Building the Future with FINANCE OF AMERICA COMMERCIAL

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Constrained housing supply has been a theme for much of the past year, with land and labor shortages, expensive lumber and tight financing options all contributing to what has been a challenging year for both builders and buyers. Finance of America Commercials new construction product could be starting to change that.

Launched in February 2017, the product is available in all major markets to new and seasoned real estate investors who have experience building or who have partnered with builders to capture value in markets with a lack of new construction supply. Eligible brokers can also refer this product to their clients.

‘The real estate market recovery of prices and apparent lack of available housing supply improved the margins available for new construction properties. Both large renovation and new construction projects quickly evolved as additional opportunities for investors…’

~Andrew Hurd, VP of Credit (Finance of America Commercial)

New Construction Financing Fills a Gap

When asked about the development of this new financing option for investors and builders, Finance of America Commercial VP of Credit Andrew Hurd said that the company took notice of new construction demand continuing to outstrip supply in all major markets over the past year. This trend, coupled with feedback from many of the firm’s clients that they were feeling the pressure of declining inventory but still seeking growth opportunities, spurred creation of this product.

“The company saw a need in the market,” Hurd said. “After a decrease in foreclosure inventory previously sought after by institutional investors and local long-term hold and fix-and-flip operators, investors turned to new ways to achieve yields in their markets. The real estate market recovery of prices and apparent lack of available housing supply improved the margins available for new construction properties. Both large renovation and new construction projects quickly evolved as additional opportunities for investors, so we saw an opening to help our clients overcome a challenging market dynamic with new financing options.”

As part of the new construction loan program, the company offers loans from $150,000 to $2.5MM for the construction of non-owner occupied single-family residences, two- to four-family units, townhomes, and multi-family properties up to 20 units.

Additional features of the program include:

  • Lines of credit for multiple transactions and single loans for new investors
  • Funding up to 75% of land value, 95% of construction budget, 75% After Repair LTV
  • 12 month terms, with optional 3 month extensions
  • Rates from 6.99%

Despite being available for less than a year, Hurd said that investors and builders have been flocking to this new option.

“Clients using this product enjoy the simplicity of financing which allows for proceeds on land acquisition, including up to 95% financing for construction costs. This financing is supporting construction projects from the West Coast to Key West for builders working on starter homes from the $100s up to luxury builds over $5 million. We’re seeing this product fit a range of needs and project sizes and our borrowers have been vocal that this is filling a gap.”

Finance of America Commercial brokers are echoing Hurd’s sentiment.

“My client was looking for financing for a groundup build as well as the ability to purchase more investment properties,” said Ralph Taylor III, a broker in Irvine, CA. “The ability to turn the line multiple times and the flexibility of the qualifying threshold was exactly what he needed to continue building his real estate investment business.”

Finance of America is the Partner for the Builder Community

FACo’s new construction program sits alongside additional builder financing options from the Renovation and Construction Lending group within Finance of America Mortgage, another of Finance of America’s lending channels.

Options available from the Renovation and Construction Lending group include construction to perm financing and the FHA 203k program, which are both available to borrowers who intend to occupy the home after construction or renovation.

“With loan products available for homebuyers, builders and real estate investors, Finance of America has quickly established itself as a key partner for the builder community,” said William Brown, director of the Renovation and Construction Lending group at Finance of America Mortgage.

New Opportunities Emerge

While financing for builders and investors is getting a bit easier to come by, FACo’s Hurd thinks there are still opportunities to create new forms of financing.

“The market for build-to-rent is gaining traction,” Hurd said. “Investors are looking to build new construction rentals without the hassle of repairs and while capturing higher rents with new condition properties.”

Hurd said this push is informing the company’s latest development, a product designed for build- and flip-torent investors, which is due in early 2018.

 

Crowdfunding Meets Amazon

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The Future of Investing is Here

Investing & Financing DEALS is Now as EASY as Shopping on Amazon!

