Property Management Agreements for Real Estate Investors

Clearly lay out all of the responsibilities a property management company is taking on for you.

Real estate investors can prevent misunderstandings and protect themselves with clear, professional property management agreements.

If you have multiple properties or properties that aren’t close to home, you need management help. Make sure the people helping you have clear, legally binding instructions.

Third-Party Property Management
In these situations, we outsource property management. If you are among the investors using any kind of third-party property management, whether it’s on-site, off-site, a single person, or a large company, or some other version of a property manager, you will need a property management agreement.

Managing Property Management
When you can’t be there to do the job yourself, your job becomes managing your managers. All the research in the world may not prepare you for the realities of handling your management. We find “informal” agreements tend to end poorly. The property management agreement helps establish expectations and boundaries in your relationship with your property management.

The Property Management Agreement
Don’t underestimate the power of this little document. It’s the single most effective way for you to manage your property managers. Their duties will be clarified in this document, as will your obligations to them. Remedies for common problems may be included, and a well-written agreement should prevent most in the first place.

WHY DO I NEED A PROPERTY MANAGEMENT AGREEMENT?

First of all, few property management companies will do business without a formal agreement. Next, think of all the things that can possibly go wrong with managing a property. Perhaps some of these things are reasons you wouldn’t wish to manage this property yourself.

If there’s one thing we have observed about real estate litigation, it is this: rarely is either party truly acting in bad faith. More lawsuits are fueled by misunderstanding than fraud.

Good contracts are one huge way to prevent lawsuits in real estate generally, and between property management and the investor specifically. Having the rules everyone plays by, and the remedies for parties harmed by breaking the rules, in black and white makes life easier. This clarity prevents the types of misunderstandings that may land you in court.

WHY YOU WANT A REAL ESTATE ATTORNEY’S HELP WITH PROPERTY MANAGEMENT AGREEMENTS

When’s the last time you practiced your legal prose? Or reviewed the basics of contract law?

Never? That’s okay. It’s probably not your job to do either of those things, which is fine. You’ve been busy investing and likely mastering many other skills throughout your life while folks like our attorneys were knee-deep in the books that taught them the finer points of contract law, legal research, and how to write ironclad documents that will hold up under legal scrutiny.

A real estate attorney knows the law, what to look for in a contract, and perhaps most importantly, how to tailor a contract to your needs. At Royal Legal Solutions, we always listen to the client first, then form our plan to keep your assets defended and support you in your other business goals.

WHAT IS IN A PROPERTY MANAGEMENT AGREEMENT?

CUSTOMIZED TO YOUR BUSINESS
While we will absolutely tailor your agreement to your situation as much as possible, there are some common items you will see across a wide variety of property management agreements. Some of the things you can expect to see in yours are listed below.

RESPONSIBILITIES
This includes theirs and yours. If there’s an item you don’t want to handle, make sure it’s in the agreement on their side of the deal. Their day-to-day duties should be spelled out as well.

FINANCIAL AND FEE INFORMATION
What fees you owe and how you will pay them should be crystal clear.

LIABILITY
You want the managers to assume as much legal liability as possible, an item our attorneys can help ensure by contract.

CONTRACT TERM AND TERMINATION PROCEDURES
Of course, the contract will need to have a specified length of time it is in effect or term. Termination issues should also be covered.

Our experts can show you other ways to limit your personal liability and safeguard your assets. Whether you need a single property management agreement or a comprehensive asset protection strategy, Royal Legal Solutions can help.

Equity Stripping for Real Estate Investors

Make yourself an unattractive target for lawsuits and creditors with equity stripping.

As real estate investors, one key issue for protecting our assets is making sure we have very little or no equity exposed to the world. Why? Quite simply, the equity in a property is what can be seized and sold off in the event of a successful lawsuit and judgment against you. So what’s the smart investor to do?

Fortunately, this is where equity stripping comes into play.

What is Equity Stripping?

Equity stripping is any process that will reduce the value of a given real estate asset. It is a classic among asset protection strategies, well known for being a tried-and-true method of creditor protection. Equity stripping may be used to protect your home or an investment.

Wait. I want to look poorer than I am?

Yes, you do. It’s the smart play. You can invest and earn all you like yet still appear to qualify for food stamps. The illusion that you own little to nothing makes initiating a lawsuit incredibly difficult for the other side.

Is Equity Stripping legal?

Equity stripping makes you less desirable to sue because you appear to have less than you actually do. Some investors wonder if this is ethical or even legal. The answer is yes, provided you set everything up before a creditor or lawsuit comes your way. Be proactive!

We Simplify Equity Stripping For Real Estate Investors

Don’t attempt equity stripping alone. There are some tasks that require a professional’s oversight, and this is one of them. Fortunately, the pros at Royal Legal Solutions are happy to help you out.

Who Needs Equity Stripping?

Equity stripping is a viable solution for many types of real estate investors and even ordinary homeowners. Therefore the answer to what type of person needs this service can be varied and diverse.

For instance, not all laws protect the equity in a homestead equally across the United States. For those who have paid off more on their home than is statutorily protected, equity stripping is one legal method for protecting that homestead.

DOMESTIC EQUITY STRIPPING
There are many methods for equity stripping. Anything that encumbers an asset on purpose, or moves it from a position of exposure to safety, could be considered a form of equity stripping.

For most of our clients, we recommend domestic equity stripping. To employ this tactic, you use one of Royal Legal Solutions’ Traditional LLC structures. You can then use the LLC to strategically issue notes on the properties you own.

Which of these options is most appropriate for you?

That will depend on your needs and the advice of your attorney.

FOREIGN AND OFFSHORE METHODS
Offshore equity stripping is legally similar but has a key difference. With this method, you would need an offshore trust to issues notes on your properties. This type of offshore trust, also known as a bridge trust, offers additional benefits. However, while the offshore option is highly secure, there is a price trade-off. Bridge trusts can cost thousands to establish.

CREATING YOUR OWN MORTGAGE COMPANY
Another means of harmless debt creation we have used is instructing investors like you on the less conventional, although far easier-than-it-sounds, tactic of creating your own mortgage company. And there are even more ways to get the job done.

Assignment of Interest for Real Estate Investors

If you own an LLC or Series LLC, chances are that you may need to handle an Assignment of Interest.

There are a wide variety of situations where assigning all or part of the interest of a company can benefit the business as a whole. How this process looks is governed by state law as well as the Articles of Organization for your particular LLC. Some common reasons you may need an Assignment of Interest include the below scenarios.

Lending Negotiations

Sometimes members of an LLC will use their shares of the company as collateral for a loan. This is a fairly common practice in the real estate industry. Members may assign all or merely a portion of their interest in this situation.

Debt Resolution

Forming companies and purchasing properties is expensive. Occasionally, members of an LLC may assign a portion of their interest in a company until their profits have satisfied a personal debt.

Personal Reasons

There is a wide range of reasons you may choose to assign your interest in your company to a trusted partner or family member. Marriage, death, or other major life events can raise this issue.

Royal Legal Solutions Can Assist You With Many Assignment Of Interest Needs

If your Assignment of Interest is part of a greater issue with forming or managing your Traditional LLC or Series LLC, Royal Legal Solutions can assist you. We have years of experience forming these companies and managing the necessary paperwork. We also offer free educational resources on the best practices for corporate management, taxes, and asset protection. Our belief that informed clients are the best kind of clients drives us to offer regularly updated, accurate free materials to help you get the most out of your professional LLC. Forming your LLC with Royal Legal Solutions can simplify the process of assigning interest, as we will be the ones to draft your Articles of Organization. If you know this will be a concern for you, be certain that you advise the professional you work with of your situation when forming your LLC.

What Exactly Is An Assignment Of Interest?

An Assignment of Interest is the legal means for transferring the ownership of an LLC or other Company is from one entity to another. Typically, there are additional complications regarding under what conditions and what approvals are necessary in order to enforce the assignment. These conditions and approvals are located in the Subscription or Operating Agreement of the investment.

Why You Should Choose Royal Legal Solutions For Your Assignment Of Interest

BEWARE OF “FREE” ONLINE TEMPLATES

One mistake that some investors fall for is attempting to draft their own contracts or pulling them from free online services.

Perhaps you have seen that you can get certain templates for legal documents, including Assignments of Interest, from Legalzoom or another website. Any attorney will caution you against using these for your business. Ultimately, these “free” documents can cost you a great deal of money in the end.

Anyone can write something and give it away on the internet. So that document may have been penned by an attorney who makes $1500 an hour, or it may have been a school exercise for a student who does not speak English as a first language.

Frankly, it is impossible to know the source of such documents and they should be regarded with suspicion. Only an attorney with experience in the real estate field can tell you whether such a document would hold up under legal scrutiny. In fact, we have been called after clients of ours have made this mistake. Trying to correct errors in legal documents after the fact is infinitely more difficult, time-consuming, and costly to the client than hiring a professional to handle the document in the first place.

It is well worth the investment to ensure that your Assignment of Interest and other legal documents are properly drafted by professionals.

Our Experienced Legal Professionals Advocate For You

When you get your Assignment of Interest from Royal Legal Solutions, you do not have to live with these anxieties. You can rest assured that your document does exactly what it needs to do, and will protect your best interests.

We know you take your real estate business seriously, that you have invested a great deal of your hard-earned money into growing your investments. Royal Legal Solutions specializes in customizing the necessary legal documents and seamlessly obtaining the approvals to transfer the ownership interests for your LLC. If any of these steps are done incorrectly, the transfer will be invalid.

The good news is that we are here so that you do not have to take this unnecessary risk. Simply tell us what you need. Let us worry about how to get it done, while you do what you do best: run your real estate business.

