What Real Estate Investors Always Forget ... And How It Costs Them đź’¸

As a real estate investor, you have to understand that lawsuits are a business. If anybody is looking to sue you, they’re looking to get your money.

A proper asset protection strategy keeps people from finding out what you own. If they follow through with a lawsuit, it limits what they can get from you.

More importantly, a great asset protection strategy exhausts their will and their resources to fight.

This keeps people from continuing with the lawsuit.

It gets them to settle early.

It gets them (in most cases) to stop the lawsuit before it even starts.

Lawsuits Targeting Real Estate Investors Are Big Business

Because lawsuits are a business, the attorneys who drive them have one job: to figure out how to get money out of the real estate investors they are suing.

An asset protection strategy dismantles their approach. It protects the assets from being seized by in a judgment. This person doesn’t believe that they are getting anything out of their investment in a lawsuit.

Lawsuits are only paid for in two ways: Either you pay an attorney to sue or the attorney takes it on contingency.

If someone can't find any assets on paper have no assets on paper, how much money should you be willing to risk for a judgment?

Moreover, there’s no attorney who is worth his salt that is ever going to take a case like that on a contingency. Contingency is free for the client. The attorney risks everything.

In addition, attorneys only accept cases when they are confident they can win and collect.

How Do I Protect My Real Estate Investments?

So, when you ask yourself, "how do I protect myself from a lawsuit?", what you should really be asking yourself is, "How can I make it seem as if I don’t own anything?"

You get a proper asset protection strategy. Start with our investor quiz and we'll take it from there. We'll make you look like you qualify for food stamps. Remember ... without an asset to seize, a judgement is worthless. How much money will someone risk for a judgement which is merely a piece of paper?

 

Get Serious About Protecting Your Real Estate Investments

Get Serious About Protecting Your Real Estate Investments

I want to congratulate you on taking the tine to become the best real estate investor you can be. At Royal Legal Solutions, we're committed to make sure you have the best tax and legal information to make the most money you can. Visit us at our website at royallegalsolutions.com at the website and phone number below you'll always be able to reach us. Schedule a consultation, get the information, and make some money.

What is Fraudulent Transfer?

What is Fraudulent Transfer?

[00:08] If you're thinking of waiting to set up your LLC structure duct, the fact of the matter is that if you're sued, it's already too late. Transfers after the fact of even when a lawsuit is threatened before it's even filed can be considered a fraudulent transfer and a fraudulent transfer of doesn't mean necessarily that you did anything that was shady. All it really means is that you transfer the property outside of the normal course of business, so it means that you have $100,000 property. You would have to have sold it for $100,000 to somebody. You can't sell it to your niece for a dollar thinking that you're going to be able to protect it. The law favors the proactive in the sentence. You need to move all the properties before you ever think that there's going to be a problem with potential lawsuits. Don't think that waiting is going to be an appropriate measure in this circumstance. Contact specialist, call us at royal legal solutions. We can give you a consultation to be able to let you know what you should do for your particular circumstance. My name is Scott Smith. I'm an asset protection attorney in Austin, Texas. I'm a real estate investor and I want to help you.

[01:23] Hey, thanks for watching this video. If you want more high quality content just like this, you can find it here on our youtube channel are going to our website, royal legal solutions.com we have a ton of free content from our blogs or videos, the podcasts that I had been featured on. Whatever question you have, we're going to have it there for you for you.

Limitations for Canadian Investors

Dear Real Estate Investor: Lawsuits Are a Money-Driven Business

 

[00:07] As a real estate investor, you have to understand that lawsuits are a business and anybody's looking to sue you. They're looking to get money out of you. I've proper asset protection strategy keeps you from going from finding out what you own and if they ever were to see you, it limits what they can get to, but more importantly, a great asset protection strategy exhausts their will and the resources to fight you. This keeps people from continuing with the lawsuit. It gets them to settle early. It gets them, in most cases, to stop the lawsuit before it even starts. What you have to understand is that because law suits our business, the main part is how do we get money out of somebody when we sue them. This is what an asset protection strategy fights. Since it protects the assets from being seized by somebody via judgment, then that person doesn't believe that they're going to get anything out of their investment in a lawsuit because you see lawsuits only paid for in two ways.

[01:12] It's either I pay an attorney to sue or that the attorney takes it on contingency. But if in my research of the individual, I find out that they have no assets that it looks like on paper, then they qualify for food stamps. How much money am I willing to risk for a judgment which is merely a piece of paper without an asset to be able to seize a judgment is worthless. Moreover, there is no attorney that's worth his salt that ever going to take a case like that on contingency, which is free for the client and the attorney risks everything. Attorneys only take sure fire cases that they are very confident that they can win and collect on. So when you ask yourself, how do I protect myself from a lawsuit, which you should really be asking yourself is how do I make it look like I don't own it? My name is Scott Royal Smith. I'm with royal legal solutions and I'm an asset protection attorney for real estate investors and I'm a real estate investor myself, and I'd like to help you

[02:16] if you thought this content was good, you have to go see the bigger pockets podcast that I did. It was the top 10 things every real estate investor has to know about asset protection, and you can go listen to it right here.

The Only Two Ways to Lose Money Real Estate Investing: Lawsuits and Bad Investments

The Only Two Ways to Lose Money Real Estate Investing: Lawsuits and Bad Investments

[00:08] Real estate investors lose money in two ways. The first is because they actually made a bad investment. The second is because somebody took it from them and they can do that easily through a lawsuit and lawsuits are basically just legalized stealing. So one of the key things that we have to do to guard against half of the way that we will lose our money in real estate investing through litigation is protect ourselves from that. That's what an asset protection strategy is. A proper asset protection strategy protects you from those lawsuits. It protects you from anybody looking to try to sue you. Now when we look at how does that do that is because if your assets are held properly and compartmentalized inside of an LLC structure, it greatly diminishes somebody, his desire to want to sue you. We do this because we start taking them into the deep waters.

[01:04] We start exhausting their will and their resources to fight because if we make it look like you don't have much to come after and we make it look like it's very tough to get to and it actually will be very tough again, then the person on the other end of that says, how much am I willing to invest and put up my hard earned dollars with just the hope or the chance that I might be able to get something out of it? Most people won't put their hard earned dollars on a gamble just like they were going to Vegas to go for a lawsuit, and in fact the last, the attorneys to take the case on contingency. Well, what I can tell you is that attorneys are only taking cases on contingency because they believe that it's going to be an easy win for them because that's their business and we make it a gamble or somebody to come after your hard earned dollars and your real estate investments. The reality is is that it won't make business sense and they just won't do it. My name is Scott Smith and I'm an asset protection attorney specializing in real estate asset protection. I'm a real estate investor myself and I'd like to help you

[02:28] if you thought this content was good, you have to go see the bigger pockets podcast that I did. It was the top 10 things every real estate investor has to know about asset protection, and you can go listen to it right here.

What is the Due on Sale Clause?

What is the Due on Sale Clause?