By Lori Greymont

Here’s another big statement: InvestNestis about to completely disrupt investing as you know it…and not just real estate investing — investing across different classes of assets.

What do I mean when I say ‘disrupt’? Look at Uber — it completely disrupted the transportation market. When you take the middleman out of the supply channel or financial arena. Uber took out taxi companies and simply connected drivers with folks who need rides. The same thing is happening right now with investing…

High-yield investment opportunities just recently hit the market in a big way. Until the Jobs Act passed in 2012, sponsors weren’t able to advertise deals. Investors only found out about them via golf course meetings and backroom deals. You had to have an incredibly strong network, one that took years to build, to really get in on these opportunities. As a result, services have cropped up to help sponsors get the word out and to help investors find deals. Unfortunately, these services have been based on a middleman model. The middleman, who connects investors with sponsors, takes a cut. This drives costs for everyone and slows the whole process down.

Enter InvestNest. This marketplace ditches all the barriers to success in investing and financing by replacing them with a clean, simple platform that has one goal: facilitating deals. In the same way that you can go to a shopping mall looking for a suit, browse different stores, and even get measured right there to have the suit tailored, InvestNest has it all.

“We’ve created a technology that is really simple for the investor to get information, share information, stay in the app, and compare opportunities.“

Users can follow investment opportunities, follow builders, lenders, operators, and more. The app is user-centric and intuitive.

An investor finds a deal and says, “I really wish I could get my financial planner to look at this.” That’s easy. Click a button, shoot the planner an email and he gets to go right to the deal. Want your attorney to check out a deal? Again: hit a button.

For developers and sponsors, the shopping mall model also applies. InvestNest gives them all the benefits of opening a store in a place with lots of digital foot traffic instead of opening one off the beaten path that takes lots of time and marketing money in order to generate any real buzz.

So, what’s the backstory behind InvestNest? One name: Brian Barbuto. Brian’s 41 years of reinventing the real estate wheel and racking up successes have guided him to this moment in time: he’s poised to completely change the way we buy and find buyers.

A family man by heart and an inventive builder and entrepreneur by trade, Brian has developed everything from playgrounds to the first equestrian communities and single-attached family homes. And now, he’s developed the investment platform of the future.

Early in his career, he was known as a whiz kid. He completed his first development project by the age of 22; by age 27 he was awarded BIA Builder of the Year. From there, he went on to pioneer the first attached single family housing project in Southern California. He’s the guy who coined the phrase, ‘single attached family homes’. His career could be best defined by successfully, and continuously, finding demands and meeting them.

“Throughout my career, I’ve probably built everything that you can imagine building. I’ve built golf course communities, industrial parks, medical/professional centers, retail centers. The fun and theenthusiasm of building something that had never been built before was always more interesting to me than the cookie cutter concept of just building something over and over and over again.”

His work speaks for itself. He has developed more than one million square feet of commercial space, completed over 1,000 residential units, and worked through over $100MM in real estate project funding. Brian’s portfolio includes mixed-use, commercial, industrial, and resort communities, as well as innovative residential communities and world-class vineyard estate homes.

Now…Brian has merged all of this excellent experience with the right technology. The result? A state-of-the-art marketplace that’s going to change the way we find and fund deals.

Brian is a problem solver, “a lot of folks have teed up some really great projects, projects that are in great demand, that will be very successful, but the capital isn’t there.

At the same time, I was starting to see just how much our lives were becoming interwoven with tech — especially for millennials. They’re self-driven: they go to WebMD and self-diagnose, they go to LegalZoom for legal advice. They go online for pretty much everything today: Recreation, entertainment, work, and to create wealth.

What we’re looking at is seven million accredited investors in the Millennial bracket: they want to do everything on their own. We have a shortage of capital in the development and business world— statistically right now, as an example, there are over 3,700 development projects spanning across the U.S. that are teed up, entitled, ready to build, but are stagnant for a lack of capital and funding. And this cross section between developers who need financing and millennials who want to use technology for investing….that’s exactly where the big opportunity is.”