Why We Assist Real Estate LLC Owners With Assignment Of Interest

Whatever your reasons are for needing an Assignment of Interest, Royal Legal Solutions can assist you. We can also help with other operational or legal aspects of your corporate structure if you have additional questions or needs regarding your Traditional LLC or Series LLC.

Having an actual real estate attorney draft your LLC’s documents can make the difference between whether they will hold up in court if you ever come under attack. Smart investors don’t have to take this risk. With Royal Legal Solutions by your side, you can feel secure in the fact that your business documents are legally compliant and accomplish exactly what you need them to.

Why Use Royal Legal Solutions For A Real Estate Investment Asset Protection?

We have experience in setting up the proper asset protection and making it easy for an investor to use. Our system simplifies management structure as much as possible, and we also use common sense to ensure your needs are met. For example, just one tip we give our clients is that you don’t need multiple bank accounts as long as you have accurate accounting records. For taxation, they should stay exactly how they are now while being reported on a Schedule E of your personal return (if you’re an individual/married partners) or a partnership return (if unmarried partners).

Self-Directed IRA Options: Choosing the Best Investment Plan

Everyone has a vision for their retirement, but planning how to fund your post-work years is a puzzle that too many people fail to solve.

You already know about the individual retirement account (IRA), which lets you make tax-deferred investments in mutual funds, stocks and bonds. Typically, someone else (a custodian) manages those investments.

But if you’re a smart real estate investor, you’re probably interested in knowing how to invest your retirement funds in real estate, right? A Self-Directed IRA (SDIRA) opens up investment options like real estate, precious metals, renewable energy sources and more.

What are the best Self-Directed IRA options? It depends on what investments you’re trying to buy. The SDIRA gives investors access to many different types of investments.

In this article, we’ll show you how that works and give you an overview of the best self-directed IRA options for your particular scenario.

What’s the Difference Between an IRA and a Self-Directed IRA?

The difference between an IRA and a Self-Directed IRA, in short, is what you’re allowed to buy using the IRA. This depends upon the IRA “custodian,” which is just another word for the financial institution that manages the IRA. When you open up a SDIRA, you can get many more options than when you open up a normal IRA.

Most brokers, financial planners and attorneys aren’t familiar with the tools that give you "checkbook control," letting you choose your investments yourself. 

Let's start with the basics ...

What’s an IRA? What Can You Buy with an IRA?

An IRA, in case you didn’t know, is an individual retirement account. 

It might refer to a traditional IRA, SEP-IRA, Roth IRA, or something else. IRAs can help investors save on their tax bill, either by lowering their taxable income and letting the gains grow tax-deferred or by paying taxes upfront and withdrawing the gains tax-free come retirement.

Typically, if you’ve opened up an IRA through your employer to get a match on your contributions, your employer will restrict the types of investments that you can make using that IRA. Usually, you can only buy low-risk investments—or ones that major lenders can easily collect money on through management fees (even if they’re low management fees, like for index funds).

Here’s a short list of assets that you can buy using an IRA:

If you’re interested in investing in different assets, that’s where a Self-Directed IRA comes in.

Here are the 3 most popular types of investments for our Self-Directed IRA clients. Reach out and we can help you decide whether or not they have a place in your portfolio.What’s a Self-Directed IRA? What Can You Buy Using a Self-Directed IRA?

If you’re self-employed or you have an old IRA from a previous employer, then you can open up the self-directed version. This will greatly expand your investment possibilities. For example, here’s a short list of assets that you can buy that you typically wouldn’t be allowed to buy using an employer-sponsored active IRA:

With a traditional IRA account, making specific investments means directing the custodian to execute a specific transaction. There are custodian fees involved (assuming your IRA custodian even approves the purchase), and there are delays that can cost you the investment in certain time-sensitive cases..

An SDIRA is a checkbook control IRA, meaning you can take over some of the responsibilities of the custodian. You do not need the consent of a custodian to execute a purchase.

What CAN’T You Do With a Self-Directed IRA? 

There are some things you need to know before opening an SDIRA: the investment isn’t allowed to be used for personal use. It’s called “self-serving,” and it’s explicitly banned by the IRS.

What does that mean? Isn’t everything “personal use?” Not really.

If you’re looking to use a Self-Directed IRA to buy your next vacation house or to buy a property for a loved one, for example, you’re going to possibly open up your entire IRA to taxation. Additionally, you can forget about DIY. If you work on the property yourself, that’s technically considered “self-serving” (or “self-dealing”). All business expenses need to stay inside the IRA.

You also can’t invest in collectibles or life insurance using a SDIRA. If you’re interested in using a Self-Directed IRA to fund those investments, you’re out of luck.

Altogether, managing a Self-Directed IRA can be difficult—but for some investors, the difficulty is more than worth it. The only problem is finding a custodian who will allow you to make your own investments without constantly checking in with them. 

Luckily, Royal Legal Solutions offers you that freedom and independence. When you want to make a new real estate investment using your IRA, we make it as simple as writing a check.

Buying Real Estate with a Self-Directed IRA

When you buy real estate with cash, you get the benefits of depreciation (and other deductions) on your tax bill. That means real estate can potentially save you quite a bit of money in taxes.

However, when you buy real estate using a Self-Directed IRA, all of your gains could potentially be tax-free. Although you won’t get the benefit of depreciation, you can possibly earn real estate investment income through your IRA that can then grow tax-deferred (or tax-free, in the case of a Roth) forever.

Buying real estate with a Self-Directed IRA, then, can be incredibly lucrative.

Self-Directed IRA Options

At Royal Legal Solutions, we offer two products for investors who are looking to buy real estate using a Self-Directed IRA: the SDIRA-owned Business Trust and the SDIRA-owned LLC.

Asset protection is an added bonus of these structures; opening a business trust or LLC with your SDIRA allows you to shield your account assets and personal assets from lawsuits and bankruptcy rulings.

Checkbook ControlSelf-Directed IRA-Owned Business Trust for Real Estate Investors

When you exercise "checkbook control" over your own retirement accounts, what you are doing is using a business structure that is owned by the IRA to execute transactions. Since you are authorized to act on behalf of that entity, you essentially have complete control of your IRA.

The self-directed IRA-owned business trust for real estate investors can give you the benefits of owning real estate through a land trust along with the benefits of buying real estate with an IRA.

You’ll be able to diversify your portfolio while shielding your investment from possible litigation. You get to keep your anonymity while we ensure that your retirement/investment account is in line with everything the IRS demands, so you can focus on the investment itself.

Self Directed IRA-Owned LLC for Real Estate Investors

The self-directed IRA-owned LLC is another great option for real estate investors and anyone looking to invest in assets that you typically wouldn’t be able to purchase using a traditional IRA.

The IRA will own the LLC and you’ll be set up as the manager of the LLC.

Unlike with a business trust, you’ll have to pay for a registered agent fee because the IRS demands that you have an agent representing the LLC.

Self-Directed IRA Options: Choosing the Best Investment Plan

The best SDIRA options depend on what you’re looking to invest in, as well as your individual risk tolerance. 

Again, with a traditional IRA, you only have access to certain assets (like stocks or bonds). With an SDIRA, you can invest in real estate, tax liens, gold, cryptocurrencies, and more.

If you’re a real estate investor, you might want to look into our SDIRA-owned business trust or SDIRA-owned LLC. They give you access all of the benefits of using a SDIRA (earning money completely tax-free or growing it tax-deferred) while protecting your anonymity and minimizing your exposure to litigation.

 

The Personal Property Trust: An Often-Overlooked Asset Protection Tool

Asset protection is a crucial component of financial planning for any real estate investor. There are many tools you can use to keep your property out of the clutches of creditors and would-be-litigants, and we’ve talked about some of them a lot on this site.

While Land Trusts, Series LLCs, and anonymous trusts are some of my favorite tried-and-true asset protection methods, a financial planning tool that doesn’t get as much attention as it should is the personal property trust.

With this article, we're going to change that!

What Is A Personal Property Trust?

In general, a trust is a type of legal arrangement where a trustee holds title to specific property and manages it for the benefit of the trust’s beneficiaries. Trusts can be revocable, which means the trust can be altered or canceled at any time while the person establishing the trust is still alive. They can also be irrevocable, which means they cannot be modified or revoked.

Like a Land Trust or living trust, a personal property trust is a type of revocable trust. Whereas the Land Trust is used to hold real property, the personal property trust is used to hold title to personal property assets such as vehicles, boats and mobile homes.

Whenever an asset needs to be registered and included in public records, you can use a personal property trust to keep your ownership information private. 

Since trustees must manage the trust assets as directed by the trust instrument, you can use a trust to transfer legal ownership and protect your identity while essentially maintaining complete control over the trust property. Generally, the sale of trust property requires approval from the beneficial owner, and the trustee cannot make the decision alone. Naming yourself as the beneficiary of a personal property trust can keep you in control of your assets.

property trust

What Are The Benefits Of Putting Your Property In A Trust?

The primary benefit of using a personal property trust is privacy. When you place your assets in a personal property trust, public record registrations will show the trust as the owner instead of listing your name. If you choose a privacy-protecting name for your trust, there will be no indications in the public record that you own the property.

A few additional benefits of using a personal property trust include:

When Should You Use a Personal Property Trust?

As a real estate investor, there are several ways you can take advantage of the protections offered by a personal property trust. Here are a few of the most beneficial ways to use personal property trusts to help keep your real estate investments safe and private.

Mortgages

One of the most common uses of personal property trusts is to hold mortgages, since the ownership information for this type of asset can be found through a public records search. As a real estate investor, you may want to consider creating a separate personal property trust for each property for which you have a mortgage. This strategy will allow you to keep your ownership information private and avoid links between your various properties. 