Despite what you might read on the internet, don't worry about the due-on-sale clause. The fact is is, since before 1960, we haven't seen any bank foreclose based upon a violation of the due-on-sale clause while the note's performing. The fact is is that banks are in the business of making loans and collecting mortgage payments. The due-on-sale clause would allow them to foreclose on your property by transferring the asset. But why would they do that? This could only hurt their interest. Like I've seen it a couple of times, where banks have foreclosed based upon it. But those were always in situations where the mortgage wasn't getting paid, and that was gonna get foreclosed on anyway. So in that sense, don't worry about it. Protect yourself with your proper asset protections strategy. My name is Scott Smith. I'm an asset protection real estate attorney, out of Austin, Texas, and I wanna help you.

Why a Registered Agent Is Required For Every LLC

Why a Registered Agent Is Required For Every LLC

A registered agent is required for every LLC in every state that it does business. The only reason for the registered agent to even exist is because if someone wants to sue your LLC, and they're not able to get to a member or manager personally to be able to serve them. Then this allows them to serve the lawsuit onto the Secretary of State and be able to have a person that must receive service of process or the lawsuit. Typically, these services are able to be engaged for anywhere from between 40 and $75 per year online. And they're all fungible, meaning that they're all the same, no matter where you go. So I always recommend saying, what's the best deal that you an get, and be able to go with that. My name is Scott Smith, I'm an Asset Protection Attorney at Austin, Texas. I'm a real estate investor, and I wanna help you.

What Is a Charging Order?

What Is a Charging Order?

So I'm a real estate investor. I have my properties properly structured inside of an LLC. And out of the blue I got into a car wreck. And this resulted in a judgement against me because it exceeded the limits of liability of my auto policy. Now they have tried to record that judgement against my LLC. Can they take it? The answer is no. This is part of the protections that an LLC gives you. It allows you to be able to know that your assets are gonna be protected from the personal actions that you take in your day to day. You'll know the exact laws that'll happen inside of your particular state. Because it'll be under the heading of what's called a charging order. In most states, the way it works is that they can't take your membership interest in the LLC, they can't take over a management function, they can't force you to sell the assets of your LLC. What they can do is put a lien against your LLC. So that way, if there's any distributions from that LLC to you that it goes to your creditors. There's ways around this if you ever end up in that situation. One of the ways that we would think to do that, is by selling your interest in the LLC to another party. But you always want to keep that in mind with what's gonna happen in your particular state. With what's known as the charging order. Look it up, make sure you know those laws whenever you're setting up your LLC to know exactly what the limits are of your liability there before you end up setting up your structure. My name is Scott Smith, I'm an asset protection attorney specializing in real estate. I'm a real estate investor myself and I wanna help you

Judgment-Proof

Judgment-Proof

This might sound strange to you as a real estate investor, but you're in one of the most high-risk industries in the United States. The United States is already a very litigious country, and real estate is the most litigated of all of those industries. You're exceptionally at risk if you hold any assets in your personal name. What we specialize at Royal Legal Solutions is making you what's known as judgement proof. That means if anybody sues you, they get nothing.

Title Clouding Within Real Estate Investing

Title Clouding Within Real Estate Investing

[00:08] The reason that it's important to be able to use a series. I'll all see it's because you want compartmentalization of the asset. If there's ever a lawsuit against you and you're on the property personally or your LLC and your LLC owns multiple properties, you should be prepared for some filing against all of your properties known as a Liz pendens. What that means is that there's a potential lawsuit regarding that property. This is does something that's called clouding title. It prevents you from being able to sell that property to other people and gives a significant legal advantage to anybody trying to sue you. Think about how much that hurts your business if you're not able to sell a potential flip or being able to liquidate an asset if you're having to wait for potentially years to resolve some litigation. My name is Scott Smith. I'm an asset protection attorney out to Austin, Texas. I'm a real estate investor and I want to help you.

[01:05] Hey, thanks for watching this video. If you want more high quality content just like this, you can find it here on our youtube channel are going to our website, royal legal solutions.com we have a ton of free content from our blogs or videos, the podcasts that I had been featured on. Whatever question you have, we're going to have it therefore you for you.

Why You Need a Real Estate Corporation

Real estate is usually a sound investment. I would remiss if I didn’t use the word “usually” considering the little hiccup we experienced in 2008. Investing in real estate is sound, but you need to know pay attention to what way the wind is blowing.
Still, real estate is a good investment 99.9% of the time. Just make sure you consider the following:
You’re liable for your property. You need protection. You will most likely use an umbrella insurance policy or an LLC to protect yourself.

Insurance vs. LLC: Which is Better?

An umbrella policy adds additional coverage to the insurance you already have.
Now, if Demi Moore has 100k worth of liability coverage and business general liability is 500k, than a $1M umbrella policy is going to give you 1.1 M in pool liability coverage and 1.5M of general business liability coverage.
So, an umbrella policy doesn’t insure anything that isn’t insured. It’s more like a top up on a half full tank.
Let’s say you provide home appliance repair services and somebody sues you for a failed repair. If your general liability doesn’t cover those repairs, you’re umbrella policy is about as useful as that appliance you failed to repair. So, in short, don’t get an umbrella unless you’ve already got your rubber boots: You’re umbrella won’t keep your feet dry when the flood of litigation comes.
LLCs are 100% necessary if you want to keep your feet dry. Your business assets are at risk in a lawsuit, but if you don’t have an LLC, you could lose your home. Don’t get caught barefoot in a flood. Make sure you have your coverage.
The cost of an LLC is a few hundred dollars. You’ll pay yearly fees as well. $50.00 to $200.00 a year is the average, but it’s different in every state. You are going to pay monthly for an umbrella policy. About $1200.00 a year will get you a million in coverage. Umbrella policies have benefits such as attorneys that will be appointed to defend you, but they also have exclusions. You have to know what they are. An umbrella won’t save you from the storm if it’s full of holes.
Now for the million dollar question:

What Type of Company Structure is Best For You?

Well, it depends on what you own. If you have multiple units or commercial property, you want a lot of coverage because you have a lot of tenants. Tenants are people, and people can be very stupid. On the other hand, if you only have a single family, one policy might be enough.
You’re going to have to do some homework here and consider the risks. Bottom line, if you own property, you are going to face catastrophes. Be prepared. When the storm passes, you’ll be dry as a bone.
If you need specific advice on the best method for forming your real estate corporation, schedule your personal consultation today.

Joint Ventures in Real Estate Investing: How They Work

After the recession, Joint Ventures were hotter than documentaries about corruption at investment banks. If you’ve been in real estate investing since then, you’ve probably entered into one at some point.

These tasty commodities were attractive because they gave loan-to-value ratios as high as 70%. Not many real estate investors like to gamble with those kinds of numbers, at least not alone. However, get a pack of lemmings together and they’ll pretty much gamble on anything, up to and including jumping off of a cliff.

What is a Joint Venture in the Context of Real Estate Investing?

A JV agreement is a contract between two or more parties that divides up the investment, the responsibilities, and the profits or losses. You know, an agreement. It’s for those entering into a one-time deal. You aren’t wining and dining here. You’re in and out fast for a quick and tidy profit.

Parties usually form a new company to own and operate an investment if it is a long-term deal. For short-term investments, a Joint Venture does have some great benefits.

Example of Joint Venture Agreements in Real Life

This is a common JV Agreement scenario for real estate investors. My friend Randy purchased a property with his LLC that he intended to restore and then sell for a profit. Then he hired a contractor, our buddy Johnny.

