.com
About MREIA
We are a not-for-profit Real Estate Educational Organization and a member of
The National Real Estate Investors Association.
The elected and appointed officers are unpaid volunteers.
DISCLAIMER
We do not render legal, accounting, tax, investment or other professional services either through the Metro or at general meetings. We disclaim all
liability for actions (or inactions) taken as a result of any communications between the Board of Directors, appointed officers and the membership.
We do not officially endorse any product, project, person or organization. Before making any investment decision, you are urged to seek advice
from qualified and competent professionals and to use due diligence before using any product, services or ideas presented in the Metro or at general
meetings. At times the Board may take particular positions or points of view on matters regarding the real estate industry. Said positions do not represent solicitations.
Our speakers are permitted to sell any products or services they may have to offer our members or guests.. The opinions expressed by the speakers and writers do not necessarily reflect the opinions of the Executive Committee or Advisory Board.
M REIA LEN D IN G LIBRARY
D o you enjoy spending hundreds or even thousands of dollars buying real estate books and CD s? Som e courses are valuable to have as a perm anent part of your personal
reference library. H owever, not all inform ation available m ay m eet your individual goals. TH EREFO RE, last year we created a Lending Library for your convenience and
FREE to all M REIA m em bers. O ur goal is to help educate and to guide you in m any areas of real estate, such as creative financing, negotiating techniques, landlording,
renovations, asset protection, etc.
To use our library, there are guidelines that you m ust agree to:
1.
2.
3.
You m ust be a current M REIA m em ber.
O nly one book or m aterials m ay be checked out at a tim e.
An item borrowed m ust be returned within thirty days. N on-attendance at the next general m eeting is not an acceptable reason for failure to return the m aterials.
If not returned, the book/m aterials loan is considered LATE. Your credit card will thereupon be charged a $15 late fee.
4.
If you do not return the item borrowed after two m onths, your credit card will be charged the retail value to replace whatever was borrowed. You will then be
the owner of whatever you have not returned.
5. See Angela Fan, Lending Library Chairperson, at a general m eeting.
The above guidelines are necessary so that all m em bers will have access to all of the books/m aterial being offered.
Volume 17 Issue 6
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June 2014
New Jersey State Bar Association
One Constitution Square, New Brunswick, NJ 08901
(732) 249-5000 Visit www.njsbf.org and then click on Directions
ATTEND AN EVENT
There are many informative seminars and conferences you can attend, presented by attorneys and
experienced practitioners in specialized areas. These FREE PROGRAMS are held at the New
Jersey Law Center in New Brunswick unless otherwise specified.
Advance registration is required for all events. To get event details and to register online, select
from the event listing below or choose by date in the calendar.
You also can register by calling 1-800-FREE LAW
Event Listing:
June 18, 2014
Volume 17 Issue 6
Wills and Estate Planning
42 of 51
June 2014
ENVIRONMENTAL PROBLEMS
Verbal Environmental Assurances
by Stuart Lieberman, Esq.
You are buying your dream home. It's great and everything is perfect - except for one small thing: the seller tells you
that an old oil tank leaked several years ago and an environmental cleanup has been performed and is completed. Is
this the end of the story?
Probably not. Certainly not if you are my client.
It’s not that sellers are dishonest. Rather, it is the reality that if the seller is wrong, even accidentally wrong -this is
going to be your problem after your purchase the home. And since oil tank leaks can cost a lot of money you need
to be careful. Usually, that means doing your own evaluation.
The extent of evaluation that you should undergo depends on a lot of things. You and your real estate professional
should evaluate the matter and determine how far you need to go.
Perhaps a copy of a municipal approval and a seller's sworn statement will do. Or you may decide that the other
extreme is required-meaning that you hire a consultant who will actually engage in confirmatory environmental
sampling. This is actual soil and perhaps water sampling necessary to prove that no environmental problems have
been overlooked.