LLCs

Savvy real estate investors often use an LLC to own real estate directly or name an LLC as the beneficiary of a Land Trust. To add another layer of separation and anonymity to your asset protection strategy, you can use a personal property trust to hold your membership interest in the LLC. 

If you use an LLC as part of your real estate asset protection plan, it’s important to remember that, in most states, LLC membership is included as part of the public record. One way to keep your LLC interests private is to list a personal property trust as the LLC member and name yourself as the trust beneficiary. 

Vehicles

Any vehicle—including cars, trucks, and motor homes—that must be registered with the Department of Motor Vehicles is generally part of the public record, which can make your personal data open to public search. You can avoid this by titling your automobiles to a personal property trust. 

Given its various uses, a personal property trust can be a valuable tool for real estate investors, as well as people who haven’t caught the real estate bug (yet). No matter how you use your personal property trust, it is a practical but often-overlooked component of a successful asset protection plan. When deciding what financial planning tools are best for your real estate investment plan, it’s vital that you seek the input of an experienced asset protection attorney. 

 

Filing for Incorporation: What To Know About Making Your Business Legit

Most serious real estate investors eventually consider filing for incorporation to make their business legit. While the process can be complicated, it’s well worth the effort to protect your assets through incorporation.

Before we dive into the nitty-gritty of starting a corporation, it’s important to keep in mind that incorporation is only one option for making your business "official" in the eyes of Uncle Sam and the IRS. Depending on the circumstances, you might find that it’s preferable to form an LLC or Series LLC to protect your assets.

I recommend consulting with my team or another attorney specializing in real estate investing to make sure you choose the most advantageous option for your situation. Check out our article on Series LLC Rules to find out more on that front.

What Does It Mean To Incorporate Your Company?

When you incorporate your business, you form a corporation, which is a legal entity that is separate from its owner. Corporations are taxed independently from their owners and can be held legally liable for corporate actions. A corporation’s profit is separate and distinct from its owners’ income.

Corporations are created by state statute, which means that each state has its own requirements and regulations by which corporations must abide.

The owners of corporations are usually referred to as “shareholders,” and there is no maximum number of shareholders that a corporation can have. In most states, shareholders can be individuals, LLCs, other corporations, and foreign entities. Most states also permit an individual to form a single-shareholder corporation.

How Much Does It Cost To Start A Corporation?

To start a corporation, you will usually have to cover four different types of costs. These fees include a filing fee paid to the Secretary of State, a first-year franchise tax prepayment, governmental filings fees, and attorney fees.

Depending on the state of incorporation, Secretary of State filing fees can be a flat fee, determined by the number of shares authorized or a combination of both. Secretary of State offices typically charge between $100 to $250 for filing fees.

Franchise taxes are required by some states to be paid for the privilege of doing business as a corporation in that state. Franchise fees usually range from $800 to $1,000, but some states do not require this tax to be paid.

What Documents Are Needed For Incorporation?

To incorporate your business, you’ll need to file a few different types of documents.

Articles of Incorporation

Articles of incorporation are the legal document that creates a new corporation. To start your corporation, you’ll need to file articles of incorporation with the appropriate entity in your state. In many states, you’ll file with the Secretary of State, but this can vary.

The required information for your articles of incorporation to include can differ between states, but most states require at least the following info:

Every state will charge a filing fee, which generally ranges from $100 to $500. Once the state entity processes the articles of incorporation, they will send you a certified copy that confirms that your corporation has been approved to do business in the state.

Articles of incorporation are only required if you are forming a corporation. If you decide to go with an LLC, you’ll need to file a similar document called articles of organization.

Corporate Bylaws

Corporations must also establish corporate bylaws, which determine how the company’s shareholders, officers, and directors will divide authority and management in the business. The bylaws will also outline how the day-to-day functioning of the corporation will operate.

People often confuse articles of incorporation and bylaws, but they serve entirely different functions. While the articles of incorporation establish the corporation’s foundation, bylaws are much more detailed and explain how the corporation will be run.

Tax Election Form

For many businesses, it may be advantageous to be taxed as an S-Corporation instead of a C-Corporation, as income from a C-Corp is taxed twice. Because corporations are separate taxable entities, your business will have to pay taxes on its profits, and then you’ll have to pay personal income taxes on the money you make from your business.

An S-Corporation, on the other hand, is what is known as a “pass-through” entity. Because S-Corps don’t have to pay their own taxes, all of your business profits are passed through to your personal income.

The default tax election for all new corporations is a C-Corp. This means if you do nothing, you’ll be taxed as a C-Corp. In order to be taxed like an S-Corp, you will need to file Form 2553, Election by a Small Business Corporation, with the IRS.

Can I Incorporate Without A Lawyer?

While it is possible to incorporate without a lawyer, it is not recommended. An experienced attorney can guide you through the decision-making process and ensure you pick the legal structure that best suits your business. A lawyer can also help you hide ownership of a company to maintain your anonymity.

You don't have to call us to get this done—but please call someone who knows the law.

Section 179 Property Tips: How to Scoop Up Big Write-Offs

I work with savvy real estate investors day in, day out to give them strategies to protect their hard-earned moolah from Uncle Sam’s clutches.

One tactic many of them overlook is the Section 179 property deduction. With this write-off, you can deduct the total value of certain types of property instead of having to depreciate it over time.

Here's a rundown of how it works.

What Is Section 179?

Section 179 of the United States Internal Revenue Code (26 U.S.C. § 179) allows investors to deduct the cost of certain types of property in the year it is purchased and put into use.

Under the typical deduction process for property purchased as a business expense, tax law would require the cost of the property to be capitalized and depreciated over time. But with Section 179, you can write off the total cost of eligible property instead of having to wait for the property to depreciate.

While Section 179 write-offs can be used for various types of business structures, it is particularly advantageous when you combine it with the tax savings offered by an S Corp. With an S Corp Section 179, you get the benefits of pass-through taxation combined with tax deductions for your business expenses.

What Property Qualifies For A Section 179 Deduction?

Unfortunately, you can’t deduct all the property you obtain for your business using Section 179: only certain assets can be written off. To qualify for a Section 179, the business property must meet the following criteria:

It Must Be Tangible

To be eligible for a Section 179 deduction, an asset must be tangible personal property. In most cases, it will be equipment or office furniture, but other types of property can be deducted.

It Must Have Been Purchased, Not Leased

A Section 179 write-off can only be used only property that you purchase using business funds during the tax year, including loaned funds. You cannot deduct leased property, inherited property, or gifted property using Section 179. Financed property may be deducted, however, as you'll see in a bit.

The Property Must Be (Mostly) Used Specifically For Your Business

You can only deduct property under Section 179 if you use it for business purposes more than 50% of the time. If less than 50% of the use is for business purposes, you cannot use Section 179, which means you’ll have to depreciate the asset instead.

If less than half of the use of the property is for personal purposes, you can still deduct the purchase using Section 179. However, you’ll need to reduce the amount of your deduction by the percent of the time you use it for personal purposes and keep records of your business use of the property.

The Property Must Be Used During The Current Tax Year

You can only use a Section 179 deduction for property that was purchased, acquired, or converted to business use in the current tax year.

The Property Must Be Acquired From A Non-Related Party

You cannot use a Section 179 deduction for property purchased from a relative or another corporation or organization that you control.

What Property Does Not Qualify As A Section 179 Write Off?

The following types of property cannot be deducted under Section 179:

Limitations on Section 179 Deductions

There are also several limitations in place that restrict the amount of Section 179 deductions you can take in a single year:

Section 179 And Equipment Financing

Did you know that Section 179 also works with equipment financing? Many people don’t realize they can also use Section 179 to deduct the entire cost of financed equipment, thinking they can only write off the amount they actually paid. Fortunately, this isn’t the case! If you finance an equipment purchase with a loan, you can still deduct the total purchase price. And as an added bonus, you can also include the borrowing costs in your Section 179 write-off.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

What Is Passthrough LLC Income for Tax Purposes?

There are two short answers to the title question: yes, and hell yes.

But don't just take our word for it. Passthrough LLC income is a hot topic in the investment community. If you're not sure what that means, you're not alone. Read on to learn about what exactly passthrough income is, how it impacts your LLC, and what benefits you will reap from it.

What is 'Passthrough' Income?

Passthrough LLCs allow you to collect the profits from your business as part of your personal income tax. The LLC itself is not taxed, but its owners are. This allows you to save substantially, simplify filing, and enjoy more of your hard-earned profits.

Businesses love this feature so much that at the time of this writing, roughly 90% of entities take advantage of passthrough income. While this access used to be primarily the domain of giant corporations, even the smallest business can also take advantage.

How Does a Passthrough LLC Benefit Me?

The most obvious benefit of passthrough entities is that it saves you tremendously on taxes. Opting out of passthrough benefits would mean you would essentially have to pay taxes on your income twice--both on your personal and your business tax returns. Few among us have the means or desire to pay the taxman twice. Fortunately, businesses don't have to if they take advantage of passthrough taxation. This is available for any type of LLC, including our personal favorite, the Series LLC.

What About the Taxman?

While passthrough has always had the benefits discussed above, there are even more perks you can take advantage of when Tax Season rolls around. Below are some of our favorite perks, along with a little update about the 2018 Tax Bill.

Can I Get Passthrough Treatment for Other Entities?

You bet! S-Corps, Limited Partnerships, and many other types of entities are eligible for passthrough taxation. Of course, we recommend the Series LLC for real estate investors. All of the information above applies to the Series LLC the same as it would to its Traditional counterpart.

That's all for our discussion of passthrough income for LLCs and Series LLCs. That wasn't too painful now, was it? You learned the basics in under ten minutes, but please feel free to reach out for personalized recommendations by taking our Tax Discovery Quiz below.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

How to Get an Employer Identification Number (EIN) for a Foreign Entity

If you’re interested in any of the following, you’ll need an an Employer Identification Number (EIN), also known as a Federal Tax Identification Number:

The Internal Revenue Service issues IENs for corporations and partnerships to properly track their business activities for taxation and general monitoring. Here’s a full list of different types of businesses that are required to have an employer identification number.

