Sunday, February 28, 2021

Who Owns Your Property?

Some will jokingly tell you that the bank really owns their property, just like it does the new car you just bought with the seven year payment book. Even though your name is on the title, is it really yours?

That's not exactly what I am talking about today. Stick around, you may or may not have heard some of this before. Before I go any further, I need to point out that I am not a lawyer and I've never played one on TV. I confess to spending some time watching Matlock and Perry Mason, but that didn't do me much good. However I have learned a thing or two over the years and hope to help you ask a few more of the right questions of the esquires in your life.

Is That Your Name on the Title?

When you get a property or two, it feels good to see your name on the deed and get the feeling of owning something solid like real estate – even if you are in debt up to your neck with the lender. In time, you gain another property, then another. You are on the road to becoming a major property owner in your community.

You are also on the road to becoming a major target should anything go wrong that an ambulance chasing attorney believes he can turn into a big pay day for himself, maybe even, his client. These guys love to go after the “evil rich”, who they define as anyone who as enough assets to justify suing.

By holding five, ten, twenty or more properties, you are in his cross hairs and he is just waiting for something bad to happen. You are ripe for the picking. When you don't have anything (at least in your own name), there are no big pay days for the shyster lawyers and they are hesitant to work of nothing, which they will do if they sue some poor schlub who has nothing to take.

You can stay safe if you don't accumulate many assets and some have chosen that route...but that is not the route to financial success.

Don't Put Them In Your Name

Some folks will tell you to form an LLC to hold the properties. There is some wisdom in this, but it is not fool proof. While there is some liability protection with an LLC, holding a dozen properties in an LLC makes it the same kind of target as an individual holding as many properties.

Some have recommended a separate LLC for each property, or at least for every two. However this can be an administrative and tax reporting nightmare. Rules are different in each state, but here in Florida there is an annual report with a hundred dollar plus filing fee for each one and much higher penalties if you should not get the reports in on time.

This is not to say that LLCs are bad, just that this isn't the best use of them. I have one and it functions well, but it does nothing to conceal the ownership of the properties since all anyone had to do is go to sunbiz.org and see the names on the registration. It is probably just as easy in other states to find the true ownership of a company.

What Do You Do?

You want to accumulate real estate without advertising you wealth – that is the best way to keep it. Here in Florida, this is easily done by holding the property in a trust. It sounds complicated, but it is not, once you actually do it. This is not an instruction on how to create a trust – like I said, I am not an attorney and I have never played one on TV. It is, however, meant to encourage the reader to look into it and explain some of the benefits. We'll discuss how to get this information shortly.

Generally one property in one trust will serve your interests nicely. If anything really bad happened and a court order penetrated the protection of a trust, there will be no way to link it to other trusts you happen to control.

As an example of how this works, I was rehabbing a house a few years ago and needed a fairly large window replaced. I got a couple of estimates, but the interesting thing was one salesman told me that they like to check out who they may be dealing with and all they saw was the trust name on the property and they had no idea who actually owned the house. I smiled and told him that is exactly how it is supposed to work.

Some Things to Think About

Here in Florida, the trust has a trustee. The trustee legally has complete control of the property. Even if he (or she) receives a subpoena, there are somethings they generally are not able to do... but they can sell the property, rent it or do anything an owner would do. So the first thing you need in a trustee is someone you can trust – someone who actually believes in integrity.

Then you need a trust agreement. I will not begin to outline this agreement, but they are not complex. If you are in the Sunshine State, I would recommend looking up the Land Trust Service Corporation. It is operated by an attorney who can create these documents for a reasonable fee and can even serve as trustee. I understand the readers reservations, but Mark Warda is a good guy and his business would not last long if he were not a straight shooter.

In other states most real estate attorneys can put together an trust agreement, but you really want one that deals with and understands investors. They can often be located through REIA groups or title companies that work with investors. The point is that it is not very expensive and it is not worth doing wrong.

