Creating multiple LLCs

[HoldAndBuy]

If they can freeze your LLC without actually taking your money, but make it impossible to do anything, what purpose does equity stripping serve? Is that supposed to deter lawyers from suing you in the first place, or is it supposed to help after someone has already sued you?

I'd like to add that I'm most concerned about what Hooch was talking about -- someone doing a frivolous lawsuit and hiring an ambulance chaser. Or someone getting hurt (really hurt, not fake) by some hazard I was never aware of in the house. If I did something deliberately negligent I wouldn't expect to be protected (and I certainly don't intend to do anything like that).

As for my personal actions outside of the business, I'm not as concerned. I don't have people financially dependent on me, and I don't do things like drunk or reckless driving (no tickets in 6 years) 

[HoldAndBuy]

I think Hooch just got to the crux of the issue. If I do something willfully negligent that hurts someone I expect to be sued and lose money. The nightmare scenario that I'm trying to protect myself from is:  Litigious doofus of a tenant + ambulance chaser + emotional jury. I don't expect to protect myself from every possible unlikely permutation of events that could possibly happen.

[BLL]

So basically you are saying that LLC's are completely useless and offer NO more protection than a straight out ownership of the house.

I never said they were useless. I identified the ways they can be pierced. However, they create more problems than they solve for the average investor and he would be better off owning in his own name.

Most of the scenarios you listed were due to actual negligence.

That's the only way to win damages. There's no liability if there's no negligence, and no lawsuit.

Lets use examples in a situation where the landlord for the most part follows the law. The examples you listed all require a permit in my town. Permit to build a deck, permit for HVAC. If the code enforcer says it's good your chances are slim to none of someone winning a frivolous lawsuit against you.

In those cases, there is no negligence and therefore no liability. Of course the plaintiff will lose.

Also, the question was related to multiple LLC's and you saying that the lawyers will get into all of them.

There are ways to pierce the one LLC per property strategy. They aren't bulletproof like you assert.

An LLC in Nevada even better because they will have to hire an attorney in Nevada to handle it which adds one more layer of expenses for them.

That is completely false. Real property is subject to the laws of the state where it is located. A NV LLC that is not registered in that state doesn't exist. There is no way to force a CA judge to accept NV law or require a CA plaintiff in a dispute over CA real property to move the case to NV. The only time that happens is when there is an internal dispute among LLC members.

[BLL]

The nightmare scenario that I'm trying to protect myself from is:  Litigious doofus of a tenant + ambulance chaser + emotional jury. I don't expect to protect myself from every possible unlikely permutation of events that could possibly happen.

You send a back off bozo letter to the people with frivolous claims and they go away. If they push and the claim is truly frivolous, the case will never get to a jury because your attorney will have the case dismissed. If you are truly negligent, then pay a fair settlement. People sue because they are pissed off. Treat them right, especially when you are wrong, and you'll never see a courtroom. That's why you have insurance.

[BLL]

If they can freeze your LLC without actually taking your money, but make it impossible to do anything, what purpose does equity stripping serve? Is that supposed to deter lawyers from suing you in the first place, or is it supposed to help after someone has already sued you?

They are hoping to force a settlement. In the old days, they would have to wait for the LLC to pay the debtor, which never happens. Today, creditors have wised up and are starting to use charging orders that really interfere with business to force a settlement.

Equity stripping works in the event they foreclose on the LLC interest. You foreclose on the mortgage and take the property away from the LLC, leaving the creditor with nothing.

I'd like to add that I'm most concerned about what Hooch was talking about -- someone doing a frivolous lawsuit and hiring an ambulance chaser.

That's no worry. The ambulance chaser will go away when you tell him to back off. He is hoping to scare you into paying. He doesn't want a trial. Even if he sues, your attorney can get a frivolous suit dismissed.

Or someone getting hurt (really hurt, not fake) by some hazard I was never aware of in the house.

Unfortunately, the law in many states holds you responsible. There is an assumption that you are aware of all hazards. That is addressed in the legislature.