Should you need to retain the services of an environmental consultant, I recommend not using a company
recommend to you by the seller. You want a professional who is 100% neutral.
And if the seller's real estate agent makes the recommendation, I would generally shy away from the testing
company. There is a good chance that the company will be motivated not to give bad news, because that might kill
this deal and dry up future referrals.
Ask your real estate professional or your lawyer for recommendations. You may also ask your state regulatory
agency if tank remediation companies are regulated in your state. In that case, perhaps you might want to pick some
one from that approved list.
Your consultant should be given a copy of everything the seller gave to you relating to the leaking tank problem.
Your consultant will propose a few tests which should confirm the representation that the leaking tank is no longer
a problem. And hopefully that is how it will turn out.
Often, the news will be good - the problem has been fully dealt with. However, based on my experience I can tell
you that many times consultants find that former leaking tank locations that are reported to be clean really
are not clean. In that case, often more site cleanup will be required.
If you learn that the tank problem has not been adequately addressed, you will need to engage in additional
negotiations with the seller. To do this, I suggest that you see your lawyer once again. This can be a costly
proposition if not handled correctly and you should have a professional handle the discussions.
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Here are the important points.
If a tank problem is reported to have once existed, obtain iron clad proof that it has been adequately
addressed. This can mean anything from a written assurance to all out testing. You and your advisor
need to determine how far you need to go.
If a problem still does exist, it does not have to kill the deal. There are many creative ways in which to
handle this situation. Perhaps money can be escrowed, perhaps the seller's insurance company may
commit to the cleanup, or perhaps the closing will have to await the completion of the cleanup. Other
possibilities exist as well. You and your lawyer need to be protective and creative: if you are, the deal
can be saved.
In my opinion, no real estate transaction should ever be killed because of a leaking tank. While lawyers must provide
their clients with complete protection, where there is a will, the deal can be saved -and should be saved.
The above article was written by Stuart Lieberman, a practicing environmental attorney, and is for general information
purposes only. It is not legal advice and should not be used in place of legal advice. Reprinted by Permission. Visit
www.liebermanblecher.com The author was MREIA’s featured speaker at our June 2007 general meeting.
CREDIT
Ten Myths Of Credit
by Alison Feliciano June 21, 2010
Ten Greatest Myths About Your Credit
Credit Agencies are empowered with some kind of governmental authority.
Credit agencies have no legal authority at all, they are simply private companies who are in the business of
selling credit information.
The credit agencies are required by law to keep derogatory items on your credit report for seven to ten years.
There is no law that the credit agencies report anything on you at all. Just the opposite is true! Credit Agencies
are required by law to automatically remove all derogatory items older than seven years or in the case of a
bankruptcy, ten years.
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(Continued from Previous Page)
It is impossible to get a bankruptcy off.
Bankruptcies come off just like any other derogatory that is incorrectly reported, obsolete, erroneous,
misleading, incomplete, or that cannot be verified. Remember, the nature of the item has nothing to do with its
removal under the Fair Credit Reporting Act.
The information on your credit report cannot be changed.
The opposite is true under the Fair Credit Reporting Act; both the federal and various state laws REQUIRE that
items be removed if they are not 100% accurate or cannot be verified in a timely manner.
It is illegal or immoral to have the information on your credit report altered or removed.
Not only is it not illegal or immoral, but it is what the Fair Credit Reporting Act is all about. It was enacted by
congress for the very purpose of protecting consumers from the intrusion of the credit agencies into our lives.
Paying a past due debt removes it from your credit report.
Just because you pay an old debt does not change or erase the fact that at one time you were not paying on it as
you agreed. Can this record be changed? Absolutely!
Inquiries are not derogatory and will not affect your credit standing.
Anything that erodes your financial credibility is damaging to your credit standing. In the case of inquiries, one
or two is not too bad, but any more than that and they begin to tell a story of their own. Any prospective credit
grantor will look at your credit report and think that you are desperate for credit.