InvestNest is not crowdfunding. Brian explains, “We’re not a private equity firm operating on the Internet. The majority of crowd investing you see online today basically is putting a new spin on what private equity firms do or capital companies have been doing forever, but they’re using their technology to tell the story about an investment opportunity, instead of sending it by way of an email or placing a call.”

Brian continues, “We say, that’s great for them, but we want to get beyond that. Let’s do something better. Let’s educate and empower the investor. Let’s give the institutional investor a place to go, and let’s tee up sponsors with investment opportunities in all industries, in all asset classes, in a standardized fashion, so they can be seen and evaluated in a standardized fashion.”

InvestNest is the only place that investors can insure their principal investment. Capital Asset Protection (CAP) is an insurance product that was specifically designed for the InvestNest marketplace. Sponsors who want to offer this option to their investors must go through rigorous third party due diligence reviews, then pay for the protection.

It will insure the investor against several kinds of loss, possibly up to as much as 80% of their investment. As you and I both know, investing is not saving. With every investment, you have a chance to lose money.

Can you imagine the peace of mind investors will have knowing there is a backstop to their loss with this insurance?

InvestNest is a true market disruptor and it’s about time. For far too long, investing has been restricted to the Ol’ Boy’s Club. Now, anyone who’s an accredited investor or sponsor can start taking advantage of the deals and capital that’s out there with just a few clicks of a button.

I’m not impressed easily. I’ve been immersed in the high-tech world of Silicon Valley for decades.

I also head SJREI, an award-winning real estate investors association in San Jose. Because of this role, I’m cautious as to where I direct our members. InvestNest managed to not only impress me, but excite me. I’m excited about what the future holds for all of us investors and developers.

When I think about shopping 10 years ago vs. now, I can’t believe the difference. I wonder what we’ll all say about investing 10 years from now.

Turbo Tips to Navigate Your Brokerage toward EXPLOSIVE Growth

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QUICKLY EXPAND YOUR BROKERAGE (OR REAL ESTATE INVESTMENT BUSINESS), LISTEN TO THIS WEEK’S SHOW.

Are you ready to grow your brokerage business quickly and effortlessly? Whether you’re a seasoned top producer or a newbie real estate agent, you’ll benefit immensely from this week’s Realty411 Radio podcast show.

This week, Realty411 Radio focuses on growth, expansion and increased productivity. And, we have an amazing guest that is going to help us navigate out of mediocrity and stagnation.

Justin Ford, CEO of Michigan-based Encore Real Estate Group, has EXPLODED his real estate business consistently over the past five years.

Starting as a rookie agent, with over 100 closed transactions in his first year of acquiring his license, Justin quickly expanded his brokerage to FIVE STATES in just the past two years. His goal is to have a brokerage in every state; and he plans on adding additional offices in 2019.

How did he do it? Why is Encore expanding while other brokerages are shutting their doors? What is Justin’s #1 secret of success?

Find out now… because Justin is ready to assist Realty411 listeners who also want to skyrocket their real estate business.

How to Determine the Value of Good Probate Real Estate Leads

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By Leon McKenzie, CEO, US Probate Leads

The real estate industry is full of potential for both REALTORS® and investors looking to cash in. One sector within the industry that will allow you to spread your wings and fly is the probate real estate sector. This sector has a value that runs in the trillions due to wealth left behind by aging and dying American homeowners. If you are interested in building a profitable realty or real estate investment business, then you definitely should pursue probate leads.

There is one question though: what constitutes a good probate real estate lead? What should you be on the lookout for when determining whether to spend your time and money investing in marketing to that lead?

After all, time is money and you do not want to pursue probate leads that are going nowhere. Not when you have to contend with competition.