[HoldAndBuy]

Thanks. By foreclosed, do you mean a forced bankruptcy? What exactly are the mechanics and requirements of foreclosing on that interest--does that require sloppy maintenance of the LLC and "piercing the veil", or the $11,000 forced judgement that you were talking about earlier? This would be very helpful to know.

Equity stripping works in the event they foreclose on the LLC interest. You foreclose on the mortgage and take the property away from the LLC, leaving the creditor with nothing.

'

[BLL]

Thanks. By foreclosed, do you mean a forced bankruptcy?

Involuntary bankruptcy is a different topic. That is useful when you want to pierce a single member LLC.

I am talking about foreclosing on a mortgage, just like any other lender. The equity stripping in this case involves a friendly company holding the mortgage to the property. If the creditor manages to get the LLC interest or get a lien on the property, then the friendly lender initiates a foreclosure and the junior lien gets wiped out and the property is taken out of the LLC. The creditor ends up with nothing.

[Hooch]

BLL, sorry, you lost me. Could you clearly give examples of equity stripping and how it can benefit an investor? Could you do it as if you are teaching it to a 3rd grader? 

You seem to be highly in tune with the more cutting edge creative real estate techinques and your expertise is invaluable.

[BLL]

BLL, sorry, you lost me. Could you clearly give examples of equity stripping and how it can benefit an investor? Could you do it as if you are teaching it to a 3rd grader? 

There are 2 ways to strip the equity out of properties. The first is the traditional mortgage. You borrow money and the lender gets a lien on the property. Creditors don't get paid unless there is equity after the sale. That's good when you just start out as there is no equity, but mortgage balances go down over time and soon there will be equity. There is also property appreciation. How do you protect this equity? What if you bought the house for cash and have no mortgage?

That is the 2nd kind of equity stripping. You create an entity. I prefer c-corps, but some people use LLCs. It doesn't change the concept, but there are tax and liability issues for choosing one over the other. This entity loans money to the entity that actually owns the property and has a first position in any property disposition. Just about all the time, these loans are demand notes with no payments due. As the accrued interest grows, it increases the amount due and protects future appreciation to some extent.

Let's take the first one and see what happens if you have a judgment that exceeds your insurance limits and the creditor is coming after the property. He puts a lien on the property and waits for the mortgage balance to drop. He might be able to force a sheriff's sale and get any money after the mortgage balance is paid. You get what's left.

In the second situation, the lender is friendly to your situation and can demand that you pay the loan. Since you don't/can't/won't, he forecloses and gets the property. The creditor's lien is removed as part of the foreclosure and the property is now out of his reach. He had a claim against the property owner, not the lender, and has no claim against the lender since they are two separate entities. Now, you have the property (owned by the lender) with no lien and the creditor is left with nothing.

[HoldAndBuy]

Thanks BLL. In the second situation, with the demand note, does the entity doing the lending have to have some kind of state business purpose for existing? Is "lending" the purpose? I wonder if a judge would see such as arrangement as a sham if he/she thought existed only for the purpose of equity stripping properties held in another entity? Thanks.

BLL, sorry, you lost me. Could you clearly give examples of equity stripping and how it can benefit an investor? Could you do it as if you are teaching it to a 3rd grader? 

There are 2 ways to strip the equity out of properties. The first is the traditional mortgage. You borrow money and the lender gets a lien on the property. Creditors don't get paid unless there is equity after the sale. That's good when you just start out as there is no equity, but mortgage balances go down over time and soon there will be equity. There is also property appreciation. How do you protect this equity? What if you bought the house for cash and have no mortgage?

That is the 2nd kind of equity stripping. You create an entity. I prefer c-corps, but some people use LLCs. It doesn't change the concept, but there are tax and liability issues for choosing one over the other. This entity loans money to the entity that actually owns the property and has a first position in any property disposition. Just about all the time, these loans are demand notes with no payments due. As the accrued interest grows, it increases the amount due and protects future appreciation to some extent.