Together, they agreed that Randy would reimburse Johnny his expenses and they would share the profits from the sale, in accordance with the terms of the JV agreement they’ve drafted.

By the way, you can add a contractor to your S Corporation or LLC in order to share profits, but that can be a bad idea. If you don’t want to give up a permanent piece of your company (and there are a lot or reasons why you might not want to do that) a JV agreement will bridge can bridge the gap without giving away your firstborn. It is a collaborative contract between companies, rather than a permanent marriage.

By creating a venture-specific LLC, all of the parties acquire some much-needed liability protection.
If you find that the arrangement is worth keeping to explore new opportunities, there is no reason why you can’t modify the terms.

Who knows? Maybe this short-term fling will become the real thing.

Your new LLC will also isolate the JV’s capital and resources in the event of litigation. Your other companies are safe from being liable for this new one.

Is a Joint Venture Right For Me?

As in so many things finance related, your decision really depends on the size of the deal. If you are pushing millions around, the added liability protection of an LLC is essential. If you’re just puttering around with tens of thousands of dollars, as was often the case between Randy and Johnny, that JV agreement is the cheaper option.

JVs work well where the goal is quick cash and in cases where the partners do not qualify for financing. They also let you partner with companies that have different skills than you. The investor/contractor arrangement like Randy and Johnny’s is a perfect match for quick flips on real estate.

In the end, no matter how short-term a deal is, you’re going to have to work with the person you go into business with for longer than you think. Whether starting a new company or signing a Joint Venture, find people who you trust and who you like to work with. Make sure you understand Joint Venture liability. Forge business relationships that have potential for growth and leave the door open for more collaboration. A good deal is an awful thing to waste.

Do you still have questions about your Joint Venture or LLC? Take our quick investor quiz and we'll help you find the solution that is best for your situation.

Real Estate Contingencies: A Beginner's Guide

The paperwork piles up fast in real estate. Like a nasty rodent problem, you need to stay ahead of it.

Real estate contingencies are an important part of your real estate contract. They provide protection like a suit of armor. Here’s how to use them.

What Are Real Estate Contingencies?

A contingency clause says that your purchase is contingent on a number of conditions specified.

So, if the buyer insists on having a complete roof repair and rodent inspection, they are going to write those contingencies into the contract. If they buy the property and find mice playing in the halls and the shingles falling from the eaves, the contingencies haven't been honored.

These are a few of the contingencies you might want to consider in a purchase agreement.

#1 Appraisal Contingency

Simple enough. Your purchase is contingent on an appraisal that evaluates the property at or above the purchase value.

#2 Financing Contingency

The purchase in contingent on the buyer obtaining financing terms acceptable to a the buyer. Make sure your purchase agreement specifies that you must obtain acceptable financing. If your contingency simply says you will purchase upon obtaining financing, you could find yourself in trouble if the financing offers unfavorable terms. For example, if all you can afford is 7% on your financing, put 7% into your contingency as your acceptable financing rate for purchase.

This may sound confusing, but it’s actually pretty simple. If you can’t afford the financing, don’t buy. Make sure your contracts say as much.

#3 Inspection Contingency

Get your property inspected and make sure that you approve of its condition before purchase. If you’re buying a fixer-upper, make sure that you aren’t putting more into repairs and than you can afford. Don’t buy a money pit. Buy a money-maker. You can ask the owner to make repairs or lower his price as contingencies.

More About Contingency Clauses

#1 Earnest Money

Make sure your contract states clearly that you get your contract money back if the owner fails to address any of your contingencies. If you don’t do this, you are going to risk losing a lot of cash.

#2 Don’t Miss Deadlines

These clauses almost always have a deadline so give yourself enough time to meet them.

You need time to obtain financing. You need time to properly inspect the property. You time to review the seller’s disclosure documents. Two-week deadlines are the norm, but this is often ridiculous for anybody who actually plans to exercise any due diligence.

If deadlines are approaching and you need more time, ask the seller for an extension. If the seller refuses, haul out your contingency and drop it on the table like a hot mic.

#3 Get it in Writing

Make sure that you are communicating via whatever format is required by the contract and its contingencies. You need a hard copy, not a digital one. The pen is mightier than the sword, and in this case, the printer is mightier than the screen.

Telephone calls and emails will not invoke contingencies unless a contract permits emails as notice. Make sure everything is in writing and sent to the seller on a date that can be tracked.

Contingencies are sometimes the difference between buying a sound investment or a money pit. If you don’t have contingencies, you may be forced to buy a property at a loss or lose your earnest money.

Real Estate Contingencies Protect Your Ass

Don’t get caught with your pants down. Contingencies are like a pair of suspenders that will keep you from exposing your bare ass to the world.

Real estate buyers should always use contingency clauses. Your purchase contracts are only as good as the contingencies you’ve written into them, as they dictate the terms of your purchase. If you don’t have them, you may find yourself spending a lot of time and money before your investment pays off.

When a friend purchased his fishing business, the wharf on the property had to be completely replaced. My friend wrote in a contingency that made the owner finish the task so that he could be on the open water on day one, generating a return on his investment right away.

If you handle your contingencies right, you should be able to open for business the day your receive the deed to the property.

Keep your pants up when you purchase real estate. Start with our investor quiz and we'll help with contingencies or any of your other investing needs. 

Real Estate Contingencies: A Guide For Buyers

The paperwork piles up fast in real estate. Like a nasty rodent problem, you need to stay out ahead of it.
Contingency clauses are very important to your real estate contract because provide they protection. Think of them as a suit of armor. Or a glue trap, if you prefer.

Here’s how to use real estate contingencies to your advantage.

A Beginner's Guide to Real Estate Contingencies

When Randy purchased his fishing business, the wharf on the property had to be completely replaced. Randy wrote in a contingency that made the owner finish the task so that he could be on the open water on day one, generating a return on his investment right away.

If you handle your real estate contingencies right, you should be able to open for business the day your receive the deed to the property.

A contingency clause says that your purchase is contingent on a number of conditions specified. So, if like my friend Randy, you insist on having a wharf replaced (or, more likely, a complete roof repair or rodent inspection), you are going to write those contingencies into your contract.

If you buy property and find that Ratatouille is cooking pasta in a kitchen full with water up to your ankles, then you haven’t been careful about your contingencies.

Real Estate Contingencies: RatThese are a few of the contingencies you might want to consider in a purchase agreement:

Appraisal Contingency

Simple enough. Your purchase is contingent on an appraisal that evaluates the property at or above the purchase value.

Financing Contingency

The purchase is contingent on the buyer obtaining financing terms acceptable to the buyer. Make sure your purchase agreement specifies that you must obtain acceptable financing. If your contingency simply says you will purchase upon obtaining financing, you could find yourself in trouble if the financing offers unfavorable terms. For example, if all you can afford is 7% on your financing, put 7% into your contingency as your acceptable financing rate for purchase.

This may sound confusing, but it’s actually pretty simple. If you can’t afford the financing, don’t buy. Make sure your contracts say as much.

Inspection Contingency

Get your property inspected and make sure that you approve of its condition before purchase. If you’re buying a fixer-upper, make sure that you aren’t putting more into repairs and than you can afford. Don’t buy a money pit. Buy a money-maker. You can ask the owner to make repairs or lower his price as contingencies.