If you get a derogatory item removed, it will just come back.
Not if it is removed legally. When it is removed with cause under the Fair Credit reporting Act it cannot legally
be placed back on your credit report. The same law that required its removal prohibits it from being placed back
on.
The past equals the future.
This is the biggest myth of all. The concept that once bad, always bad, or at least for seven years is totally false.
Anybody can run into hard times or an emergency situation now and then, but that doesn't automatically mean
that they are a poor credit risk for a magical seven years. The simple truth is, no credit report can predict the
future.
I cannot restore my credit.
Yes, you can! You can try to do it yourself (just like you can be your own attorney in a court of law). OR, you
can allow licensed professionals to educate you and assist you in restoring your credit profile
Alison Feliciano Marketing Adminigator The Inspectagator - Central Florida's Answer to all Home
Inspection needs! Reprinted by Permission. Copyright © 2004-2014 BiggerPockets Inc. All Rights Reserved.
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June 2014
BEGINNER’S CORNER
Do A Good Job
by Kevin Smith
I met a friend of mine up in Dallas recently and asked him how everything was going for him. He told me that his
aging mother was in the care home and that she had been failing slowly for some time. He went on to add that she
was not often alert anymore and that the doctors had told him that her time was approaching and that the family
should prepare for the end.
My friend had a dilemma. He lives in California and was coming to Dallas to teach a seminar I was attending. You
can just imagine how he felt. On one hand he wanted to stay with his mother and be with her until her time came.
On the other hand he had made commitments to the attendees, hired a room in a nice hotel in Dallas. and had
given his word that he would come in and teach.
He thought about it long and hard and finally came to a conclusion; he would simply ask her what she would like to
have happen. So he went to the care home and went in to see her. He sat down beside her bed and began to talk.
His mother was sort of drifting in and out of being awake, and so he slowly explained what his problem was and
how he was unsure about leaving her with her state of health being what it was. He told her about the commitment
to the seminar and all the plans that had been made that could not be changed at this late date. Finally, after he had
said everything he wanted to say about it, he paused.
It was at that time his mother sat up in the bed and shook her "mother finger" at him. "Go," she said. "No more
excuses. Go and do a good job." And so he took her advice and came to Dallas that weekend. I will say that his
mother did make it through that weekend. and that he was able to see her again.
You may well wonder what all of this has to do with real estate investment. Plenty. Now I'll explain why. If any of
you have ever put on a couple of extra pounds over a holiday, or with the passing of the years, you already know
that there are probably a million books available today about losing weight. In addition to that, there is a broad
availability of exercise machines, regimens, nutrition and exercise plans that are sold to help you find your way back
to the body and energetic life style you used to have. The market is flooded with information on how to do it.
Given that there is so much information out there, and so many different varieties of methods to lose weight, why,
then, are we one of the most overweight nations on the face of the earth? The information is there for us. The
equipment is there for us. The places of learning are there for us and the path has been followed successfully by
many who have gone before us. What then is the problem, why are we still overweight?
Simple. We don't do any thing with the resources we have to transform the situation. We are drowning in those
resources. You can't turn the television, open a magazine or listen to the radio without seeing something else to help
us do what we've been yearning to do all along.
Motivational speaker Tony Robbins once said that the difference between the people who accomplish the things
they are after in the world and those who do not is that the people who get what they want are able to get
themselves to take action.
We already know what we need to do to be successful in the real estate bus ness. We have real estate investment
clubs with all of its speakers and the huge net working asset of its members. We have special interest groups, we
have workshops, and we have boot camps and bus tours and free information from professionals at the meetings. It
not because we do not have the resources or the tools that we need to accomplish what we want, it is that we fail to
take action.
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Good things do come to those who wait, but the good things that come to them are the leftovers from the people
who are out there hustling. I don't care who you are or what your station is life, right now, right this minute there is
something out there that you want: a job, a raise, a date, a house, a referral, a title company a plumber, a better rate
on your mortgage.