Well, the secret is in having a list of criteria that you can use to find the right leads. Here are some of the factors that you can consider:

1 THE REPUTATION OF YOUR PROBATE LEADS SOURCE

Probate leads are only as good as their source. Do you have any idea of the reputation of your source? Now, you could go down to the county courthouse yourself and attempt to find a few leads that you could follow, but be prepared to spend a lot of time there.

You can rest assured however, that this is the most reliable way of getting good leads.

You could also use referrals to find leads but there is only so much you will get in the way of quantity of leads. How many people do you know who can tell you where the latest probate leads are?

You could also utilize online resources like social media, but there would be no way of you ascertaining whether the information you are getting is correct until you follow up. And this could waste a lot of your time.

For all the above reasons, you should consider using a probate leads company whose sole job is to find good probate leads for its clients. A company of this nature would do due diligence because its reputation depends on the quality of the product it provides.

Do note that not all probate real estate leads companies are worth your money. You want to get your information from a company that is reputable and reliable. A company that provides the latest leads is your best shot of getting access to good quality leads that have yet to be pursued. In addition, your leads source should provide a comprehensive list of leads from as many counties as possible from across the nation.

2 THE POTENTIAL VALUE FOR MONEY YOUR PROBATE LEADS CAN BRING

You have no way of knowing which probate leads will work out for your real estate business and which ones will not. However, you can determine based on the pricing package whether leads are worth buying in the first place.

Quantity is not always a good thing. Cheap is not always better. What you want is quality. Ten probate leads that will result in a sale or two are much better than 50 probate leads that will not work out at all.

So, what you are looking for is how many leads are on offer for sale, how much they will cost you, and their potential return on investment. You also need to consider just how many people will have access to the same set of probate leads at the same time you do.

The latter is very important because it determines the level of competition you will have with other REALTORS®and investors for the same leads. This in turn will determine your success rate when it comes to converting those leads into clients.

It would be prudent therefore for you to be on the lookout for a set of probate leads sold for a fixed affordable price. It would be even more profitable for you to hold out for leads that are offered to you exclusively for a set period so that you can have the first shot before your competitors get access to the same leads.

3 THE QUALITY/ COMPREHENSIVE NATURE OF THE LEADS

What is the nature of the leads that you have access to? We definitely are not talking about the name of the executor and nothing else.

A name alone will not help you if you want to launch a marketing campaign strategy to reach out to your potential clients. What you want are details; lots and lots of details. You are far better off getting a probate lead that constitutes of the mailing address of the probate property and the phone number of the person who can be reached as primary contact. This is much better than having a name only. You can always address an introductory letter to the title “the executor” until you are able to get the name of the contact you reach out to.

If a lead does not contain at least the mailing address, ignore it. That lead is not worth your time and energy. It will require you to waste a lot of resources just to find out if the lead is worth pursuing, which you could have spent wooing otherleads and trying to convert them.

4 RESPONSIVENESS OF THE LEAD

A lead remains so until you convert that person into a customer. For that reason, you need to gauge whether a lead is worth pursuing further based on how responsive that party is to your first attempt to communicate.

If you want to be the best REALTOR® or real estate investor in your locale, it is important for you to learn how to read into not only what people are saying, but also what they are not saying. When you choose to stick to probate real estate, be aware that you will be dealing with the grieving on a regular basis, and they are a bit more unpredictable than the ordinary potential seller. So, gauging how responsive they are is a skill that you need to learn, and learn very fast.

The fact of the matter is that most executors who act as the primary caretakers of probate properties are motivated sellers. It’s just that some of them need to grieve and get their act together first before they choose to part with the properties that they are in charge of.

As a REALTOR® or real estate investor, you need to keep two lists. One list should be for those leads that are very responsive, and the other should be for those leads that are worth revisiting several months in the future.