Interested in learning more? Check out our articles, How To Assign A Real Estate Contract and Real Estate Contingency Clause Examples: How Buyers Avoid Getting Burned.

Other Things to Remember About Contingencies

1. Earnest Money: Make sure your contract states clearly that you get your contract money back if the owner fails to address any of your contingencies. If you don’t do this, you are going to risk losing a lot of cash.

2. Don’t Miss Deadlines: These clauses almost always have a deadline so give yourself enough time to meet them.

You need time to obtain financing. You need time to properly inspect the property. You time to review the seller’s disclosure documents. Two-week deadlines are the norm, but this is often ridiculous for anybody who actually plans to exercise any due diligence.

If deadlines are approaching and you need more time, ask the seller for an extension. If the seller refuses. Haul out your contingency and drop it on the table like a hot mic.

3. Get it in Writing: You need a hard copy, not a digital one. The pen is mightier than the sword, and in this case, the computer is as well.

Telephone calls and emails will not invoke contingencies unless a contract permits emails as notice. Make sure that you are communicating via whatever channel is required by the contract and its contingencies.

Make sure everything is in writing and sent to the seller on a date that can be tracked.

The Takeaway

Contingencies are sometimes the difference between buying a sound investment or a money pit. If you don’t have contingencies, you may be forced to buy a property at a loss or lose your earnest money.

Don’t get caught with your pants down. Real estate contingencies are like a pair of suspenders that will keep you from exposing your bare ass to the world. Real estate buyers should always use contingency clauses.

Your purchase contracts are only as good as the contingencies you’ve written into them, as they dictate the terms of your purchase. If you don’t have them, you may find yourself spending a lot of time and money before your investment pays off.

Keep your pants up when you purchase real estate. Contact Royal Legal solutions for help with contingencies, or any of your other investing needs. Set up your personalized real estate consultation in minutes with our online tool.

 

Protect Yourself from Swimming Pool Liabilities

For those that don't remember, we're going to start with a real case that was all over the news. You may have even heard about it at the time.

We're doing this to make some general points about the risks all pool owners face. Being rich and famous won't save you from an improperly maintained or managed pool. It sure didn't help Demi Moore.

Swimming Pool Lawsuit Case Study: What Happened to Demi Moore

Demi Moore’s assistant had a pool party in 2015 at Demi Moore’s California home where alcohol was served. Somebody drowned. It was an unfortunate accident and Demi Moore, who wasn’t even at the party, was quickly swimming in litigation. 

It sounds so ridiculous it could be the plot of one of Demi’s erotica thrillers.

There are carefully outlined state safety regulations that you have to comply with if you don’t want to end up on the witness stand with Tom Cruise screaming at you. In most states you are responsible for keeping your pool reasonably safe.

It doesn’t matter that it was Demi’s assistant who held the party. Demi owns the pool. Demi is responsible.

Understanding How Swimming Pool Lawsuits Happen 

There are two ways you can be considered too lazy, cheap or careless to own a pool under the law:

#1 You violate a local pool safety law

In this case, you’re strictly liable, like Demi Moore.

The solution here is simple. Bring your death trap up to code. Find out what the law is and comply. Build a fence and put on a pool cover. These are the basics.

# 2. Your pool is deemed “unsafe”

This is trickier, from a liability standpoint. Broken fences, rusty nails, lack of depth markings, and more can make a pool unsafe. Once again, this varies, but I’m sure through the use of the computer you are using to watch this video, you can figure out your local regulations. Better yet, contact an asset protection attorney to help you understand them.

Here’s another issue, and this one is key. If you party by your pool and your friends enjoy drinking cocktails, you may want to consider hiring a lifeguard for the afternoon. Preferably a sober lifeguard.

It’s a small expense that may keep somebody alive. If the conditions at the party are deemed unsafe (SEE: Rooftop cannonball championships) you might be on the hook.

Remember, like Demi, you might be liable even if you are not at the party so be sure that there are safety measures in play. It’s the summer time, so party hard. Just don’t end up paying for it.

In short, if you own the pool, you are responsible for its compliance with safety regulations. Landlords must keep this in mind when considering tenants. But you also have to make sure that everything you own is up to those same safety standards. Sorry fellas, but it’s not all collecting rent checks. Even trespassers can hold you liable if they get hurt in your unsafe pool.

How to Prevent Swimming Pool Lawsuits

Here’s a short summary of what you need to do if you want to avoid fishing dead bodies out of your pool and the costly lawsuits that come with it.

1. Comply with all safety requirements for your city and state. If you can’t afford them, you can’t afford a pool. But you’re a good little saver. Maybe next year.
2. Include a clause or separate pool disclosure and waiver. This is a tip for landlords or investors with rental property. Taking a few minutes to do this could save your ass in court. That way if some fool wants to work on his swan dive after his tenth martini, he’s already assumed the liability at least in part.

Your waiver should include the following:

Asset Protection with Royal Legal Solutions Can Keep You Above Water

Losing your investment, as noted above, is terrible. Losing your house is much worse. When it comes to owning a pool, be PROACTIVE with your liability before you have to be REACTIVE to a lawsuit.

Yes, there is work, responsibility and expense here, but you need to own a pair of big boy trunks before you go swimming in liability. Royal Legal Solutions can help you address legal matters relating to  your pool and construct an asset protection plan that keeps you out of court. If you would like advice on how to navigate this issue or begin protecting your assets like the pros, send us a message take our quick investor quiz for landlords and investors.

How To Flip Houses & Avoid UBTI/UBIT

First of all, I'd like to commend all you house flippers out there. Flipping houses isn't easy--not unlike some less honorable professions. But you know what makes it a little easier? Avoiding unnecessary contributions to Uncle Sam. Let's talk about the best way to flip houses and limit or avoid UBTI/UBIT.

Use a Self-Directed IRA for Flipping Houses

With a Self-Directed IRA, you can flip homes or engage in real estate transactions funded with your retirement savings by simply writing a check. As owner of your Self-Directed IRA LLC, you will have the authority to make real estate investment decisions on your own without having to wait for the consent of an IRA custodian.
Another advantage of using a Self-Directed IRA to flip homes is when you want to purchase a home with your self-directed IRA, you can make the purchase, pay for the improvements, and sell or flip the property on your own without involving an IRA custodian.

Did I forget to tell you all the money you make from flipping houses using a Self Directed IRA will be tax free? This is true, believe it or not. However, there are a few things you need to watch out for.

Understand and Avoid UBTI & UBIT

When engaging in a real estate transaction, like flipping a house, you should always be mindful of the Unrelated Business Taxable Income rules (also known as UBTI or UBIT).
The purpose of the UBTI and UBIT rules is to make sure those who are traditionally tax exempt, (IRA's, charities and 401k's) are taxed as a for-profit business when they engage in active business activities or use leverage.
The UBTI or UBIT rules generally applies to the taxable income of “any unrelated trade or business…regularly carried on” by an organization subject to the tax. The regulations separately treat three aspects of the quoted words—“trade or business,” “regularly carried on,” and “unrelated.”
Overview of The Three UBTI/UBIT Aspects
Trade or Business
The rules start with the concept of “trade or business” listed by Internal Revenue Code Section 162, which allows deductions for expenses paid or incurred “in carrying on any trade or business.”
The tax code is vague on this issue, but by using Section 162 as a reference you can limit the term “trade or business” to profit oriented activities involving the tax exempt entity. Let's break down the language.