It is different for each one of us, but the thing we all have in common is that if we don’t take action, we are not
going to get it. The-Fulfillment Fairy is on vacation right now, so there is no one coming over to wave the magic
wand and give you what you want. You have to get yourself to take action.
Some folks say that "sooner or later it will come my way." Well, if you can have it sooner rather than later, let us
rise up and possess it now. I am fond of quoting Mary Kay Ash, the founder of Me Kay Cosmetic Company when
she said, "If you don't A-S-K, you don't G-E-T. Why roll over and throw your legs up into the air and give up? Why
not go for what you want? It's there, and it's there right now. Someone is going to get that house; it might just as
well be you.
I know, it can seem daunting in the beginning. It's like trying to steer a parked car. The car has to begin somehow to
have motion, even if it's only a little bit of motion, before you direct it to where you want it to go. People tell me
frequently that they want to rehab five houses a month. Splendid! Go for it!
However, if you are just starting out, I would counsel you to begin by looking at a number of houses a month and
putting out five contracts a month. Start where you can succeed. Anyone can make a phone call and set an
appointment to see a house. Sure, the first few phone calls can be a challenge, but that's only because it is new to
you. Believe me, talking on the phone is like kissing; the first couple of times can be a little awkward, but after you
get the hang of it, it can be a lot of fun for you.
Make a plan. Make time for your plan. Decide what you can do today or this week to work in your real estate
investment career and begin there. For example, if you are brand new, you might decide what area you want to work
in and commit to spending a certain number of hours each week looking for prospect houses. That's it. Do that and
when you are able to get yourself to keep your word to yourself and do that first task, then continue to take action
by finding out what these houses would sell for after they are fixed up.
Don't know how to get the sales price? A-S-K someone. Ask a [MREIA] member, a mentor, a realtor, an investor
you know who is already doing what you want to do and find out what you need to do next to be able to do what
you want to.
Step by step, piece by piece, inch by inch. Look for progress, not perfection. Don't obliterate yourself by
coming in as a new investor and saying that you will put three houses under contract this week, because you will
surely fail at that. You won't have the experience or the knowledge base to do that yet. Be reasonable in your
expectations, but be persistent. Little by little you are gaining ground. Little by little you are making your way to the
dream you had when you started out investing. Did you get started and then stall out? Look at where you made your
mistakes and consider what other skills you will need to make it work this time. There is plenty for each and every
one of us, so get off the couch and get moving!
I'm here to help with any construction or repair questions you have, I am that resource for you. Call me if you need
help, I am always ready to help someone who has gotten themselves to take action. Now go. No more excuses. Do
a good job!
Reprinted by Permission. The author, of Forward Assist, has conducted "Mr. Fixit" workshops, and served on
the Realty Investment Club of Houston Board of Directors as “The Enricher” Newsletter Editor for three
years. He shares his treasure chest of secrets with anyone who asks. You can reach him at (713) 858-1330
Volume 17 Issue 6
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June 2014
TAXES
September 15 – IRS Corporate And Partnership Deadline
by Michael Plaks, E.A. Posted September 14, 2012
The deadlines below apply only to
1. Corporations (both C-Corporations and S-Corporations) that filed a five month extension request on Form
7004 on March 15.
2. Partnerships (including some multi-member LLCs) that filed a five month extension request on Form 7004
on April 15.
I’ll start with a concise summary, followed by a more detailed explanation:
C-corporation and S-corporations: September 15th
General and limited partnerships (GPs, LPs): September 15th
Single-member LLCs: October 15th
Husband-wife LLCs in Texas: October 15th
Other multi-member LLCc: September 15th
Now bear with me, as this can get a little confusing, especially with LLCs.
1. Most LLCs (Limited Liability Corporations) are NOT corporations. In order for an LLC to become a
corporation, you had to file a special request with the IRS. If you did – you would probably remember. If you did
not – then your LLC is not a corporation.
