Flippers and Rehabbers Beware

The primary goal of flipping houses is to make a profit. Investors seek out properties with the intent of making basic improvements and reselling them. An experienced flipper with a skilled crew can turn a distressed property into an attractive turn-key investment opportunity. However, there are several traps that await the investor/flipper. Even a technical violation of state contractor licensing requirements could expose the investor to substantial risk of serious financial consequences.

In addition, if the contractor you hired is not licensed, or does not have workers” compensation insurance, the workers brought onto the job site might be classified as employees of the property owner! Check – and double-check – whether your contractor is currently licensed and has proof of workers” compensation insurance!

Many states, such as California, require anyone who does any improvement work on real estate that requires a permit must declare they are licensed as a contractor, or demonstrate that they are exempt from the licensing requirement. Some investors seek to take advantage of the “Owner-Builder” exemption and bypass the need to hire a licensed general contractor, doing some of the work themselves and hiring subcontractors as necessary. For those investors with the required skills and know-how, this could result in significant cost reductions and boost the profit margins. For those whose experience is limited to watching a few episodes of “Flip this House,” it could result in a disaster.

Qualifying for the Owner-Builder exemption is not easy. The Contractors State License Board (CSLB) division of the California Department of Consumer Affairs provides a checklist for Owner-Builders in a brochure appropriately titled: “Owner-Builders Beware!” Among the requirements is that the Owner-Builder must register with both the State and Federal Government as an employer, and be responsible for complying with various payroll withholding requirements. Most importantly, the Owner-Builder must provide Workers’ Compensation insurance. The Owner-Builder is responsible for supervising the job, obtaining building permits and all inspections, and making sure that all workers and material suppliers are paid.

Moreover, in order to qualify for the exemption, the Owner-Builder must sign an affidavit, under penalty of perjury, affirming they have read, understood and agree to comply with the applicable provisions of State law. The declarant must affirm that the property is your personal residence that you have occupied for 12 months prior to completion of the work; that the work must be performed prior to the sale of the home; and the exemption can only be used twice in any three-year period. For those flippers who seek to turn properties more often, the exemption is not available.When hiring a general contractor or subcontractor, investors, flippers and homeowners are cautioned to check and casino online confirm that the contractor is licensed and in good standing before signing the contract, and should recheck to ensure that the contractor remains in compliance at all times for the duration of the work. This can be done by checking the CSLB website (www.CSLB.ca.gov) and checking the name and number provided by the contractor. It is very important to confirm that the name the contractor is using on the contract is the same, exact name registered with the CSLB. Also, check to confirm that the contractor has a workers’ compensation policy in full force and effect for the full duration of the contract.If a contractor’s workers’ compensation policy expires and is not renewed, the contractor’s license is automatically suspended. Although this would prohibit the contractor from recovering any compensation under the contract, it may also expose the property owner to liability for any claims from any of the contractor’s workers or subcontractors.

Private lenders involved with rehab projects should be aware that if a contractor’s license expires or is automatically terminated for technical reasons (i.e., expiration of a worker’s compensation policy; improper transfer to a different entity, etc.), the contractor may be required to disgorge all compensation received under the contract. (B&PC 7031) Having an experienced contractor can make a big difference in the success of a rehab project. Taking a few minutes to confirm that your contractor or subcontractors are properly licensed and in compliance with state requirements can be the best investment in your investment project.

Taking Stock of The Fools Advice

The Motley Fool provides a wealth of information and tips for stock market investors.  In a recent article, “Stock Market Risk Reduction,” offered some excellent tips for reduce risk in the stock market.  These same tips would easily apply to real estate investors.

1.  Be a long-term investor, not a short-term speculator.  The Fool warns that holding stock for only a short period of time is “not investing – it”s gambling.”  The same is certainly true of real estate. Building wealth in real estate takes time. Even Flippers soon realize that the real value of their business model is doing many deals over a longer period of time, some of which will make more than others. The law of averages will catch up.

2.  Increase your knowledge.  The Fool puts it well:  “The more you know, the fewer mistakes you”ll likely make.” So true!  The Fool cautions against relying on the “tips from friends or strangers.”  Many novice investors jump at prospects based on what they heard from their buddy or a promotional event they attended.  Due diligence is the process of obtaining relevant information in order to reduce the risk of loss. You need to take time to understand the market, the area, and the factors that will impact your investment. Attend a real estate investing association that provides educational programs and training, not sales pitches.  Read books and articles, and topical blogs such as those provided by The Bigger Pockets.

3.  Limit your downside.  The Fool recommends that in investing in stocks, you need to consider the valuation of the company. The same applies to real estate. Learn to assess the true value of real estate that you are considering. Experts often say you make Du kan l?se om dem alle her pa dkonlinecasinos.com online. your money on the purchase, not the sale. Spending too much on a property, compounded by failure to control rehab costs, can quickly wipe out your return and even result in a loss!