The moment a lead that you reached out to contacts you, pay very close attention to what that person wants. If the lead in question just wants to ask what it is that you do, that’s good enough. Even if that lead is not ready to be converted into a customer, the fact that he or she has reached out to your business means that what you are offering in the way of services has caught the lead’s attention. You should double down, and nurture that lead until you can get what you want.That is a very good quality lead.

Other very good quality leads consist of executors who live far away from the probate property they are in charge of, as well as those in charge of prime properties that beneficiaries are fighting over. Such executors are usually very motivated to sell and get rid of the troubling property just so that they can have peace of mind and steer clear of stress. Also be on the lookout for leads associated with properties that have pending bills. The bills indicate an overwhelmed executor who has no idea of how to go about managing an additional property. Leads of this nature can easily be converted to customers because they do not want to handle financial stress for long.

That said you should not completely ignore leads that show a reluctance to even contemplate selling a prime probate property. If the death of the lead’s loved one is still fresh, it makes sense that the executor will not be in a mood to part with that person’s property. But if you were to offer your services a few months down the line, that lead would be more amenable to being nurtured and converted into a customer.

It would be prudent therefore, for you to learn the useful skill of gauging the responsiveness of a probate lead on a case-by-case basis.

CONCLUSION

While the real estate industry as a whole is very competitive, a significant part of the probate real estate sector is still uncharted. You can be a pioneer in your locale, if only you take the time to invest in your realty or real estate investment business.

The quality of your probate leads is the foundation to building your real estate business into a successful company, so tread carefully when acquiring them. Start by scrutinizing the reputation of your probate

leads source, determining the ROI, selecting the highest quality of leads based on details provided, and then learning how to gauge the responsiveness of the leads you contact. By paying attention to the details, you will set yourself up for success. It will be much easier for you to laugh all the way to the bank thereafter.

FOR MORE INFORMATION

Leon co-founded US Probate Leads more than 12 years ago and has witnessed its growth during that period from a one city lead provider in the probate space to the only national provider of probate leads for virtually every county in the country.

Leon likes to point out that US Probate Leads is the only company providing Probate-related Real Estate-related leads to Investors and REALTORS® based on data collected directly from individual probate courts in virtually every state. This has been achieved by building a National Network of Researchers that visit each county one time each month. Leon’s team processes this incoming data and makes it available to individual subscribers for their use in reaching out to highly motivated property sellers.

 

SELLER FINANCE 101

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What Is It? HOW IT WORKS. How You Benefit.

By Bruce Kellogg

In a real estate transaction, seller financing takes place when the seller and the buyer agree that the seller will lend some of the purchase price to the buyer to facilitate the sale.

This is often labeled “owner will carry” (“owc”), and is a well-trodden path in residential, commercial, and land transactions.

HOW IS IT DONE?

As in any real estate transaction, buyer and the seller negotiate the terms of the loan, including the amount, due date, interest rate, and monthly payment. Other terms could include a late charge and a “due on sale” clause, and more.

The documents consist of a promissory note and a deed-of-trust or mortgage, depending upon the laws of the state for securing loans to real property. Depending upon the state, an attorney, escrow company, or title  company will prepare the documents for the parties, making the process very straightforward, though not necessarily simple.

NEGOTIATING THE TERMS

Down payments are usually between 10% and 30%, depending upon the buyer’s financial position, the buy-er’s creditworthiness, and the seller’s need for cash. A credit report on the buyer is essential.

It is possible to have a loan where the payments are interest-only, but some degree of amortization is preferable so the buyer is building up equity and can refinance more readily in the future. The interest rate should be a “market rate”, or less if lending to a friend or family member. Excessive interest rates do nobody any good, just making it harder for the buyer to succeed with the property.

The length (“term”) of the loan is negotiable based on the needs of the parties. The note could be written with one or more “options to extend” in case conditions for refinancing are not favorable when the loan matures. The idea is not to create a condition where the buyer cannot pay off the loan when it comes due.