"Regularly Carried On"

The UBIT or UBIT rules only applies to income of an unrelated trade or business that is “regularly carried on” by an organization.
Whether a trade or business is "regularly carried on" is determined by comparing what the tax exempt entity does to non-tax exempt entities. Basically, tax exempt entities can't do things that are deemed "commercial".
Unless they want to start paying taxes.

"Unrelated"

In the case of an IRA or 401k plan, any business activity will be treated as “unrelated” to its exempt purpose. This can be confusing, I know.
For IRA's and 401k's, a transaction would not trigger the UBTI or UBIT rules if the transaction is deemed not to be considered a trade or business that is "regularly carried on".
Activities which wouldn't trigger UBIT OR UBTI include capital gains, interest, rental income, royalties, and dividends generated by the IRA/401k. The passive income exemptions to the UBTI or UBIT rules are listed in Internal Revenue Code Section 512.

But if you, as a tax exempt entity, engage in an active trade or business, such as a restaurant, store, or manufacturing business, the IRS will tax the income from the business since the activity is an active trade or business that is regularly carried on.

How Do The UBTI/UBIT Rules Apply to Flipping Homes?

So now you're probably wondering what kind of real estate transaction will trigger the UBTI or UBIT taxes. As I mentioned earlier, the IRS is unfortunately vague on issues like this. What a coincidence, right?
There's no telling how many houses you have to flip in order to trigger the UBTI or UBIT tax. But the IRS does have a number of factors it will use to determine whether you've engaged in a high enough volume of real estate transactions, such as home flipping, to trigger the UBTI or UBIT tax.
3 Factors The IRS Uses:

What Happens If You Trigger UBTI or UBIT?

If it's determined that an activity/transaction you engaged in is an active trade or business transaction, you will trigger the UBTI or UBIT tax, which is taxed at a rate of approximately 40% for 2017.
The 40% rate can be lower or higher, depending on the facts and circumstances of your situation. What you should know is that one or two flipping transactions per year wouldn't be considered an active trade or business and wouldn't trigger the UBTI or UBIT tax.

Final Thoughts on Flipping and UBTI/UBIT: One Size Doesn't Fit All

Now, knowing the real estate tycoon that you are, you're probably asking yourself, what happens  if you do 4 or 5, or even 10 flipping transactions in a year? Would that be considered an active trade or business causing the UBTI/UBIT taxes to get triggered?

The answer to your question largely depends on the circumstances of your unique situation. It's all about how and why you flip the houses, not how many you flip. At least, that's how your friends at IRS see it anyway.

 

How To Purchase Real Estate With A Self-Directed IRA (And Save Taxes In the Process)

Wall Street has successfully fooled the majority of American investors into believing they can only invest in stocks, bonds, mutual funds or bank CDs. If you've fallen for this, you're not alone. But we're about to teach you how to break free.

The truth is, you can you invest in virtually anything you want with a Self-Directed IRA LLC (excluding collectibles and art). Even better, you don't even need a custodian in the middle to do it.

Real estate is the most popular Self-Directed IRA LLC investment, particularly among our clients. Why? Because there are many advantages, tax benefits, and other little tricks which are only accessible to real estate investors who use a Self-Directed IRA LLC.

Let's go over the biggest perks below.

Advantages of Using a Self-Directed IRA LLC to Purchase Real Estate

Income or gains generated by a Self-Directed IRA  LLC are tax-deferred. Which means you can invest tax free and not have to pay taxes right away, or in the case of a Roth IRA, ever.

Tax Advantages Of Buying Real Estate With A Self-Directed IRA LLC

When you buy real estate with a Self-Directed IRA, instead of paying tax on the returns of a real estate investment, tax is paid only at a later date, allowing your real estate investment to grow quickly.

The key to investing in real estate with a Self-Directed IRA LLC is to do so when you're earning high income (and being taxed at a higher rate.) Then when you start making less money (and get taxed at a lower rate) you should make withdrawals because your withdrawals will be taxed at a lower rate.

After 20 years your $200,000 investment would be worth $349,572 after taxes on your earnings. Whereas, if you had made the investments with taxable, personal funds (non-retirement funds), in 20 years your investment would only be worth $320,714.

Popular Types of IRA-Funded Real Estate Investments

Below is a small list of real estate related investments you can make with a Self-Directed IRA LLC (foreign and domestic):

And that's actually the short list. There are many more opportunities available.

The Differences of Investing With a Self-Directed IRA LLC

Buying real estate with a Self-Directed IRA LLC is essentially the same as buying real estate personally. Except you have way more benefits and advantages when you do it with a Self-Directed IRA LLC.

But there are a few differences as far as the "backend" is concerned:

How To Make Real Estate Investments With a Self-Directed IRA LLC

When using a Self-Directed IRA LLC to make a real estate investment there are a number of ways you can structure the transaction:

Partnering with your family & friends to make a real estate purchase won't trigger a prohibited transaction if your Self-Directed IRA LLC is set up correctly. For this reason, it's important that you get professional help to establish your Self-Directed IRA LLC.

Also, when it comes to borrowing money, you must use a non-recourse loan. That is, unless you want to trigger a prohibited transaction and pay the taxes below.

If you do trigger a prohibited transaction, you will be paying UBTI (Unrelated Business Taxable Income) Tax. You will be taxed at the trust tax rate because your IRA is considered a trust. For 2018, a Self-Directed IRA LLC is taxed at the following rates:

Why Should You Buy Real Estate Using a Self-Directed IRA LLC?

There are so many benefits to using the self-directed IRA LLC for your real estate investments that we have written multiple previous articles on the subject. Check out some of our top reasons to use a Self-Directed IRA LLC in greater detail. But we'll go over the basics here. The top four reasons investors use this method include the following:

Royal Legal Solutions Can Guarantee Your Tax Efficiency & Compliance

Tax-Free Investing: Be happy like this man

As you can see, there are so many advantages and benefits when it comes to investing in real estate with a Self-Directed IRA LLC.

However, in order to enjoy those benefits you have to make sure that everything is structured correctly from a legal standpoint. The legal aspects are what matter for protecting you and your hard-earned money from the IRS.

Royal Legal Solutions can guarantee that your Self-Directed IRA LLC is set up correctly and kept up to date with all future IRS regulations. Your satisfaction is our greatest priority.

The Top 10 Most Lethal Real Estate Investment Mistakes

Here you are, years after the housing crisis. The markets are surging higher than ever before and there's never been a better time to invest in real estate. But it's still just as easy to make a mistake now as it was ten years ago.

Most of my clients invest in real estate. Heck, I even invest in real estate! I've seen it all as far as mistakes go. In order to help my clients and the general public out I decided to make this list. I hope you enjoy it!

The 10 Most Lethal Investor Mistakes:

  1. Overpaying.
  2. Expecting easy money.
  3. Working alone.
  4. Planning as you go.
  5. Skipping homework.
  6. Being inconsiderate.
  7. Misjudging cash flow.
  8. Not building your business.
  9. Limiting your options.
  10. Miscalculating your estimates.