4.  Avoid futures, commodities, option, penny stocks, shorting and margin – at least until you”ve learned a lot about them.  Good advice for stock investors! In real estate, there are numerous examples of complicated investment schemes that are extremely risky, and should be avoided until you understand and accept the risk involved. Unfortunately, there are a lot of promoters who make a lot of money selling program packages for the novice real estate investor with promises of quick riches that involve complex schemes that are at best risky, and at worst, might be illegal in some states! Stick to the basics and learn the fundamentals before you venture into the deep end!

Don”t be a Fool – learn before you earn!

Is your LLC Doing Business in California?

Do you use an out-of-state or “foreign” LLC for your real estate investments? Due to recent changes in California law, you may be considered to be “Doing Business” in California, and must register your foreign LLC with the State and pay the $800 tax anyway!

Many people ask me “What state should I register my LLC in?”  “I don”t want to pay the $800 tax in California.  Are there any disadvantages of registering my LLC in another state?”  No matter what, you must register your LLC in any State where you are “doing business.”  Up until recently (2011), this meant – in most cases –  if you were a California resident, had formed a Nevada LLC, and owned an investment property in Arizona, you would only need to make sure you registered your Nevada LLC in the State of Arizona.  Many investors seek to maximize their returns, and avoiding the $800 franchise tax levied by California is a common reason given for forming out-of-state or “foreign” LLCs.  However, in 2011, California changed the rules in 2011 as to how it determines whether or not you are “doing business” in California.  Be sure to review the Examples below – they may surprise you!

California defines doing business as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” (R&TC § 23101(a)). In addition, LLCs are considered “doing business” in California if:

•   It is a nonregistered foreign LLC that is a Although you may come across as a superficial person owing to your gemini horoscope Ascendant, you actually seek the true meaning of your life, and you value meaningful interpersonal relations. member of an LLC that does business in California.

•   It is a general partner in a partnership or limited partnership that does business in California.

•    Any of the LLC”s members, managers, or other agents conducts business in California on behalf of the LLC.  (Emphasis added)

For tax years that begin on or after January 1, 2011, a taxpayer is also doing business in California if any of the following apply:

•   The casino online taxpayer is organized or commercially domiciled in California.

•    Sales, as defined in subdivision (e) or (f) of R&TC § 25120, including sales by the taxpayer”s agents and independent contractors, in California, exceed the lesser of $500,000 or 25 percent online pokies of the taxpayer”s total sales.

•   Real or tangible property of the taxpayer in California, exceed the lesser of $50,000 or 25 percent of the taxpayer”s total real and tangible property.

•    The amount paid in California by the taxpayer for compensation, as defined in subdivision (c) of R&TC §25120, exceeds the lesser of $50,000 or 25 percent of the total compensation paid by the taxpayer.

For the preceding conditions, the sales, property, and payroll of the taxpayer include the taxpayer”s pro rata or distributive share of pass-through entities (R&TC § 23101(d)).

Regardless of where LLCs primarily conduct business, if any of their members, managers, or other agents conduct business in California on behalf of the LLC, the FTB considers the LLC as doing business in California (R&TC § 23101). [Go to ftb.ca.gov and search for doing business for more information.]

Example 1

Paul is a California resident and a member of a Nevada LLC. The Nevada LLC owns property in Nevada. The LLC hires a Nevada management company to collect rents and provide maintenance. Paul has the right to hire and fire the management company. He occasionally has telephone discussions with the management company regarding the property. He is ultimately responsible for the property and oversees the management company. Paul conducts business in California on behalf of the LLC. The LLC must file Form 568.

Example 2

Rachel is a California resident and member of an Oregon LLC. The Oregon LLC has a retail store in Oregon. Rachel uses a California address for the LLC”s tax filings and a California accountant to prepare the LLC”s tax returns. Rachel conducts business in California on behalf of the LLC. The LLC must file Form 568.

Example 3

Sara is a California resident and a member of a Texas LLC. The Texas LLC receives royalties from Texas oil wells. Sara maintains a California business bank account and secures financing in California for the LLC”s Texas investments. Sara conducts business in California on behalf of the LLC. The LLC must file Form 568.

(The foregoing is taken from FTB Form 3556 LLC MEO 4-2011.  For more information, go to www.ftb.ca.gov, and consult with your Attorney or tax professional.)

HOW TO GET FREE LEGAL ADVICE

Let’s face it – everyone objects to paying for advice; after all, our parents probably provided more than we ever wanted to hear when we were younger. Conversely, very few object to paying for emergency care after a disaster has struck. It is human nature to ignore or downplay the warning signs when you start your hike into the wildnerness; it is also human nature to spare no expense demanding a helicopter rescue when you’re trapped in a ravine with a painful broken leg, night is falling and so is the snow.

Here’s a critical fact that most people fail to grasp:  the hourly rate your attorney charges doesn’t change. However, the number of hours of legal service that you will require can be dramatically different, depending whether you are meeting with your attorney in his office before the transaction takes place, or in the courtroomafter the transaction went sour! Like the injured hiker stuck in a canyon with a broken leg, the cost to extract you from a legal mess is of secondary importance to the need for an immediate rescue. So, if it costs less to get the advice in advance, is it possible to get relevant legal advice for free?