WHAT ABOUT COLLECTING PAYMENTS, AND PROPERTY TAXES?

Sometimes with seller financing the buyer will neglect to pay the property taxes or keep the premises insured. The best way to prevent this is to hire a “loan servicing company”.

They will do everything, and even foreclose, if the need arises. The cost is reasonable, and the piece-of-mind is priceless!

WHAT IF THE BUYER DEFAULTS?

There are three alternatives. The obvious one is to hire an attorney or foreclosure company to legally recover the property. Then, it’ll be necessary to make repairs and re-sell the property, or rent it out. This should be chosen if the buyer’s default appears to be permanent, and cannot be corrected.

If the buyer’s default appears to be temporary, a job loss for example, then it’s best to suspend payments. Once the situation is resolved, modify the note to include the missed payments and proceed as before.

The third alternative is to sell the note at a discount and let someone else deal with the default.

Discounts on defaulted notes are typically 40 –  80%. This is a terrible idea! Don’t do it!!!

WHAT IF THE SELLER NEEDS MONEY LATER?

There are several alternatives here, also. The first is to sell the entire note at a discount. Since the note will be “performing” (i.e., not in default), the discount could be in the 20 – 30% range, which isn’t so bad if you need cash.

But maybe you don’t need to use the entire note. You could sell just part of the note, or just a certain portion of the payments. There are markets for notes across the country and over the internet. Notes can be very “liquid” nowadays.

Finally, you could borrow against the note. The legal term for this is “hypothecation”. Private parties, banks, credit unions, and “factoring companies” all do note hypothecations. Check the internet first.

BENEFITS TO THE BUYER

There are two primary benefits to the buyer. The first is that the buyer can negotiate a “customized” loan with the seller to accommodate the buyer’s circumstances. Banks and mortgage brokers usually sell their loans on Wall Street, so the loans are standardized. These don’t necessarily fit everyone!

In addition, commercial lenders charge “loan origination fees”, also known as “points”. Most sellers do not charge fees for lending, and in many states they cannot. This saves quite a bit for the buyer.

BENEFITS TO THE SELLER

There are two benefits to the seller. The first is that carrying some financing facilitates the sale. No doubt about it!

Secondly, the note that is carried back generates a regular monthly income stream that is secured directly by the property. This makes it a very good, long-term investment.

ABOUT THE WRITER:

Bruce Kellogg has been a Realtor® and investor for 35 years. He has transacted about 500 properties for clients, and about 300 properties for himself in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches. He is available for listing, selling, consulting, mentoring, and partnering. Readers can reach him directly at: [email protected] , or (408) 489-0131.

 

A Rehab Repair Estimator

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By Gary Massari and Bruce Kellogg

Introduction To Real Estate Matters

This is an initial article in a new series called, “Gary’s Real Estate Matters” from Gary Massari, CEO of REI Fortunes and Bruce Kellogg, Real Estate Consultant.  In this article you will learn the importance of estimating repair and renovation improvements and how you can benefit financially!

Use With Contractors

When working with contractors, you can save money several ways; first, buy your own materials and only hire the contractor for labor. This will save you 20% on materials that contractors mark up.  Secondly, if you are a veteran, Home Depot will give you a 10% discount. If not, then find a friend who is a veteran to make your material purchases for you.

We are going to show you a template we use so you can see how it works, especially with contractors and sub-contractors for each area of rehab. It is important for the bidding to be uniform so that careful comparisons among bids can be made. If a bidder departs from the estimator, there must be discussion to reconcile any differences. Otherwise, you are comparing apples and oranges, as the saying goes.

Building Your Own Estimator

There are a lot of cost estimators you can get for free by searching Google, but designing your own to meet your specific needs is far better and more accurate.