2. If your LLC has yourself as its only member, then it is a single-member LLC. The IRS considers single-member
LLCs to be disregarded entities. It means exactly what it sounds like: the IRS ignores them, and these LLC do not need
to file a tax return – at all. Instead, all business activities of single-member LLCs are reported on its owner’s
individual tax returns. Those are due on October 15, provided an extension was filed on April 15th.
3. LLCs owned by more than one person are naturally called multi-member LLCs. The IRS treats them as partnerships,
unless they specifically elected to be taxed as corporations which is rare. Partnerships must file a separate
partnership return on Form 1065, which was due on April 15th. If you have such multi-member LLC, and you filed
a Form 7004 extension on April 15th, then your deadline is now, September 16th.
4. LLCs owned by husband and wife are tricky for tax purposes. They are supposed to be treated as multi-member
LLCs. As we just discussed, it means partnerships. However, in community-property states such as Texas, husbandwife LLCs are treated as single-member LLC. As such, they are disregarded entities for the IRS: no tax return needed for
the LLC. LLC business transactions will go on the business schedules included with the couple’s personal tax
return. Husband-wife LLCs in non-community-property states can file either as partnerships or as part of the
personal return, under the relatively new qualified joint ventures rules.
5. One more twist for the multi-member LLCs. If the only business of a multi-member LLC is holding rental properties
jointly, then the LLC does not have to be treated as a partnership, and it does not need a separate return. Instead, all
rental income and expenses are divided between partners and reported on their respective personal returns. Please
be careful: this exception from partnership treatment applies only to strictly rental operations. All other LLCs,
including non-rental real estate businesses, are partnerships.
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6. If you do have a corporation or a partnership with a valid extension, then you must file at once. Otherwise, you’ll
be hit with horrible penalties. It’s $195 per month, per person, going back to March 15 or April 15. With 2
partners (or shareholders), you’re looking at an almost $3,000 penalty. Yes, it is three THOUSAND dollars, you saw
it right.
7. Even if you did not file an extension in March or April, go ahead and file by the deadline. You will at least stop
already huge penalties from growing even bigger.
8. Finally, what if you are not ready, and your records are a mess? File SOME return anyway, with your best
estimates. Later, you will need to submit an amended return with the correct numbers, but at least you won’t have to
worry about additional penalties.
Please make sure to mail your returns certified mail, with return receipt. I have had many cases when the IRS
claimed they did not receive documents timely, and I had to prove them that the deadline was met.
Reprinted courtesy of Michael Plaks. Visit www.MichaelPlaks.com The information and opinions presented in the
above article are general in nature, not intended to address specific tax situation and/or to substitute for
professional consultation, and shall not be considered legal advice. Email: michael@MichaelPlaks.com or call 713721-3321 The author is a Houston-based accountant, working exclusively with real estate investors. He is a federally
licensed Enrolled Agent who can represent his clients in their dealings with the IRS.
ENTITIES 101
Is Your Corporation In Trouble?
by William Bronchick, Esq.
Studies show that most small, closely held corporations would not withstand the challenge of a
lawsuit or IRS audit. "Why not?," you may ask, "I thought a corporation would protect me from
liability." A corporation will protect you from liability, but only if you follow the "corporate
formalities."
Use the following as a checklist:
•
•
•
•
•
•
•
•
•
Did you hold organizational meeting and appoint a board of directors?
Did your board of directors appoint officers?
Do you have written minutes of these meetings?
Do you have a Federal Tax ID number?
Did you physically issue the shares of stock?
Does your corporation have its own bank account?
Do you "commingle" your personal funds with your corporate funds (i.e., do you use the
corporate checkbook to purchase personal items and vice-versa)?
Does your corporation have a business license?
A telephone in its own name?
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•
•
•
•
A physical office address with a written lease?
Do you have annual meetings of the shareholders and board of directors?
Do you have written minutes of these meetings?