The answer is a qualified “yes.” It is important to distinguish “legal advice” from “investment” and other forms of advice. Recently, I saw an article titled “How to Avoid Drowning,” and quipped: “Don’t go near the water.” Accurate, guaranteed, and free advice, but neither helpful or practical.  Good legal advice is designed to put you into the best position – from a legal perspective – to protect your interests while allowing you to achieve your objectives. Staying away from the water will protect them from drowning, but does little to help them achieve their objective of having a fun day sailing, surfing or swimming. By analogy, the answer to the question “How can I protect myself from risk in a real estate investment?” would be “Don’t invest in real estate.”  Again, accurate but useless advice.

For real estate investors, there is no shortage of “advice” provided in books, articles, seminars, workshops, and classes, as well as a virtually unlimited amount available on the Internet. You already knew that, or you wouldn’t be reading this!  If you take the time to review this material, attend courses, and identify your investment objectives, learn how to accurately calculate return on investment and account for expenses, and develop a plan that is designed to achieve your personal and financial objectives, you will drastically reduce the range of variables that need to be considered when assessing your legal risks. Further, understanding the importance and value of assembling a team of professionals: brokers, contractors, property managers, insurance agents, and accountants, you will develop decision-making methodologies designed to optimize your personal situation while identifying and – hopefully – minimizing the degree of risk involved.

In addition to assembling a team of professionals, you should join a local Real Estate Investment (REI) association that meets regularly and features guest speakers on different topics related to real estate investing. By listening carefully to these speakers, as well as interacting with like-minded individuals who attend the meetings, you will learn a lot more than you can imagine! Stick to REIs that offer educational programs, and steer clear of those that sell books, investment packages, etc. However, when you meet someone who specializes in selling certain types of real estate investment products, remember you are the customer. You can ask questions, check references, and do your due diligence to further minimize your risks. Make certain you get all agreements in writing. After a careful and objective analysis, if the proposed investment appears to help you achieve your personal and financial objectives, you will have accomplished the single, largest and most important element of reducing your exposure to liability or loss. Ignoring or postponing this analysis could be extremely expensive and, in most instances, futile.

And that, dear reader, is very relevant, practical — and free — legal advice. But it only works if you use it!

LOGIC IS SO OVERRATED

Fact checking is popular sport during election season, but as psychological studies repeatedly demonstrate, people will believe what they want to believe.  There are many theories, but it boils down to this:  we’re all human, and therefore subject to human foibles.  Whether it’s attributed to selective perception or redactive devalutation (where one side simply refuses to believe anything the other side says), or whether we’re all prone to confirmation bias – where we give greater weight to information that is consistent with our predetermined beliefs and devalue or ignore evidence to the contrary – as Spock would say: Humans are illogical. Yet, we manage to function, albeit not as efficiently as some would hope.

The importance of managing our investments is no less critical than the importance of managing our jobs, indeed our lives. Making the correct decisions as we go through the day requires discipline, wisdom, and focus – not unlike the choice whether or not to have a second helping of chocolate ice cream because, well, it’s right there in front of you! It matters somewhat that you saw your photo tagged on Facebook and initially wondered who was that chubby guy, but you blame the cell phone camera and pick up the scoop, rationalizing that you’ll do an extra 5 minutes on the exercise bike in the morning. Besides, you tell yourself, you missed lunch. Logic. I crave, therefore I am.

Getting information is not difficult. Making investment decisions without sufficient information is only part of the problem. The other part is understanding what information you really need. Your personal and financial goals play a bigger role in the process than you might realize, since they form the framework which helps determine more precisely what information you need to make a good decision. As individuals – and we are indeed individuals – each of us has a somewhat different focus or framework with which we process information. Just because your neighbor invested in precious metals doesn’t necessarily mean that you should, or that your decision to double-down on Facebook shares because, well, they’re so affordable right now, is necessarily crazy. Perhaps logical, but only time will tell.

The key is to develop and understand your own personal Goal, and seek out everything you can reasonably learn that will help you achieve that Goal. If an opportunity arises that will get you closer to your Goal, consider it. If the opportunity distracts or distances you from your Goal, determine if it creates a unique but unforeseen chance to achieve an even more attractive Goal – something you had not considered possible – and if not, discard it.  Warning: extreme discipline required; stay focused!

Over the course of the next two months I will be participating in and attending four separate seminar/symposium events designed to provide individuals with the necessary educational tools required to make intelligent investment decisions. I know in advance that I will be inundated with the proverbial “fire hose” of data, charts, theories, and forecasts from some very, very intelligent people. When I am not presenting myself, I plan to sit back and take it all in. But first, I will need to reflect what among the treasure trove of information I need to focus on,  mindful that I might hear or see something that will cause me to completely change my perspective.  And that’s part of the fun of going to these events – you never know what you might learn if you keep your mind open.  It’s not logical, but then, Spock was right.  Hand me that ice cream scoop!