Even if you’re a sole proprietorship, you still might want to get an EIN to protect your identity. You don’t want to go around handing out your social security number all the time, after all.

But what if you aren’t based in the US? Can you still get an EIN? If so, how do you get an EIN for a foreign entity?

Let's start with a basic question:

ein foreign entity

What is a foreign entity?

Before your business can operate in a state other than your home state, your corporation, LLC or other entity must qualify to “transact business” in that state, and is considered a foreign entity.

In general terms, any business entity not incorporated in your home state is considered a “foreign entity." A Series LLC in California is a "foreign entity" in Texas. For the purposes of this article, however, we're talking about an actual overseas business entity—not a business based in another state.

Previously established out-of-state businesses have typically already registered for an EIN from the IRS, so that California SLLC won't need a new EIN to transact business in Texas.

How to Apply for an EIN for a Foreign Entity

Quick and easy answer: review the information below, fill out the SS-4, and then call the international EIN helpline for the IRS at 267-941-1099 (which is not toll free).

To get an EIN as a foreign entity, you need to fill out Form SS-4, aptly titled, “Application for Employer Identification Number.” (The IRS’s internet EIN application is their “preferred method” for applying for most entities looking for an EIN, so if you stumbled upon this page and you’re not a foreign entity, start there). With that said, however, for international applicants, the IRS recommends calling the following non-toll-free number: 267-941-1099.

To do so, you’ll need the following information, at a minimum:

If you’re filling out the form online, make sure to follow the instructions very carefully to make sure the process is as smooth as possible.

Tips to Make Sure Your EIN is Approved

You’re only eligible to apply for an EIN online if you meet certain criteria:

If you don’t meet those criteria, call the number at 267-941-1099.

Why Do You Want to Apply for An EIN Even If You Don’t Have To?

Why might you want to apply for an EIN even if you’re, let’s say, a sole proprietorship?

There are a few reasons, and we touched on some of them in the intro, but we’d like to go over them for good measure here—as well as add some more:

An EIN allows you to file business taxes and avoid tax penalties.

There are certain tax breaks that are only available for businesses. Take, for example, the PPP loans as part of the pandemic. Many of them were even forgiven, so they were essentially grants for certain businesses.

An EIN can protect your Social Security Number.

Occasionally you might have to fill out forms for your business. If you have an EIN, you no longer have to use your more sensitive personal information to fill out those forms.

An EIN opens up a variety of business accounting options.

With a foreign EIN, business loans and business savings accounts are options for you to consider.

An EIN speeds up pretty much everything related to running a business.

With an EIN, you can more easily do everything you need to run a business, and if you’re a foreign entrepreneur, it lends you that much more credibility to US businesses and workers.

The Takeaway

A foreign entity EIN can have benefits, as we've seen. In order to get an Employer Identification Number for a Foreign Entity, you should look over Form SS-4 from the IRS, prepare all of the information you’ll need, and then call 267-941-1099. If you fill out the application online, your business needs to be located in the US or any US territories.

Thinking About Buying Real Estate with Your IRA? Read This First

Thinking about buying real estate with your IRA? Read this before you do.

An individual retirement account (IRA) typically offers massive tax-saving benefits while you’re planning for your retirement, like tax-deferred growth or tax-free withdrawals after a certain age—and they can even allow you to lower your taxable income.

So, naturally, just about every personal finance guru will give you the same advice when it comes to withdrawing money from your IRA before retirement: Never do it.

So why is buying real estate with your IRA any different?

First, you’re not actually withdrawing money from the account. If you’re a responsible real estate investor, you can use your IRA in a way that allows you to utilize the account’s tax-saving benefits, potentially saving you thousands, if not tens of thousands, of dollars.

But there are drawbacks (which we'll cover below).

Second, using your IRA to fund a real estate investment isn’t all that different than using your IRA to purchase any other investment, like bonds or shares, but you need to know how to do it responsibly so you don’t end up disqualifying your IRA.

In this article, we’re going to explain how to go about buying real estate with an IRA.

How to Buy Real Estate with a Self-Directed IRA

Using a self-directed IRA for real estate can be a bit more complicated than opening your Vanguard account and buying VTSAX.

Most financial institutions won’t allow real estate investors to use their IRA to purchase real estate, since it doesn’t generate any income for the bank. So, you’ll have two options:

  1. “Custodian controlled’ self-directed IRA
  2. “Checkbook controlled” self-directed IRA

What is an IRA Custodian?

A custodian is any financial institution that the Internal Revenue Service has approved to take care of an IRA. As we mentioned before, most custodians restrict the use of the IRA for certain investments.

Custodians for self-directed IRAs, though, work differently. The SEC defines self-directed IRAs custodians very succinctly:

“A self-directed IRA is an IRA held by a custodian that allows investment in a broader set of assets than is permitted by most IRA custodians.  Custodians for self-directed IRAs disclaim most duties to investors, and may allow investors to invest retirement funds in “alternative assets.’”

What does this all mean in layman’s terms? If you want to set up a self-directed IRA for real estate, you have to go with a bank that’s going to allow you to do that.

What is a Checkbook-Controlled IRA?

On the other hand, if you go with a checkbook-controlled IRA, you’re setting up a real estate IRA LLC for, of course, the purpose of buying and holding your real estate, and then you’re using the funds from your IRA to invest in that LLC, which is then investing in the property you wish to purchase.

In this case, the IRA needs 100% ownership over the LLC, but it opens up the possibility for making quick cash deals using the money in your IRA.

Can an IRA Be Held in a Brokerage Account?

Since we’re on the topic of alternative investments that you can make with your IRA, you might be wondering, “Can an IRA be held in a traditional brokerage account?”

The simple answer is yes. You can hold an IRA in a brokerage account, but the IRA is its own account. Most of the time, when you open a brokerage account—or any additional account within your current brokerage—they’ll typically ask you whether or not you want to open it as a traditional (taxed) account or a tax-deferred IRA (or a Roth, or SEP, or any of the other types of IRAs).

6 Things to Keep in Mind While Using a Self-Directed IRA to Buy Real Estate

Finally, here are some important things to keep in mind if you’re interested in using an IRA to buy a property:

  1. You can’t mortgage a property using the funds in your IRA. Since you can’t borrow money against your IRA, you’ll need to make the purchase in cash using the funds that you have available.
  2. Your IRA needs to be large enough to cover the investment’s ongoing expenses. Not only do you need enough money to cover the down payment and closing costs, but you also need to make sure you have enough money in the IRA to keep running the business before it starts generating income itself (if ever). Crunch the numbers on the property taxes, special assessments, HOA fees, home insurance, and maintenance. Make sure you have enough stashed away in the IRA to cover those costs.  
  3. You can’t personally use the investment. If you’re looking to use your IRA to purchase a primary residence (or a vacation home or anything for your relatives), you’re out of luck. It needs to be strictly arm’s length, and you can’t receive any direct or indirect benefit from it.
  4. You can’t withdraw any of the gains from your IRA until you’re 59.5 years old without incurring penalties—and that number may go higher in the coming years.
  5. As soon as you reach 70.5 years old, you’re required to start taking required minimum distributions regardless of whether or not you need them (unless your IRA is a Roth). This could cause you to sell your IRA-funded property in a down market.
  6. If you break any of the IRS’s rules on managing your IRA, you subject the entire IRA to taxation.

The Takeaway

In this article, we examined the relationship between the IRA and real estate. This includes opening up a self-directed IRA with a custodian (a financial institution) that will allow you to use the IRA for “alternative investments” and to set up a real estate IRA LLC so that you can then buy that LLC through your IRA, which is known as a “checkbook-controlled IRA.”

Sometimes it might sound like a bunch of alphabet soup, but if you’re an experienced real estate investor who doesn’t need access to the gains until you’re past 60 or so, you can save a bundle on your tax bill by using your IRA to fund your real estate investment. It’s really no different than using your IRA to fund any other investment, it’s just a bit different than what most investors use the account to do.

Remember, though, there are some drawbacks. First off, depending on the real estate you’re looking at, you’ll need quite a bit of money inside the IRA to start, and this can take some time to build up. Second, you can’t use the property yourself, or for your relatives. Finally, if you break any of the IRS’s rules, you could possibly subject your entire IRA to taxation, so make sure you know what you’re doing by working with an experienced professional.

Don't Jeopardize Your Portfolio: 2 Guiding Principles Successful Investors Follow

It’s a common cliché among investors that we are our own worst enemies.

While it’s true that some investors shoot themselves in the foot by jumping on a bandwagon that’s headed for a cliff, another cliché to keep in mind is to never put all your real estate investment eggs in one basket.

We tend to let our emotions guide us. Investment bubbles are said, for instance, to be the product of a certain kind of “euphoria” that manages to trump all caution and reason. Millions are lost and depression soon follows.

Such is the nature of mania.

The question then becomes: how do we, as investors, manage these emotions that seem to guide us down blind alleys?

Top investors follow two guiding principles:

#1 Successful Investors Don’t Chase Performance

Too many investors get caught up in the frenzy of recent strong performance. Take, for instance, the cryptocurrency rush. Millions of unskilled investors rushed to jump on a bandwagon that made major headlines all across the globe. True, many of them got rich. 

They got lucky.

There’s nothing necessarily wrong with investing in cryptocurrencies, but rushing into an investment simply because there’s been buzz around it is not likely to yield good results.