So, go out and buy some properties and do it in a way that you can keep them,


Sunday, January 31, 2021

Robber Barons Return

Robber barons flourished in the late 1800s and acquired the label because of practices that mimicked those of organized crime – such as corruption, intimidation, conspiracies and, on occasion, violence. They amassed great wealth though monopolies and manipulation.

Many think of today's hedge funds in the same terms. It appears that nobody really likes them, except those reaping the profits of their activities. We have witnessed this week something we hardly ever see in America: an almost universal condemnation of efforts by stock market elites to protect the hedge funds that held short positions in Game Stop. I was dumbstruck to see AOC, Elizabeth Warren and Ted Cruz singing off the same page.

This whole dust up has little to do with the intrinsic value of the stock or the corporation itself. As with much of the market, it is more driven by the perception of the investors. Logically, the funds were right in expecting the stock price to fall as the Game Stop stores are facing increased pressure from online competition.

A Brief Explanation

Photo by BP Miller on Unsplash
For those not familiar with the process, I will give a very brief outline. To sell a stock short, means that you borrow shares from someone who doesn't share your belief or who, at least, takes your “rental fee” as a hedge against falling prices. To maintain this position in the presence of rising prices means being certain the brokerage has sufficient funds to buy the shares to cover the ones you borrowed. Because of this the fund managers were meeting calls for more and more cash.

This is the reason for the panic on Wall St. when the short sellers were faced with calls for funds to cover stocks they thought were going to $4 a share when they went to $300 and $400. It cost them billions. Some sold other stocks to cover themselves. Nobody really felt that sorry for them except some brokerage houses halted trading in Game Stop and a few other stocks. Prices began to fall, but public and public official pressure made them open trading again.

Many public figures proclaimed, this halt in trading was proof that the system was rigged in favor of the major investors and when the “little guys” figured out a way to win and beat the hedge fund operators at their own game, they had to be stopped.

Application For Real Estate

Hedge funds, Zillow and others have been moving in on our territory for years. Hmmmm... even that terminology smacks of organized crime. I understand that many of us who have been at this for a while have made connections with private investors, etc. that we have access to funds for our deals. However, often it takes more than just purchase and rehab money.

There will always be people who would rather deal with an individual or small business man or woman than a corporate entity. However, the economics of the corporate buyers are different than individual investors. The kung flu has already created a shake up in the real estate business, and these new players have added to it. Many who don't adapt will be gone.

The Defense

Personalized service is an advantage we have over the formula driven competition. We can listen and adapt our approach more easily than corporate types even though most of out pockets aren't quite as deep as theirs. Will that be enough? I don't know. Big money almost always finds a way to squeeze out the “little guy”. That's the way the robber barons of the past have done.

The events of the past week should give us hope. I am not proposing a particular strategy for two reasons. First, until it is ready to be implemented it is best to keep it under wraps and, second, I really don't have one at this point.

I am suggesting that we begin to look for one that, similar to the Game Stop crowd, uses their massive resources against them as martial arts practitioners often do. We need to keep a watchful eye on their activities – and keep thinking. There are flaws in their systems and we need to find them, just as the gang on Reddit used the public knowledge of the short position to burn the hedge funds.


 

Sunday, January 17, 2021

What's Up for 2021?

There are a lot of articles telling us what we will be living with in the coming year. Everyone seems to have an opinion, and that is a good thing – that we are all free to see things through our own lenses. So, I thought I would put in my two cents, although due to inflation, it may be up to a nickel or even a dime.

Some are predicting a real estate boom, although I am not sure what the see as driving it, but that is what they see. Others see doom and gloom on the horizon. I find more evidence for that, but I really don't believe there will be a universal collapse.

The Great Migration

One of the factors we have to consider is the exodus from states like New York, California, Illinois and, to a lesser degree, other similar places that have not handled the Chinese flu or fiscal policies well. But it cannot be blamed soley on the actions of the communist regime – the one in China that is. Restrictive regulations, high taxes and general lack of concern for middle class Americans who make the country function has pushed many who can afford it to pack up and leave for friendlier places.