1. Overpaying.

Most real estate investors don't make as much money as they can because they overpay for properties. The amount of profit you can make is pre-determined by how much you pay to acquire a property.

2. Expecting easy money.

It's not easy to get rich in real estate, and it isn't easy to make a profit. Real estate is a  great long term investment. But so is putting your money in a mutual fund, which is a lot easier, and has far less risk.

Don't believe everything you see in an infomercial. In order to profit in real estate you have to be smart. You have to be willing to work. You have to take risk knowingly.

Working alone.

Even Walker Texas Ranger didn't work alone, and he could've easily been a lone ranger.

The key to success in real estate and in many other fields is building a team of people you can count on.

You need connections with at least one real estate agent, an appraiser, a home inspector, a closing attorney and a lender, both for your own deals and to assist with financing for prospective buyers.

Also, in the remodeling and maintenance side of real estate, your ideal connections will include a plumber, an electrician, a roofer, a painter, an HVAC, contractor, a flooring installer, a lawn maintenance service, a cleaning service, and an all-around handyman.

You can’t build a business as an investor if you’re spending all day watching DIY plumbing videos and fixing lights.

4. Planning as you go.

Lack of a plan is the biggest mistake new investors make. You buy a house because you think you got a good deal and then try to figure out what to do with it. That's doing things backwards!

First you should make a plan and then find a property that fits your plan. Don’t form a plan after you find the home!

5. Not doing your homework.

Many wannabe real estate investors don’t think twice about taking their financial lives in their hands without even cracking a book. Sure, you can go invest in anything you want with your money.

But will you make money if you don't know the ins and outs? Probably not.

Educate yourself before you put your money on the line. Read articles (good articles, mind you), read real estate investment books  and try joining some sort of local real estate organization.

If all else fails, research who owns a lot of property in your area. Study everything they do or have been doing. You might even try working with them or paying them for some advice.

6. Miscalculating your estimates.

This mistake is common mostly for all you rehabbers out there. Rehabbers buy homes that need fixing, fix them up, and sell them.

After you've done all your research and come to a reasonable cost of how much money it'll cost you to make a property profitable, double it. If you can still make a profit, then it's a good deal.

7. Misjudging cash flow.

If your strategy is to buy, hold, and rent out properties, you need sufficient cash flow to cover maintenance. That's where a property manager comes in. Property managers prefer to manage large complexes, not just 1 or 2 homes. And on top of that they aren't cheap.

Most managers charge fees of 7-10% of the monthly rent. That can seriously cut in to your bottom line.

But just think, you could've invested your money in a mutual fund and only had to pay someone 0.50%.

It’s not uncommon for a property to sit on the housing market for 90 to 120 days before it’s leased. While it's sitting there, unoccupied and decaying, you have to pay the mortgage, taxes, insurance, and more.

If you don't have the money to pay for those things, you're screwed.

8. Not building your business.

If you’re working on one deal at a time, you’re doing transactions, not building a business. You need a steady pipeline of prospective deals. The more deals you have, the more profit you can make.

Best of all, you'll be able to turn down crappy deals and focus on properties that will make you the most money or be the easiest to work with.

9. Limiting your options.

Don't buy a property with one exit strategy in mind. Always have two or three ways to get out of any deal.

For example, if plan A is to rehab the house, put it on the market and resell it, then plan B could be to offer a lease-purchase to a buyer. Plan C could be to rent the house out.

Finally for the dreaded plan D (your "option of last resort") there is the wholesale option, which would involve selling your property at a below market value. You might still be able to make a profit this way.

But at least you’ll cut your losses sooner rather than later.

10. Being inconsiderate.

No, I'm not talking about relationship problems here.

Most real estate investors have to move quickly on deals. Yet that doesn’t mean they sign a contract and write a check without doing plenty of research. That’s where a lot of new real estate investors crash and burn.

If you don’t consider everything there is to consider about a deal, such as the costs or the market conditions, you'll most likely (we're talking nearly 99% of the time) lose your money.

That's it for our list of deadly real estate mistakes. Did we miss something? Did you learn something new?

How To Build Your Real Estate Empire

Throughout the history of civilization real estate has always been the cornerstone of wealth, and it still is to this day.

These days you don't have to be a noble or an aristocrat to get a mortgage. The real estate market has changed quite a bit. We also have to deal with homeowners associations and appraisers now.

Investing in real estate can make you a multimillionaire. That said, many people invest in real estate, but few make a profit. It's the same with stocks. There are a few people who will become extremely wealthy, but most will be lucky to outperform the market average. Some will lose all their money.

How Do You Get Rich in Real Estate?

You build your real estate investing empire by building it one property at a time. Remember the board game, Monopoly? Real life is the same way, except, nobody flips the game over when they start losing. Most of the time.

There are four pillars you will need to understand and exploit to build your real estate empire.

Four Pillars of Real Estate

Property Appreciation

When the value of a property increases, it's called “appreciation.” Appreciation isn't guaranteed, as anyone who remembers the housing crisis can attest to. Historically however, real estate has  appreciated on average at a rate of 3 to 4 percent in the USA.

There is also another type of appreciation known as “forced appreciation". This is where you physically improve a property. This is done by installing new appliances or putting in a new roof, etc.

Profit

Profit is the money you'll make monthly/yearly from the property you own. Profit goes up and down easily due to things like repairs and vacancies. (Vacancy is when your profit is unoccupied and costing you money instead of making you a profit.)

Without profit you won't be able to upkeep your current property, let alone invest in any new ones. Profit is essential. You will either profit or perish.

Monopoly Money

If you ever played Monopoly, you know you can borrow money from the bank if you want to buy a property you can't afford with the money you currently have. In real life the concept is the same, except we call it a mortgage.

The key to buying a property with a mortgage is to get a tenant in there ASAP. Why? Because over time your tenant will pay your mortgage off for you. Let's try an example.

Let's say you bought a property for $200,000 with a mortgage for $175,000 and your property never climbed in value, but you used the income from your tenant to pay off the mortgage.

What you've done is paid off your mortgage and "broke even" (you didn't gain or lose any income.) BUT now that your mortgage is paid off, you now own a property worth $200,000 you didn't even have enough money to buy in the first place.

Before you become a fully fledged real estate tycoon with tons of capital, money will be essential for you to acquire new properties.

Tax Benefits

Ever heard "the rich get richer" ? Well, it's true! The fourth and final pillar to your real estate empire will be the tax benefits you receive from owning property in the USA.

Uncle Sam loves his real estate investors and even encourages people like you and me to invest in real estate. You get extra tax write-offs, less taxes to pay, and even sophisticated investment options, such as the Self Directed IRA LLC or Delaware Statutory Trust. Learn more about real estate investing with the Self-Directed IRA LLC from our previous article on the subject.

Check out Your Guide To Purchasing Real Estate Tax Efficiently With A Self-Directed IRA or What Is A DST 1031 Property And Why Should I Care? to learn more.

When you're building your real estate empire, each property you own will "lean" more on one pillar than the others. For example, when you flip a home, you're not just going to buy that property and just stick a tenant in there.

Well you can, but in most cases that's probably a bad idea. When it comes to flipping homes, the way most investors make their money is via "forced appreciation" (fixing the home themselves).

When you're flipping a home there's no Monopoly money involved or any tax benefits. Taxes will actually be the main thing bringing your profits down when it comes to flipping homes, unless you use a Self Directed IRA LLC.