Do you sign all of your leases, contracts and letters in the capacity which you are acting?
(e.g., "President" or "Secretary")
Your failure to follow one or more of these formalities may result in a "piercing of the corporate
veil." This is a legal expression for the process by which a court can actually penetrate the invisible
wall of protection between you and your corporation and permit a creditor to go after you
personally. Let me ask you a question . . . do you think IBM violates any of the above mentioned
items?
The lesson here is that if you want to be treated like a legitimate corporation, then act like one! Go
dust off that big, black corporate minute book that you tossed in the closet years ago. Look
through the forms. It's not "rocket science" . . . it's simply a matter of keeping records in case of a
lawsuit or IRS audit. You don't need to run your corporation with rigidity, you simply need a
“paper trail” to justify what you are doing.
Here are a few tips:
•
If you use your spare bedroom as an office, have written lease between you and your
corporation. Make it a "net" lease, so that your corporation can pay you for its share of the
utilities, taxes and insurance on your home.
•
If you a constantly "funnel" money between your personal and corporation bank accounts,
draw up a line of credit agreement between you and your corporation. That way, the
"piecemeal" payments that go back and forth will appear perfectly normal (after all, isn't that
what you do with a credit card account?).
•
If you need a legitimate office and phone, consider an "executive suite." There are
companies that will rent you an office address with answering service for as little as
$75/month. This will not only give your corporation legal legitimacy, but it will give you a
place to meet an occasional client
Do not wait until you are sued or audited to "backdate" the paperwork! If you get caught (and you
will), you'll find yourself in a legal mess that attorneys just drooooool over! An ounce of prevention
is worth a pound of regret!
Reprinted by Permission. Email questions or comments to william@bronchick.com Visit www.legalwiz.com or
call 1-888-587-3253. The author, CEO of Legalwiz Publications, is a nationally known attorney, author, entrepreneur
and speaker. He has been practicing law since 1990, having been involved in over 700 transactions.
Volume 17 Issue 6
50 of 51
June 2014
FINDING DEALS
Calling Sellers From The Classifieds: A New Twist
by Cameron Dunlap
When I first started in the business I was taught that one way to find good deals was to call sellers who had ads in
the "Real Estate For Sale" section of the classifieds. I tried this and soon discovered that approximately 90% of the
sellers I reached were simply not motivated. In fact, some were downright offensive and nasty.
Have you ever asked non-motivated sellers what their mortgage balance was? I can tell you that it can really bring
out the worst in those sellers.
When you are talking to the right seller, their mortgage balance is a piece of information they'll readily share with
you. In fact, this can be one of the most critical qualifying questions.
The bottom line is this: you need to have sellers calling you. When they do, they pre-qualify themselves as
"motivated enough to pick up the phone and call".
If you are concerned about your positive mental attitude when you're calling sellers, here's an important key. You've
heard me say it over and over. AVOID PEOPLE WITH NEGATIVE ATTITUDES LIKE THE PLAGUE. In
fact, I say you should contract an acute case of "selective deafness." Slam your ears shut like steel traps whenever
you detect the presence of negativity.
But wait. You say you want to do some outbound calling to sellers but want to reach motivated sellers. How can
you do that?
Here's a hot idea. Call the classified ads under Houses (NOT apartments!) For Rent (NOT For Sale!)
Think about it. Someone who owns a vacant house is running each one of those ads. And there's an excellent
chance that, when the idea is presented to them, that they would love to sell that pain-in-the-neck house.
If you've ever been a landlord, you know that if your property is sitting vacant that's the point at which you'd be
willing...if not desperate...to sell. I do this and it works.
If you have the grit to make cold calls, calling the Houses for Rent ads is the most effective use of the classifieds
when you're buying because these individuals are motivated. If you're not working with motivated sellers, you won't
be in the business long.
Reprinted by Permission. Visit www.camerondirect.com
Volume 17 Issue 6
51 of 51
June 2014