It is not just the worker bees leaving, but corporations are leading the pack in some cases as they look for a more favorable environment for themselves and their employees. Two notable examples are Elon Musk bringing his operation to Texas, as is Oracle as they desert the silicon valley environment. The NRA is reconstituting in the Lone Star State as well.

These actions do not bode well for the economies of the donor states, but what does it mean for their states with expanding populations? The influx of affluent residents would indicate that even if it doesn't result in an actual real estate boom, the market will have more support than areas with collapsing populations.

All this movement is on top of the normal movement of those of us who have had enough ice and snow to last a lifetime and headed to warmer climates.

The Caveat

This may not necessarily be good news for those of us who see fleets of moving trucks in our neighborhoods. If our new neighbors have not learned from their experience and want to create a world something like they left, it could be bad news for all of us, only we would be more comfortable when we are all out of work and can't afford to pay for heat.

The Opportunity

Obviously an expanding population puts sellers in a better position, whether they are regular homeowners, real estate agents or investors. It is possible this prosperity could be just an illusion. Homeowners who jump at the chance to sell their property for a price they never dreamed of will benefit them little if they are looking for another place to live in a similar area, as the house they are looking to buy will be selling at a premium as well... unless they want to move up north to retire. Who in their right mind does that?

However, agents will be cashing larger checks. Investors, if they watch their pennies, can turn larger profits. Businesses that cater to consumers will have more people to serve – if they are not in a business that has much online competition.

For those with deep pockets and the intestinal fortitude for long term plays may actually be able to make a profit from falling prices in the areas losing population – if they believe it will come back in the foreseeable future. Even in bad times there are always people who find a way to prosper. Fortunes were made even during the great depression. One good thing about looking for the golden ticket in these places is that you probably won't have a lot of competition.

One Certainty

There are always opportunities. Sometimes they are disguised as work. While occasionally they will come knocking on your door, most of the time you have to chase them down and catch them – but you can't even do that if you aren't looking.

Sunday, December 20, 2020

How Many Bedrooms Do They Need?

A while back we wrote about changes in the real estate market brought about by the Chinese flu and the government reaction to it. There are many negative impacts on individuals and businesses, but today we will look at the changes in single family housing that are taking place already.

We noted then that many people were working from home instead of commuting to an urban cube farm. Unless they were already doing a significant amount of work at home, most of these newly confined employees find themselves working from makeshift offices in the corner of a bedroom, dining room, garage or wherever they can find some space and an internet connection.

Another Curve Ball for Construction

As if home builders did not have enough to contend with on the building materials and labor fronts, they are now facing the demand for another bedroom or dedicated office. In some areas, the traditional three bedroom home is being pushed to the side in favor of this extra room.

Because they are still working with the middle class market, not looking for a McMansion and not being able to afford one anyway, they are trying not to bump the price up too much. One builder working in the new construction for rental market recently explained that they were trying to rework their current designs to carve out that extra room with the same footprint – thus minimizing the price impact.

This may mean pulling back from the open concept designs and smaller rooms to avoid adding square feet and pushing the price of the home further out of the reach of many of the people they are building for.

Why Build For Rentals?

Some new developments of single family homes are actually being created for the rental market. A significant segment of this market is occupied by the much maligned millennials. There are many who have not been damaged too severely by their education are working at pursuing the American dream – however they define it.

Many have saddled themselves with excessive college borrowing. Even though some make pretty good income, the education debt stands in the way of a reasonable home loan, or even an unreasonable one. This is one reason many would like to palm their debt off onto the unsuspecting tax payers who have plenty of their own debt to deal with. Because of this, some builders are working to build rentals that provide nice housing at a rental level the market can handle.

Impact on Investors

Many investors working in this same market may well find themselves looking at similar demands from their tenants. When you get into the family market many here are also looking for and extra bedroom or office. Most of the time, expanding the footprint of the home is neither practical or economical. Here is where some creativity will come into play in meeting this demands of the market.

Investors and rehabbers are usually flexible and creative people able to find ways to turn a property into something people will either want to buy or rent. Being aware of this trend will help meet the needs of the market and the profitability of the investor.