The key to building your real estate empire is to leverage all four of the pillars I've mentioned above. You want to build your empire during your lifetime right? Let's go over some ways to speed up the empire-building.

6 Ways to Build Your Real Estate Empire Faster

It's time for you to start building your real estate empire.

Well there you have it! Applying what you've learned above can have you well on your way to becoming a millionaire or even a billionaire through real estate. Just remember, your path won't be easy.

There are many other ways to get rich through real estate that I didn't mention. Like I said, people have been investing in real estate for thousands of years. But don't get stuck trying to learn all those ways.

Find a strategy that works for you and start building your real estate empire one day at a time. Learn from your mistakes and adjust your strategy. Rome wasn't built in a day, and your real estate empire, or anyone else's, won't be either.

You may also be interested in our article, How To Invest In Real Estate With No Money.

Clash Of The Titans: IRA Vs 401K

You've probably heard a lot about 401ks and IRAs. But do you know how they compare to each other? More importantly, how do you know which is better for you?

401ks are usually employer-sponsored retirement accounts. Unfortunately, not everyone has access to those. Meanwhile, anyone can open a Roth IRA or Traditional IRA. To get the most benefits possible, you should max out contributions to both accounts if you're able to.

But maxing out both may not be an option for you. So the real question here is, should you contribute to your IRA or 401k first?

I'll give you two answers, one will be a short "quick version" while the other will be a detailed comparison and contrast analysis via chart below (as in, the actual "Clash of the Titans" you came here for.)

Let's start with the quick and dirty version.

The Quick Answer: IRA Vs. 401k

The account you should contribute to first depends heavily on whether your employer offers a 401k with a company match. Scroll to the option that applies to you.

Contribute to your 401k only to the point where your employer will no longer continue matching your contributions. This way, you can get as much free money as possible. Then consider an IRA.

Start with an IRA first. Opening one is free. After contributing up to the limit, contribute to your 401k for the pre tax benefit it offers.

 

A Detailed Comparison of The 401k, Traditional IRA, and Roth IRA: Clash Of The Titans

 

  401k

 

Traditional IRA Roth IRA
contribution limit $18,500 for those under age 50.

$24,500 for those age 50+.

$5,500 as a combined IRA limit. $6,500 for those age 50+.
Pros Employer contribution match. (If offered.)
Higher annual contribution limit.
Contributions lower taxable income in the year they are made.
Eligibility is not limited by income.
Able to borrow up to $50,00 or 50% of your 401k's value, whichever is greater.
Large investment selection.
If deductible, contributions lower taxable income in the year they are made.
Large investment selection.
Qualified withdrawals in retirement are tax free.
Contributions can be withdrawn at any time.
No required minimum distributions when you retire.
Cons No control over plan and investment costs.
Limited investment selection.
Distributions in retirement are taxed as ordinary income, unless a Roth 401k.
Required minimum distributions start at age 70 1/2.
Contribution limits are lower than a 401k.
Deduction phased out at higher incomes if you or your spouse are covered by a workplace retirement account.
Distributions in retirement are taxed as ordinary income.
Required minimum distributions begin at age 70 1/2.
Contribution limits are lower than a 401k.
No immediate tax benefit for contributing.
Ability to contribute is phased out a higher incomes.
Bottom line Fund a 401k first if your company is willing to match your contributions. Fund an IRA first if your 401k doesn't offer a match or if you can't get a 401k.

If you max out your IRA, start funding your 401k. Are you not sure which IRA is best for you?

If you plan on being in a higher tax bracket when you retire, choose a Roth. (Yea. I know that isn't the easiest thing in the world to predict.)

Keep reading to read more useful information about IRAs and 401ks, along with the conclusion to this article. Spoiler alert: we are going to discuss a nontraditional option that you might consider--especially if you're a real estate investor.

  401k Traditional IRA Roth IRA
Tax treatment of contributions Contributions made with pretax dollars, which reduces your taxable income on a dollar for dollar basis. Some employers offer a Roth 401k option, funded with after tax dollars.
Investments in the account grow tax deferred. If Roth 401k, investments grow tax free.
Contributions are deductible. Higher income and participation in a workplace retirement account (for you or your spouse, if married filing jointly) may reduce or eliminate deduction.
Investments in the account grow tax deferred.
Contributions are not deductible.
Investments in the account grow tax free.
Investment options Limited choice of investments.

Some plans have a brokerage option with access to investments outside of the plan.

Any investment available through your account provider (stocks, bonds, mutual funds, etc.).
Taxes on withdrawals after age 59 ½. Distributions are taxed as ordinary income. If Roth 401k, distributions are tax free. Distributions are taxed as ordinary income. Distributions are tax free as long as the account has been open for at least five years.
Early withdrawal rules before age 59 ½. Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. Contributions can be withdrawn at any time without taxes or penalties.

Unless you meet an exception, early withdrawals of earnings may be subject to a 10% penalty and income taxes.

Best Practices For Traditional 401ks and IRAs

If you've got enough money, max out both. Otherwise, fund your 401k to the point where you max out your employer contributions for the year, then max out your IRA. And if you have a lot of money to invest, consider establishing a Self Directed IRA LLC.

Note: You may also want to check out our related articles:

What Is a Self-Directed IRA LLC & Should I Get One?

A Self Directed IRA LLC offers the same benefits as a Traditional or Roth IRA, but with even more investment opportunities available for you to choose from, such as real estate, along with asset and liability protection up to one million dollars.

Fair warning though, a Self Directed IRA LLC requires more involvement on your part and is not intended for passive investors. I'll tell you this though. If you're already investing in real estate with your personal funds, there's no reason for you not to get a Self Directed IRA. If you're considering this option, you may find our previous article on investing in real estate with your Self-Directed IRA LLC helpful.

If you still have questions about IRAs, 401ks, or lesser-known retirement options, feel free to ask them below or contact us.

 

Why You Should Pay More Attention To Contingency Clauses In Your Real Estate Purchase Contracts

Real estate is more than just about selling and buying. It's also about signing and copying. You may or may not enjoy doing the "backend" paperwork. But it's just as important as all the other work involved when it comes to buying and selling real estate.

Which brings us to contingency clauses. Contingency clauses are some of the most important parts of a real estate purchase contract, and can provide significant protections to buyers of real estate.
Whether you're buying or selling real estate, it's essential that you know how to use real estate contingencies to your benefit.

Contingency Clauses 101

Let's say you want to buy some real estate. A contingency clause often states that your offer to buy property is contingent upon X,Y, & Z. For example, the contingency clause may state, “The buyer’s obligation to purchase the real property is contingent upon the property appraising for a price at or above the contract purchase price.”
Under this contingency, you're relieved from the obligation to buy the property if the you obtains an appraisal that falls below the purchase price. Because contingency clauses provide you with a way to back out of a contract, they can be great tools for real estate investors who make offers on properties.

Common Contingency Clause Examples

Here are three contingency clauses to consider in your real estate purchase contract.