Here, the feeling that you’re missing out on something major (fear) is guiding the decision. But you can only know one thing for certain: you should have invested in Bitcoin when it was under $1,000. Once there’s a major buzz around it, it's time to sell to someone who is themselves chasing performance.

#2 Successful Investors Execute a Master Plan

Investors that go in without a plan are playing a dangerous game. Investment is not analogous to gambling merely because both involve risk. Risk can be managed intelligently in an investment portfolio. A wise investment plan should address the following:

The Bottom Line

Top investors successfully manage the highs and lows. They do not make choices based on emotions. They do not chase the latest trends. They are not caught up in investment frenzies. They do not become overconfident. Instead, they build a solid investment foundation from which they can take calculated risks. Interested in how solid your foundation is? Contact one of our professionals today.

Understanding Your Risk in a Joint Venture (JV) Partnership

Understanding Your Risk in a Joint Venture (JV) Partnership

Joint Ventures in real estate investing are pretty common.

Most of these partnerships are created by placing a property into an LLC and having the partners all own a portion of that LLC. If anyone wants to sue you or your partner they will not be able to go after the other person—the LLC makes that protection possible.

In the video above, Scott talks about how charging order against the LLC can make things messy and painful.

The best strategy to deal with this type of situation is to have both yourself and other partners enter into the Joint Venture LLC through your personal LLCs. This takes minimal effort to establish, but can prevent the messy and costly potential of dealing with a charging order.

How To Structure Your Partnership To Protect Your Assets

Say you and your friend that start a company together to invest in real estate.

Now say your friend gets sued, and next thing you know there's a charging order against the LLC. If you don't know what a charging order is, start with this article and come back.

The Cliff Notes version is this: If there's any money distributed from the LLC, it has to be used to pay off the creditors to the extent that your friend has an interest in the LLC.

This means you can't get any money out of the investments you and your partner made—even though he (or she) is the one being sued!

This is not the case if you guys both enter into a Joint Venture LLC. This means using your personal LLCs to become members of the LLC used for the Joint Venture agreement.

This will allow you to distribute money that you can now control without having to pay off those creditors and hurt your friend or your business partner. It keeps everything nice, smooth and amiable.

Which Type of Business Entity Needs an Employer Identification Number (EIN)?

Businesses pay taxes. It is a truth as old as time. However, how a business entity pays taxes vary. For many, the Internal Revenue Service (IRS) requires them to file for an employer identification number (EIN).

The EIN, also referred to as a taxpayer identification number (TIN), is a unique number assigned by the IRS that allows it to monitor any payments, wages, or other financial transactions that occur through your daily business activities.

Furthermore, if you plan to open a business bank account, an EIN will help you establish one that is independent of your own personal account. 

Does a general partnership need an EIN? What about an LLC taxed as a corporation? To find whether or not your business entity requires an EIN, keep reading.

does a general partnership need an einBusiness Entities that Do Require an EIN

Business Entities that Do Not Require an EIN

Business Taxes

The nuances of the tax world can be confusing and hard to understand. If you run a business and would like to discuss taxes with a professional, call Royal Legal Solutions today to set up a consultation. Our professionals have years of experience helping clients make the most of their business while remaining in compliance with all laws and regulations.

 

Interested in learning more? Read How to Get an Employer Identification Number (EIN) for a Foreign Entity and When Does a Sole Proprietor Need an EIN?

How Do I Get A Loan Against My Land Deed? 

Land has always held value in the United States, and if you have a clear deed to real estate property, you may be able to use it as collateral for a loan.

In this article, we'll examine the steps a borrower needs to take to obtain loans against a land deed.

There can be a lot of paperwork involved in land ownership. Your first step is to make sure your paperwork is in order and the property deed is in your name. You can find out through the County Recorder's office in the county where the property is located. Land deeds are a matter of public record, so anyone who wants this information can obtain it. 

A recorded deed provides notice to subsequent purchasers, lenders, and the general public about a parcel of real property. It also protects the owner of record in the event multiple parties claim ownership of the same land.  

When a property transfers from one owner to another, you must update the official documents. A failure to accurately record the required documents can invalidate the transfer.

After you've confirmed that your name is on the deed, your next step is to find a lender that will loan against a land deed. Land loans can be hard to find. Some lenders do not accept land as collateral at all, and others only consider land that is worth a certain amount. Most lenders will not loan on land that belongs to more than one person.

If you have bad credit, you'll have a tough time securing a land loan. When your credit is not a factor, your loan eligibility will depend on the type of property you own and its location. If you own prime land that is zoned for commercial use in a busy urban area, your loan has a good chance of being approved. If it's located right off the interstate, your chances are even better. 

loans against land deedHowever, if you own a few rural acres miles away from a city center, finding a lender may be challenging. The bank is looking at the land's profitability, meaning how easily it can be converted into cash if you default on your loan. In the case of rural property, you may have better luck with a small local bank than a larger institution. A local banker may better understand the value of your land. 

Once you have identified a lender and the lender has confirmed that the land is valuable enough to serve as collateral for your loan amount, you will be able to complete the loan process with the following steps:

If these steps are completed to the lender's satisfaction, the lender will then discuss the terms of the loan they are willing to offer. When you and the lender have agreed to the terms and the loan is issued, the lender will record a lien on your land title. 

Can I obtain a loan on vacant land? 

Lenders typically see vacant land as a riskier investment than land that is already in use. Buildings can be sold or rented out, while it can take a long time for vacant land to produce any cash flow. Once again, you may have better luck with a local bank than with a large one.

If you seek to use the vacant land as collateral for a loan to fund a construction project on the property, that's a different story. The lender will examine the financial strength of your project, and, if it likes what it finds out, it will disburse funds as you meet your construction milestones. 

Interested in learning more? Check out our article, Basics of Land Investing.

What about a loan against a land trust?

If you're seeking a loan against the assets of a land trust—called a land trust mortgage—you'll need to check the trust deed to make sure that the trust has the power to borrow money. 

Then, you'll need to ask the trustee to sign the mortgage or note. 

If the property is already in a land trust, and you want to borrow against the beneficial interest, then the lender will need to serve what is called a "Notice of Collateral Assignment" on your trustee. Your trustee will then need to write an "Acknowledgment of the Assignment" in response. Afterward, the trustee will not be able to transfer the title of any property held in the trust without the lender's written consent.

What happens if you default on a land loan?

Just as with any loan, you must pay back a land loan according to the terms of your loan contract. If you default on the loan, the lender can take possession of the land and sell it to pay for the amount you owe.

On the other hand, when you repay your land loan's full amount, the bank will cancel the lien on your deed. At this point, the lender has no further claim to the land.

2021 Is A Critical Year for Estate Planning—A Trust Is A Great Start

Real estate investors were thrown a few curveballs last year, to say the least.

The stress and uncertainty of 2020 motivated a lot of you to stop procrastinating and get your financial affairs in order. Trust me ... Financial planners and asset protection attorneys have been working overtime.

On top of an unprecedented global pandemic, another election cycle brought the prospect of legislation that could change how our businesses (and our estates) are taxed.

With the current estate credit set to end in 2025, proactive business owners were calling us before COVID spread throughout the globe. But the events of 2020 have even more of you thinking about the gloomy prospects for recession, disability or death.

Whatever happens with the pandemic and the fallout for landlords, 2021 is shaping up as a critical year for estate planning because of President Joe Biden's proposal to lower estate tax exemptions. Biden proposals include limits to the gift, estate, and GST exemption amounts a taxpayer can take. According to The National Law Review, it is now more important than ever to create an estate plan or review the terms of an existing one.

Worried yet?

Don't be. As with many things in life, a little preparation goes a long way. You have a lot of options.

For example: Setting up a trust, which allows a third party—or trustee—to hold assets on behalf of your beneficiaries, can offer you valuable peace of mind. With a trust in place, your heirs will not have to go through the time and expense of probate. A trust also allows you to protect your assets, maintain privacy, and reduce estate and gift taxes.

Even if you have an estate plan in place, it is critical to update it each year to allow for life’s many changes, including births, deaths, weddings, divorces, illnesses, and children reaching the age of majority.

In this article, we'll examine one of the primary components of estate planning—selecting who will serve as your personal trustee. But first, let's look at the changes that 2021 could be bringing to the way estate planning attorneys like me handle our clients' affairs.

estate planning: biden changesWhat Estate Law Changes Will 2021 Bring?

Changes that impact the way we leave assets to our families are afoot.  These include:

The world is changing. Your family and your needs are changing. Estate plans should be updated every year to reflect these shifts, to give you peace of mind and preserve your wealth for your loved ones.

Creating a Trust Is A Great Start

Updating your estate plan for 2021 means finding ways to control where your assets will go should you die or become otherwise incapacitated. Establishing a land trust or another kind of trust can do exactly that.

Determining who will serve as your trustee is a key step. This individual acts as a fiduciary, overseeing the management of property owned by the trust. The person (or persons) you choose must have a clear understanding of the role. The primary expectations of a personal trustee include:

While those duties align with moral responsibilities, the position also comes with distinct hands-on tasks such as paying bills, reporting taxes, fulfilling obligations to beneficiaries, and following all compliance requirements. Making investments may also be part of the job.

Particularly with large estates, the trustee may be exposed to legal action by the beneficiaries of the trust. As you can see, the position or the offer of the position should not be taken lightly. You'll want to make sure the person fully understands the responsibilities and isn't blindsided with them after your death.

In addition to being a trusted friend or family member, a trustee can be a professional (such as your attorney) or an institution (like a bank). You also can to have an individual and an institution serve as co-trustees. A professional trustee can help shift the legal liability of the position away from the personal trustee while keeping them informed and part of critical decision-making.

How is a trustee compensated for their time?

Choosing who will serve as your personal trustee is an important decision. It should be someone who knows you well and who gets along with your family members. It's more than an honor; it's a serious commitment to you and your heirs.