Let's take the first one and see what happens if you have a judgment that exceeds your insurance limits and the creditor is coming after the property. He puts a lien on the property and waits for the mortgage balance to drop. He might be able to force a sheriff's sale and get any money after the mortgage balance is paid. You get what's left.

In the second situation, the lender is friendly to your situation and can demand that you pay the loan. Since you don't/can't/won't, he forecloses and gets the property. The creditor's lien is removed as part of the foreclosure and the property is now out of his reach. He had a claim against the property owner, not the lender, and has no claim against the lender since they are two separate entities. Now, you have the property (owned by the lender) with no lien and the creditor is left with nothing.

[BLL]

Thanks BLL. In the second situation, with the demand note, does the entity doing the lending have to have some kind of state business purpose for existing? Is "lending" the purpose?

The business purpose is making investments, which happens to be securing real estate.

I wonder if a judge would see such as arrangement as a sham if he/she thought existed only for the purpose of equity stripping properties held in another entity? Thanks.

He just might, but the plaintiff has to prove it, and that isn't exactly easy. The loans also must be real. Real money must change hands and a closing must be done.

That is the main reason I use a c-corp. The owners of the corp are different from the property owners and the payments, if any, can be used to fund benefits programs for corporate employees. The property owner makes interest payments which are tax deductible. However, the corp must declare it as income. The corp funds a benefit program (retirement, health, etc.) and gets a deduction that offsets the income. If the program is ERISA-qualified, then corporate creditors can't touch the money ever. The law is so strong that OJ kept his NFL pension.

[Hooch]

In the second situation, the lender is friendly to your situation and can demand that you pay the loan. Since you don't/can't/won't, he forecloses and gets the property. The creditor's lien is removed as part of the foreclosure and the property is now out of his reach. He had a claim against the property owner, not the lender, and has no claim against the lender since they are two separate entities. Now, you have the property (owned by the lender) with no lien and the creditor is left with nothing.

This is the only part I am not completely clear on. The Lender (your investment company) makes a loan to the debtor and a demand that the debtor repay the loan with interest. The Lender then has to foreclose on the debtors property. How does the creditor's lien get removed as part of the foreclosure? Are they not the primary lien holder? Do they get paid first from the proceeds of the sale?

I think I don't understand the primary vs. junior lien holder laws well enough.

[BLL]

How does the creditor's lien get removed as part of the foreclosure? Are they not the primary lien holder? Do they get paid first from the proceeds of the sale?

The lender has 1st person. The judgment creditor, the person who sued you, has 2nd position and doesn't get a dime until the lender gets paid 100%. When the lender takes back the property via foreclosure, the 2nd position lien is wiped out. The trick is to make sure the loan balance is higher than the market value of the property.

In the end, you have a free and clear property in an entity with no pending lawsuits. You can set up a new LLC and have the lender sell the property to this new LLC with another demand note, or you can set it up like a traditional mortgage where payments must be made.

[HoldAndBuy]

Thanks. So I guess the goal is to discourage them and make it more likely that they'll accept a settlement?

Thanks BLL. In the second situation, with the demand note, does the entity doing the lending have to have some kind of state business purpose for existing? Is "lending" the purpose?

The business purpose is making investments, which happens to be securing real estate.

I wonder if a judge would see such as arrangement as a sham if he/she thought existed only for the purpose of equity stripping properties held in another entity? Thanks.

He just might, but the plaintiff has to prove it, and that isn't exactly easy. The loans also must be real. Real money must change hands and a closing must be done.

That is the main reason I use a c-corp. The owners of the corp are different from the property owners and the payments, if any, can be used to fund benefits programs for corporate employees. The property owner makes interest payments which are tax deductible. However, the corp must declare it as income. The corp funds a benefit program (retirement, health, etc.) and gets a deduction that offsets the income. If the program is ERISA-qualified, then corporate creditors can't touch the money ever. The law is so strong that OJ kept his NFL pension.

[BLL]

Thanks. So I guess the goal is to discourage them and make it more likely that they'll accept a settlement?

Yes, but just in case they get pushy, you have the means to deny them anything.