  1. Appraised Contingency: An appraisal contingency protects buyers of real estate and is used to guarantee that a property is valued at a specific amount. If the appraisal comes in lower than the amount, the contract can be terminated. Another perk to this contingency is that you'll probably get your earnest money back as well.
  2. Financing Contingency: A financing contingency will usually, “Buyer’s obligation to purchase the property is contingent upon Buyer obtaining financing to purchase the property on terms acceptable to Buyer in Buyer’s sole opinion.”

Some financing contingency clauses are not well drafted and will provide clauses that say simply, “Buyer’s obligation to purchase the property is contingent upon the Buyer obtaining financing.”
A clause such as this can cause problems as the Buyer may obtain financing under a high rate and may decide not to purchase the property. However, because the contingency only specified whether financing is obtained or not (and not whether the terms are acceptable to buyer), the clause can be unhelpful to a buyer deciding not to purchase the property.
Some financing clauses are more specific and will say that the financing to be obtained must be at a rate of no more than 7% on a 30 year term. They'll add that if the buyer does not obtain financing at a rate of 7% or lower then the buyer may exercise the contingency and back out of the contract.

  1. Inspection Contingency: An inspection contingency clause might state, “Buyer’s obligation to purchase is contingent upon Buyer’s inspection and approval of the condition of the property.”

Another variation states that the Buyer may hire a home inspector to inspect the property and that the Seller must fix any issues found by the inspector. If the Seller does not fix the items specified by the inspector then the Buyer may cancel the contract. Inspection clauses help guarantee that the Buyer is obtaining a valuable asset and not a money pit.

Details to Watch for in Contingency Clause Fine Print

The devil of contingency clauses is in the details, which of course, often come in small print.Due to the nature of contingency clauses, you want to make sure you pay attention to certain key terms and phrases. All it takes is one sentence to either win or lose you a dispute over one of the following issues.

  1. What happens to my Earnest Money? One thing that's usually vague in real estate purchase contracts when it shouldn't be is what happens to the buyer’s earnest money when the buyer exercises a contingency.

Does the buyer receive a full return of the earnest money? Does the seller keep the earnest money? If the contract is silent and if you as the buyer exercise a contingency, don't bet on getting your money back. It's likely you'd lose even more money!
Make sure your contract clearly states something like, “If Buyer exercises any contingency, Buyer shall receive a full return of any earnest money deposit or payment to Seller.”

  1. Contingency Deadlines. You don't want to miss one of those!  Most contingency clauses have deadlines well before closing. Those dates being typically somewhere from 2 weeks to 2 months from the date of the contract, depending on the purchase and seller disclosure items and the type of property being purchased.

For example, single family homes will typically have a shorter window as financing and inspection can occur more quickly than would occur under a contract to purchase an apartment building.

Whatever the deadline is, make sure that the deadline is set so that you can complete your contingency tasks. You need to make sure you have enough time to obtain adequate financing commitments, to properly inspect the property, and that you have enough time to review the seller’s disclosure documents.

Setting a two week deadline is sometimes done. But two weeks is usually not enough time to complete financing commitments, inspection, and due diligence activities. All of which are necessary to determine whether you will or won't purchase a property.

If contingency deadlines are fast approaching and you need more time, then ask the seller for an extension before the deadline arrives. If your Seller refuses an extension, point to your contingency and tell them to read it and weep.

  1. Exercise your contingency in writing. Yes, even in the digital age, the pen and paper still go a long way as far as contracts are concerned. If you do exercise a contingency and decide to back out of the purchase of the property, make sure you do it in writing.

Don’t bank on telephone calls or even emails (unless the contract permits emails as notice). Make sure that the reason for the contingency and that the date of the contingency are put in writing and are sent to the seller in a method where the date can be tracked.
For example, if your contract requires a contingency to be noticed by fax or hand delivery, don’t rely on an email to your seller or your seller’s agent. That won't invoke the contingency, and you may end up unhappy to say the least.

The Importance of Contingencies for Real Estate Investors

Let's say you're the buyer again. Once the deadline to exercise a contingency has passed, you're obligated to purchase the property and may be forced to buy the property. Or at the least you will lose your entire earnest money deposit.

Contingency clauses are your best defense to a bad deal and should always be used by real estate buyers. Hopefully by now you've realized that your purchase contracts are only as good as the contingency clauses behind them.
If these kind of details make your head spin, don't worry. That's what us real estate attorneys are here for. Schedule your consultation now to never fall victim to the "fine print" again.

How To Buy Your Retirement Home Ahead Of Time Using A Self Directed IRA

Chances are you've been steadily growing your IRA for quite some time. Did you know that you can buy a retirement home with a Self Directed IRA (SDIRA)?

Yep, it's true. But there are a few things you need to know first.

If you have any other IRA besides a SDIRA, you can only hold investments. You can't just go buy a home with your IRA and live there. However, with a SDIRA, you can buy an "investment property", which you can later distribute and use personally.

Let's break this strategy down.

Steps To Using a Self-Directed IRA to Buy a Retirement Home

If you are seriously interested in using your SDIRA to purchase a retirement home, then know that it works in two phases.

First, your IRA purchases the property and owns it as an investment until you decide to retire. (You need an SDIRA for this.) Second, upon your retirement (after age 59 ½), you can distribute the property via a title transfer from your SDIRA a regular IRA. This allows you to personally use the home and benefit from it personally. Before you go out and buy your future retirement home, you should consider a couple of factors.

Avoid Prohibited Transactions

Be careful to avoid those dreadful "prohibited transactions". The rules in place currently do not allow you, the IRA owner, or certain family members to have any use or benefit from the property while it is owned by the IRA.

The IRA must hold the property strictly for investment. The property may be leased to unrelated third parties, but it cannot be leased or used by the IRA owner or prohibited family members (kids, siblings, parents, etc). Only after the property has been distributed from the self-directed IRA to the IRA owner may the IRA owner or family members reside at or benefit from the property.

You Must Distribute The Property Fully Before Personal Use

The property must be distributed from the IRA to the IRA owner before the IRA owner or his/her family may use the property. Distribution of the property from the IRA to the IRA owner is called an “in kind” distribution, and results in taxes due for traditional IRAs.

For traditional IRAs, the custodian of the IRA will require a professional appraisal of the property before allowing the property to be distributed to the IRA owner. The fair market value of the property is then used to set the value of the distribution.

For example, if your IRA owned a future retirement home that was appraised at $250,000, upon distribution of this property from your IRA (after age 59 ½) You would receive a 1099-R for $250,000 issued from your IRA custodian to you.

One of the drawbacks of this strategy is that distribution taxes can be high. You might prefer to take partial distributions of the property over time, holding a portion of the property personally and a portion still in the IRA to spread out the tax consequences of distribution.

However, that would be a tiresome process, as you would have to appraisals each year to set the fair market valuation. While this can lessen the tax burden by keeping you in lower tax brackets, you and your family still cannot personally use or benefit from the property until it is entirely distributed from your IRA.

Bottom Line: Play By The Rules With Your Self-Directed IRA

Remember that you should wait until after you turn 59 ½ before taking the property as a distribution, as there is an early withdrawal penalty of 10% for distributions before age 59 ½.

While this strategy is possible, it is not for everyone and certainly is not easy to accomplish. Few things worth doing in life are. SDIRA investments come with rules, and self-directed IRA investors should make sure they understand those rules. Remember, you can't use your retirement home for personal use until after its been distributed and you may or may not end up paying lots of taxes.