Both personal and professional trustees are entitled to payment for their work. As you might expect, the compensation depends on the size of the estate and the amount of work the position requires.

There is no set fee for a trustee, and most trust documents and state laws state that trustees should earn a "reasonable" amount for the work. What is a reasonable amount? Here are some guidelines:

In some cases, a trustee may not want to receive financial compensation for their work. One consideration is that a trustee's remuneration is taxable as income. But family relationships also can enter into the picture.

For example, a relative may choose to forego payment for their time as a trustee because they view the position as a family responsibility. Others may think that accepting payment could cause friction or strain within the family.

curve ballThe Takeaway

With the rate of COVID vaccination increasing, many of us are looking forward to returning to some semblance of normal life in 2021. However, we would be wise not to ignore the wake-up call that the pandemic has given us to get our affairs in order. And thanks to legislative changes, investors are faced with a whole new ball game going forward. 

None of us knows what the future holds. No matter the size of your estate, you'll gain valuable peace of mind when you create or update your estate plan in 2021.

IRA Rollovers: Yes, Rolling Over Your 401(k) Into An IRA Is Smart!

Changing careers? Deciding what to do with retirement funds is going to be a primary concern. While there are a number of options available, many choose to roll these funds over into an Individual Retirement Account.

There are a number of good reasons for this, and we'll be looking at seven of them here in a minute. But first ...

What Exactly is a Rollover IRA?

IRA rollovers can be deposited into an IRA from another retirement fund, such as a 401(k). Those who don’t already have an IRA can open one for the express purpose of rolling over funds from a previous employer’s retirement plan. Those who already have an IRA can simply roll over the money into the existing IRA.

IRA Rollovers

7 Reasons an IRA Rollover Makes Sense

Many folks are content to let their 401(k) plans accrue money over time, and there’s nothing wrong with that option. Why would you fix something that isn’t broke?

Well in this instance, you would not be fixing something that is broken so much as replacing it with something better.

What do we mean?

Those who have just switched jobs have a short list of options concerning their retirement funds. These include:

Cashing the funds out immediately is not advisable. While leaving the money in the original 401(k) or rolling it over into the new one aren’t bad options, there are a number of reasons why an IRA rollover is the best option on the list.

Reason #1: Rollovers Can Preserve Tax-Favored Status

Those who choose to cash out their accounts early are not only subject to a 10% early withdrawal penalty if they are under the age of 59 ½ but will also need to pay income tax on the balance.

By contrast, rollovers can preserve tax-favored status so long as they’re transferred from one trustee to another. In other words, the IRA will continue to grow tax-deferred until a retiree begins collecting on their investment.

Reason #2: IRA Rollovers Can Increase Investment Options

Some folks choose to leave the funds in their old plan alone or roll the funds over into a new employer-offered plan. There’s nothing wrong with this per se, but rolling the money over into an IRA can increase the number of options that are available to you. For instance, IRAs typically offer a broader range of investments. 401(k) plans, on the other hand, may be limited to a handful of mutual funds.

This advantage will contribute to a better investment strategy and can prove more lucrative in the long run.

Reason #3: IRAs Have Lower Fees

Generally speaking, employer-sponsored 401(k) plans typically have higher administrative fees than IRAs.

Reason #4: An IRA Centralizes Control of Your Retirement Monies

There might some good reasons to keep your old 401(k) open, particularly if you’re satisfied with the returns. On the other hand, it’s much more convenient to have one centralized location from which to manage all of your retirement funds. IRAs are easy to figure out and significantly reduce the complexity of managing separate accounts.

From one centralized location you can access:

Reason #5: Brokers Will Compete For Your Business

Brokerage firms are more than willing to offer incentives to bring your business to them. In some instances, this could even mean free cash. In other instances, you may be entitled to free trades. It’s certainly something to look into as you figure out how you want to invest your retirement money.

Reason #6: 401(k) Plans are Subject to Rules an Individual Company Establishes

Every company has a great deal of wiggle room when it comes to setting up a 401(k) plan for their employees. IRAs, on the other hand, are subject to a centralized set of rules established by the IRS.

This is better for two reasons:

Reason #7: The Rollover Itself is Free

While there are other costs to consider, rolling over a 401(k) into an IRA is free. There will be transaction costs for individual investments and other costs to bear in mind, but setting up and rolling over the money is a relatively pain-free process.

The Bottom Line

The advantages of rolling over your 401(k) into an IRA far exceed the risks. It makes sense not because the other options are bad, but simply because IRAs are better for some. With more investment options to choose from, lower administrative costs associated with the account, a simple centralized location from which to access your retirement investments, and more transparency regarding how the fund operates, IRAs make the most sense  for your retirement plan.

How Landlords Can Get Maximum Value From A Rental Property Appraisal

A rental property appraisal will tell you exactly how much the property is worth to the average buyer or investor in the current market.

In part one of this article, we talked about why rental property owners need an appraisal, how much an appraisal typically costs, and what the appraiser looks for when they’re on your property.

In part two, we'll talk about how to handle a tenant who won't cooperate with an appraisal (due to coronavirus or some other reason). We'll also drop some helpful hints for landlords who want to get the maximum appraisal value for their property.

Let's get started!

Can a Tenant Reject an Appraisal?

What should you do if the tenant won’t let an appraiser inspect the property?

If the tenant refuses to let an appraiser come in and look at the property, review the lease agreement with them. Typically the lease agreement has a section specifically on what to do about this, but usually you only need to give the tenant 24 hours notice before you send in an appraiser. In that case, all you have to do is send them a “notice of intent to enter” and you’re all good.

Given that there’s currently a pandemic, though, you might not want to force outside contact on an at-risk tenant. You don’t want to create an unsafe scenario for either the tenant or the appraiser, and forcing contact without a lease provision and reasonable notice is begging for legal trouble.

Tell your lender about the scenario, and they’ll work out possible solutions with you. As we’ve mentioned before, there are appraisal options for some loan types that are exterior-only.

How to Get Maximum Value for Your Rental Property Appraisal: 4 Tips To Remember

And, finally, the section that could possibly help your bottom line the most: How do you get the highest possible appraisal for your property? Is there anything you can say or do that’s actually going to help the value? Or is it all out of your hands?

Here are our four best tips, in order from most-impactful to least-impactful on the value:

Provide the appraiser with a list of improvements

This is the biggest one. It’s not immediately clear to the naked eye where and when any improvements have taken place—particularly if the house is a bit of a mess, which we’ll talk about soon—but if the bathroom, kitchen, and roof have all been replaced in the past five years, you can expect that to seriously help your value.

On the other hand, if the appraiser doesn’t have any information on improvements, they might miss a couple, which could lower the quality and condition of your house, forcing the appraiser to pull up comparable sales that don’t reflect the renovations or remodels.

Fix up anything that’s in serious need of fixing up

If you’re working with a “well-lived-in” property, make sure that there aren’t any glaring maintenance issues. Again, you can use your common sense here: if you think it would bother a typical buyer, it’s probably something that the appraiser is going to note in the 1004.

Keep the property clean on the inside and out

The appraiser doesn’t care about whether or not there’s clutter around the house, and they don’t care about interior design. They likely see hundreds, if not thousands, of houses per year, so nothing is really all that surprising. However, if you want the best possible appraisal, you want to create the best possible environment for the appraiser. For the best possible appraisal, pretend you’re staging an open house.

Be on time to let the appraiser in to the property, and be respectful

This one should be a no-brainer, but do your best to be kind and respectful to the appraiser. This person, after all, is in charge of determining the value of your property, and oftentimes it can make or break your deal. If the appraiser knows that you need an appraisal completed by Thursday in order for a loan to clear, but you showed up 45 minutes late to the inspection, they might prioritize some other reports before finishing yours. If, on the other hand, you’re professional, helpful, and kind, they’re going to do everything they can to help you out.

Conclusion: Handling Appraisals the Right Way

In conclusion, let’s summarize all of the topics we listed in the beginning:

Why do you need an appraisal?

You need a rental property appraisal because 1) interest rates are incredibly low and it’s going to help your bottom line, and 2) it’s required by most major lenders, as well as the federal government.

How much does an appraisal cost?

The typical appraisal is going to cost anywhere from $300-500, but a good rule of thumb is about $400.

What do appraisers look for when they look at your property?

The floor plan (including overall square footage), building materials and surfaces, and the quality and condition.

What do you do if the tenant refuses the appraisal?

Review the lease agreement with your tenant. There’s typically a section about this exact situation. If they’re an at-risk member of the population during the pandemic, then review options with your lender.

How do you get the maximum value for your property?

Provide the appraiser with a list of improvements in as much detail as possible, fix up anything inside or outside the house that’s in dire need of fixing up, keep the property reasonably clean, and be kind and respectful during the appraisal.

Rental Property Appraisals: Refinancing Your Investment The Right Way

What are rental property appraisals and how do they affect your business?

A rental property appraisal is when a certified appraiser determines the exact market value of your rental property: how much the property is worth to the average buyer or investor in the current market.

In this article (and in part two, which you can find here), we’ll tell you everything you need to know about rental property appraisals, including:

Why Do You Need An Appraisal?

At the time of this writing, according to Freddie Mac, one of the biggest federally-backed home mortgage companies, mortgage rates are at an all-time low of 2.81% for a 30-year fixed-rate mortgage.

Naturally, that means appraisers are in high demand. Everyone is realizing that they can seriously lower their monthly bill (and, if you own rental property, maximizing your cash flow) by refinancing.

But why? Why can’t you just buy a house or refinance your mortgage without having an appraisal?

Because almost every major lender—as well as the federal government—demands that an appraisal is performed on the property prior to supplying a loan. Sometimes, in specific instances, these requirements are waived, but that doesn’t happen too often. Lenders need a way of verifying the house is actually worth what someone is willing to pay for it.

Rental Property Appraisals: Koi Ponds... Are Do They Add Value?The Difference Between Value and Price

For that reason, appraisers are hired to find the market value of a property: how much the typical consumer would pay in the current market, because the market value is different from the sale price, which is how much someone did pay for that property.

Since home-buying is such an individual and emotional process, these two numbers can be wildly different. A particular buyer, for instance, might be enamored with a koi pond in the backyard of a property. He or she may be willing to pay an extra $30k for the property (let's just say they really, really like fish) but he or she isn’t representative of the typical buyer, because the typical buyer doesn’t really care about a koi pond (assuming it’s in a market area where koi ponds are atypical, which is much of the United States). Or the price might have been driven up by a bidding war, causing untold inflation.

If you’re a lender, you wouldn’t want to give out a half a million-dollar loan on a property that’s only worth $180k, even if the buyer is able and willing to repay the money. Anything can happen: the buyer could lose his or her job or come down with a terminal illness, making it impossible for him or her to repay the loan. In those instances, the bank needs to be able to sell the home in order to recoup whatever’s left of the mortgage.

If the borrower only paid off $40k of a $500k mortgage and the bank sells the house for the much-more-realistic $180k, they’re down $300k after closing costs.

So, to answer the question, “Why do you need an appraisal?” the simple answer is: because you have to. The more complicated answer is because, at scale, it saves the bank a lot of money—and, if you’re the unlucky buyer who is willing to pay more for a property than it’s worth, an appraiser might just save you money, too.

How Much Does A Rental Property Appraisal Cost?

The cost of your rental property appraisal will depend on a few factors, including where you live, the current supply and demand of appraisals, and the type of appraisal you need (which depends on the type of loan you’re taking out).

To give you a ballpark idea, most appraisals will cost anywhere from $300-500. The vast majority of those will be the standard 1004 Uniform Residential Appraisal Report (and if you’re really bored, you can take a look at it here), but since the start of the pandemic, some lenders are clearing exterior-only appraisals, which appraisers can complete faster because they don’t have to perform an interior inspection. And, if you’re lucky, you might even be able to get an appraisal waiver—so that there doesn’t need to be an appraisal at all.

However, most of the time you’re going to spend roughly $400 on a 1004, and the appraiser is going to have to perform an interior inspection. What does that mean for you?

What Does the Appraiser Look For When They’re In Your Property?

Every appraiser is different, but typically the appraiser is noting a few different things:

Rental Property Appraisals: Floor PlanThe floor plan

The appraiser will draw a sketch of your house, noting the exact square footage of the property, and the number and locations of rooms, bedrooms, and bathrooms (and sometimes windows, fireplaces, staircases, and other details) so that they can confirm that it lines up with the research they’ve done on your property using the MLS and public records. Also, with the sketch, the bank has an easy reference for what the house looks like on the inside, and whether or not there is any functional obsolescence—which is a fancy term for anything inside a house that doesn’t fit the market area.

For example, if there’s an additional bedroom that is only accessible through another person’s bedroom, it won’t really count as a bedroom, and it’s the appraisers job to make sure that they find accurate comparable sales in the market that are actually similar to the subject property.

Building materials and surfaces

If you look at the 1004, in the “Improvements” section, there are entries for exterior and interior materials and their conditions. The appraiser is also going to look at those and jot them down.

Quality and condition of the property

If there’s dampness in the basement, evidence of infestation, holes in the walls or ceilings, or dysfunctional plumbing, that’s going to seriously affect the value of the property. Depending on the lender and loan type (like FHA), the appraiser may or may not be required to check the plumbing. It’s best to make doubly sure it’s working before the appraisal.

Generally, though, a good rule of thumb is to use your common sense. Ask yourself, “Would the average buyer be okay with this?” If they wouldn’t be, it’s likely going to negatively affect the quality and condition of your home, and therefore the value. 

To continue reading, check out part two of this article, How Landlords Can Get Maximum Value From A Rental Property Appraisal, which covers how to handle a tenant who won't cooperate with an appraisal and how to get the maximum appraisal value for your property.

Should Rental Property Be in an LLC or Trust?

Should rental property be in an LLC or trust? Unfortunately, the answer is not as straightforward as you might think.

Whether you’re planning your will or setting up a company to manage your growing real estate portfolio, you need to know exactly what type of entity you should use to shield your properties from legal trouble. If you make the wrong decision, you could potentially expose your holdings to unnecessary risk, costing you hundreds of thousands of dollars down the road (or, at the very least, giving you a big headache).

So, first, let’s start with a basic definition of "LLC" and "Trust" as they apply to real estate investing. 

(If you just want the pros and cons of each option, feel free to scroll down to the bottom of this article).

Why Use an LLC to Hold Your Rental Properties?

An LLC is a limited liability company. 

It’s one of the most popular legal entities that a person can set up to operate their business. You don’t need any employees or a board of directors, and you can use it to separate your business assets from your personal finances. That way, if you ever find yourself on the losing side of a lawsuit, the only assets you’ll be forced to give up are those assets held within the LLC (in this case, your rental properties).

If someone sues you and wins, they can’t take away your personally-owned assets (like your car, primary residence, and your kid’s college fund).

Sounds like a pretty sweet deal, right? You could theoretically make some risky moves with the assets you put under an LLC and then dissolve that LLC in case you get into any trouble. The only risk is the asset, right?

Well, not so fast. There are some instances when your personal assets might be at risk, and you definitely shouldn’t start an LLC for the sole purpose of doing something nefarious. 

When Does an LLC Fail to Protect Your Personal Assets from Lawsuits?

There are a few instances when, if you use an LLC to hold your rental properties, you’d be putting both your rental properties and personal belongings at risk. Those instances include:

Furthermore, an LLC can create a kind of avalanche effect. As soon as one property is attacked under an LLC that holds multiple rental properties, your entire portfolio can take a hit.

Why Use a Trust to Hold Your Rental Properties?

You’ve probably heard about trusts as they relate to estate planning. By putting certain assets in a trust, you can guarantee exactly how and when they’re distributed. This way you can avoid a solid chunk of estate taxes, since the assets in a trust aren’t considered your personal property, or even protect your assets from heirs that are likely to mismanage them.

One solution is putting all of your properties under separate trusts. There are a few different types of trusts: revocable, irrevocable, pay-on-death (POD), and living trusts. For our purposes, we’re just going to focus on revocable and irrevocable trusts.

What are the Benefits to Using a Trust Versus an LLC?

What are the benefits to putting your rental properties in a trust rather than an LLC?

Should You Put Rental Property in an LLC or Trust?

So, to review, what are the pros and cons of each option?

Putting Rental Property in an LLC Pros

Putting Rental Property in an LLC Cons

Putting Rental Property in a Trust Pros

Putting Rental Property in a Trust Cons

 

How To Name A Trust

In this article, we’ll talk about how to name a trust. It’s an often overlooked—but important—part of setting up a trust.

Think of  trust as a set of directions for how to handle certain assets. You can control when, where, and to whom they’re distributed. A trustee, an individual or institution, typically handles the distribution of those assets to your beneficiaries.

We’ve gone over the benefits of setting up your rental property in land trusts in past articles. They help protect you from liability in a way that no LLC really can, but if you mess up the name, you could open yourself up to a host of other issues.

Why Do You Need to Know How to Name a Trust?

Why does the name of the trust matter at all? Couldn’t it be anything you want it to be, as long as the directives of the trust are carried out?

Knowing how to name a trust is important to real estate investors for a few reasons:

How To Name A TrustBasic Guidelines for Naming a Trust

So, if you shouldn’t go with the typical way to name a trust (by naming it after your family name or address), what should you do, instead?

Get Creative (But Not Too Creative)

Come up with a list of creative trust names. We recommend that you name your land trust to sound like a fictional company. The only exception, though, is that you typically aren’t allowed to make your trust sound like a lender or other financial institution. You also need to avoid naming your trust after anyone else’s existing LLC.

But it’s important that you don’t get too creative, because you still want banks to be able to correctly categorize your trust based on its name alone. Some attorneys have even talked about clients naming their trusts after their dogs. You want to walk the line between clarity and anonymity.

Try To Keep It On The Shorter Side

When you name a trust, that name will be included when you name any asset in the trust. You can probably imagine how this could quickly spiral out of control if you choose a trust name that’s too long.

Pretend You’re a Celebrity

Celebrities work closely with attorneys to find ways that they can protect their anonymity from the public. This is a good idea for you, too. Land trust rental property should be used to shield you from possible litigation. As we mentioned in that article, no one wants to sue a ghost. The more obstacles you can set up, the more illusive you can be, the better.

Don’t Overthink It

At the end of the day, the best way to choose a trust name is to make sure that it protects your anonymity. If you’re having trouble coming up with a name that both suggests what the trust was set up to do and one that protects your anonymity, either consult with a professional or ask yourself which value is most important to you.

Most of the time, people would prefer to protect their privacy. Having documents clear through banks faster is simply a perk, and not something that you’re necessarily focused on when you’re setting up a trust. Liability and privacy, on the other hand? Those are essential.

Conclusion: How to Name a Trust

What are the main points you need to know before naming a trust?

Do I Need a Medical Power of Attorney?

It is said that change is the only constant thing in life. And while this saying has fallen into the realm of overuse, it remains true today.

So how does this affect your estate planning? When planning, it will do you well to account for all eventualities that may occur. One of the ways to do that is via power of attorney.

Here is a checklist for estate planning you can use to get started. This article covers one aspect of the checklist—the medical power of attorney and how you can use it to protect yourself.

Do I Need a Medical Power of Attorney?What Is a Power of Attorney?

Hold on, what is a power of attorney? To some, it might sound like something a fairy godmother does to magically transform you into a lawyer. Pumpkins and all. But hold your horses. Even though that might be great to see, a power of attorney is a document that confers specific powers on someone, and we’re not talking about superpowers.

A power of attorney (POA) gives one person (called the attorney-in-fact or agent) the authority to make decisions on behalf of another (called the principal). These powers come into play when the principal is incapacitated and can no longer make those decisions themselves. A POA can be of utmost importance to a real estate investor for the following reasons:

There are several types of POAs. For this post, we will concern ourselves with two of them; the medical POA and the durable POA. Each serves a slightly different purpose, as we will see.

Durable Power of Attorney

A durable POA is one that confers the decision-making power on the agent after the principal gets incapacitated. The POA grants decision-making powers for financial, legal, and property matters. It is called a durable power of attorney because it needs to be explicitly revoked once the principal is available to make decisions once again.

The durable POA does not give the attorney-in-fact authority to make decisions regarding health matters of the principal, except for paying health bills. A medical POA is created to give someone authority to make health-related decisions on your behalf.

Medical Powers of Attorney

A medical power of attorney gives the agent authority to make health-related decisions on behalf of the principal. The medical POA springs into action only after the principal’s doctor says they are unable to make critical decisions themselves. The medical POA is sometimes called an advance directive, a health POA, or an advance healthcare directive.

The requirements for POAs vary from state to state, so if you move, you might want to check with an attorney to verify that your medical POA is still valid in your new home.

How Does A Medical POA Work?

You might be skeptical about ever needing a medical POA. After all, what could ever stop you from talking with your doctors to make your decisions known? Well, a medical POA usually kicks in when the principal:

Sadly, these situations happen often enough that you should be prepared. Better to have it and not need it than otherwise. If you eventually need it, then the POA works to make your decisions known through your agent.

How To Select An Agent/Attorney-In-Fact

Your life is literally in your agent’s hands in a medical POA. This means that you should try as much as possible to appoint an agent that is trustworthy, reliable, mentally capable, isn’t your healthcare provider (most states have this requirement), has discussed your wishes with you, and understands what you want to be done is specific scenarios.

Here are some of the decisions your agent has authority over:

The gravity of these decisions suggests you want to select the best possible person to be your agent.

As Scott discusses in the video above, the healthcare power of attorney and durable power of attorney let people help you when you become incapacitated. All the operational pieces can be done in your home to allow others to make health decisions for you when you aren't able to do so on your own behalf.

Should You Get One?

With all the information we’ve put at your disposal, the decision is still yours. However, we think it is better for you to be prepared for any eventualities and to streamline the decision-making process as much as possible when you’re not available to make them yourself.

Interested in learning more? Check out our articles Do I Need a Durable Power of Attorney? and Using a Power of Attorney With a Land Trust.

Do I Need a Durable Power of Attorney?

Life is unpredictable. But it’s not for nothing that the cliché says: if you fail to plan, you plan to fail.

One of the best things you can do to safeguard your assets is to prepare for the worst, including death and debilitating illness. You should also plan for a scenario where you’re not able to be physically present when business decisions have to be made.

Here is a checklist for estate planning you can use to get started. This article covers one aspect of the checklist—the durable power of attorney and how you can use it to protect yourself.

What Is A Power of Attorney?

A power of attorney (POA) is a legal document that gives someone (called an attorney-in-fact or an agent) the authority to act on behalf of another person (called a principal). A power of attorney is usually used when the principal becomes ill, is disabled, or cannot be physically present to sign legal or financial documents. A POA is especially important to real estate investors because it means your investments are not neglected when you’re indisposed.

Now, there are several types of powers of attorney. What we will concern ourselves with here are two types that are vital in your estate planning journey.

Types of Powers of Attorney

Building on our earlier statement, we will broadly cover two types of power of attorney; durable and medical power of attorney.

Durable Power of Attorney

A durable POA is a type of power of attorney that comes into effect in the event of the incapacitation of the principal. It is called a durable power of attorney because it can last for the entire principal’s lifetime unless it is revoked. The power isn’t activated until the principal is incapacitated, though.

The durable POA only covers legal, property, or financial issues. The agent or attorney-in-fact doesn’t have the power to make decisions concerning the principal’s health except when paying the principal’s health bills. To be able to do that, a medical or healthcare POA is needed.

Medical Power of Attorney

A medical power of attorney gives the attorney-in-fact the power to make decisions regarding the principal’s health. You might also hear it called a health power of attorney, an advance directive, or an advance healthcare directive.

As Scott discusses in the video above, the healthcare power of attorney and durable power of attorney let people help you when you become incapacitated. All the operational pieces can be done in your home to allow others to make health decisions for you when you aren't able to do so on your own behalf.

How Do You Prepare a Durable Power of Attorney?

Thanks to LegalZoom and a ton of other online sites, you can download or buy a power of attorney template online. However, because of how the requirements vary by state, we recommend you contact a asset protection attorney to guide you through the process.

While a POA is extremely useful, it doesn’t allow the delegations of a few rights, such as the right to vote, the right to make, amend, or revoke a will, and (in some states) the right to contract a marriage.

While the requirements of a POA vary from state to state, here some general recommendations:

Choosing an Agent and the Risks Involved

Creating a durable power of attorney can have tremendous advantages: it means you can still be in charge (in a sense) if you are incapacitated. However, in essence, you are signing over your entire financial and legal life to someone else to control. Even though there are means to help make creating a power of attorney safer, such as choosing multiple agents and having them check each other, you should take note of who you select as an agent.

Here are some characteristics you should check for when naming an agent:

  1. Trustworthiness: the agent should be someone you trust to handle your affairs diligently and fairly. Avoid agents with a history of substance abuse, gambling, stealing, and unreliability. You should be able to trust that they will follow your instructions, even over other peoples’ objections.
  2. Competence: your agent should not have a history of irresponsibility with their finances.

Do You Need a POA?

A durable power of attorney document will help safeguard your investments when you’re not able to do so personally. You should take care to select an appropriate agent when creating one, to ensure optimal protection.

Interested in learning more? Check out our articles Using a Power of Attorney With a Land Trust and Do I Need a Medical Power of Attorney?

Selling Property? Protect Yourself With A Robust ‘As-Is’ Clause

Issues regarding liability are common in real estate. There are several risks that can lead to a lawsuit. You can’t ever fully remove the possibility of legal action against you. But there are a few common-sense measures you can take to protect yourself from some of the most common claims, including

One measure you can take is an "as-is" clause. Real estate sellers will often insert an “as is” clause into purchase contracts to avoid liability.

Let's take a closer look.

as-is clauseWhat Is An 'As-Is' Clause?

 An as-is clause is included in a purchase agreement to force the buyer to rely on their own investigation to determine whether or not to purchase the property. Without an as-is clause, the seller’s representation of a property and its condition forms the basis of the buyer’s decision.

The clause protects you (the seller) from litigation stemming from a failure to disclose property defects that you are unaware of. In some cases, the seller will know of a defect but choose not to disclose it to the buyer. In this case, the seller is protected if the problem is discoverable by the buyer should they conduct a reasonable investigation of the property.

Potential Problems That an As-Is Clause May Cover

As-is clauses can protect property sellers from a slew of costly lawsuits. A property with undeclared flaws can land you in hot water for a variety of reasons, including:

#1 Breach Of Duty. It is an agent or broker’s duty to act in the best interest of their client. Dishonesty on the agent or broker’s part can come in a few forms, such as:

If a seller is willingly breaching, they may be guilty of a breach of duty. Of course, agents and brokers aren’t infallible. Honest mistakes happen, and property defects are sometimes hidden to all parties.

#2 Breach Of Contract. A breach of contract is a simple lawsuit. If the buyer feels the contract hasn’t been fulfilled, they may take legal action.

 #3 Negligence and Gross Negligence. Negligence implies that the defendant (in this case the seller) caused harm through inaction. However, negligence differs from other allegations through the lack of intent to cause harm. This means the seller failed to do their due diligence or or to handle problems promptly, causing bodily harm as a result.

Gross negligence, on the other hand, is defined as “the failure to exercise even the slightest amount of care" and often involves the deliberate disregard of another person’s safety.  A seller who is found guilty of gross negligence knows (or should have known) of the danger involved.

#4 Property Damage. This one is pretty self-explanatory.

 #5 Willful Concealment/Misleading Clients. A claim for misleading a client can stem from one of several issues. Normally, when the buyer believes that the seller intentionally hid property defects from them before the sale was complete. For example, sellers are expected to disclose known issues such as flooding before completing the sale.

What “As-Is” Does Not Cover

An as-is clause isn’t a universal get-out-of-jail-free card. It will not protect you from litigation from failing to disclose defects if:

An as-is clause won’t protect you from all allegations. But they offer you a strong layer of protection against a claim regarding an issue you can’t reasonably have been expected to know about.

selling real estate as isInterested in learning more? Check out our articles, Did You Know Selling Your Property ‘As Is’ Can Get You Sued? and Selling Real Estate ‘As Is’: Guide For Investors.

The Takeaway

Lawsuits are all-too-common in the U.S. If you’re dealing with enough real estate transactions, you’re bound to end up in a disagreement at some point.

In addition to using an as-is clause, documenting as many details as possible is always recommended. By staying on top of your property’s defects, you can avoid problems and have evidence of your reasonable efforts to provide a well-maintained property to buyers.

You shouldn’t have to suffer when you’ve already done what you can to ensure your property is in good condition. Honest oversights occur.

Consult a professional to make sure your contract provides maximum protection against claims of property fraud. And consider adding an as-is clause to your contracts before selling. It’s a simple, easy step that protects you in many situations where you would otherwise land in hot water.

 

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