When designing your estimator using an Excel spreadsheet, there are four summary parts you want to include to the estimator:

  1. Exterior
  2. Interior
  3. Mechanics
  4. Other

Exterior will look something like this…

Notice that the UNIT SF works together with the COST (unit price) to calculate the total cost, as in this case for a new roof.  You can easily contact a roofing contractor in your area to get a square foot cost to replace a roof.

Here are the categories for the Exterior:

  1. Roof
  2. Gutters
  3. Finish
  4. Masonry
  5. Painting
  6. Windows
  7. Garage
  8. Landscaping
  9. Concrete/Asphalt
  10. Decks
  11. Fence
  12. Pool
  13. Septic

Here are the categories for the Interior:

  1. Painting
  2. Hardwood
  3. Carpet/Vinyl
  4. Kitchen cabinets, flooring, counter tops, electrical & plumbing
  5. Appliances
  6. Bathroom
  7. Framing
  8. Insulation
  9. Walls
  10. Doors & Trim
  11. Basement
  12. Foundation

Mechanical

  1. HVAC
  2. Plumbing
  3. Electrical

Other

  • Demo & Dumpsters
  • Termites/Mold
  • Permits

Concluding Remarks

  • The unit cost in our example is based on the San Francisco Bay area. They will need to be revised for areas that have substantially different cost structures. Input from local contractors submitting bids should make this possible.
  • In many markets around the country, sale prices are now declining. Therefore, it is critically important that rehab costs be estimated accurately, and an extra margin be added for safety.
  • Put a Yes/No column, and that way you can walk through a home in minutes and mark Y or N based on your observations. When you leave you can then calculate the cost.
  • Make sure you add a 10% to 20% contingency to the total project to cover unknowns. Some hard money lenders will only allow 5% overall contingency, so in that case pad your line items to include a sufficient contingency.
  • When doing major renovations, it is wise to get SKU numbers for your kitchens, bathrooms and mechanical items.
  • The best use of a detailed cost estimate is to assure that you have covered your bases to have a profitable project, and to convince your investor as a wholesaler of your accuracy and credibility.
  • Your cost estimator will also come in handy when you negotiate your final offer on a discounted property to assure profitability.

Let Gary and Bruce know if this article helped you, and write us to request other topics.  You can always reach either of us by calling us or emailing us…

Gary Massari, CEO REI Fortunes, https://reifortunes.com

925-451-1619 [email protected]

Bruce Kellogg, Real Estate Consultant, [email protected] (408) 489-0131

 

New IRS RULES for LLC’s & LP’s Taxed As Partnerships

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What has changed?

The new rules change how the IRS can audit an LLC or LP. In the past, an IRS audit of an LLC or LP taxed as a partnership involved auditing, settling and collecting tax shortfalls from each individual partner. In a master limited partnership (think oil and gas or real estate) with thousands of partners, this was very difficult.

The IRS decided (and Congress approved) that it was best to conduct audits at the entity (LLC or LP) level. They now can just audit the entity and not the individual partners. In many situations, the entity – and not the partners – will pay any tax shortfall. The new program is called the Centralized Partnership Audit Regime.

What if my LLC is taxed as an S Corporation or C Corporation?

The new rules only apply to LLCs taxed as partnerships. However, in the event of a change of taxation, it will be important to amend your LLC Operating Agreement.

How does the IRS benefit from the change?

The new rules allow the IRS to deal with only one point of contact – the Partnership Representative. This individual, who does not haveto be a member or partner, has the power to obligate the entire group.

The IRS will benefit from LLCs and LPs not being able to give them the run around on who has authority for the entity (which did occur under the old rules.)

They will also benefit from being able to asses any tax shortfalls against the entity itself and not the individual partners.

Why is the Partnership Representative so important?

The Partnership Representative has broad powers to obligate the LLC or LP. Any resolution they arrive at with the IRS binds all of the partners. You want to have the right person in place for this.

If you don’t appoint such a person, the IRS can appoint someone for you. You don’t want the IRS to have such a power over your entity. This is a key reason why LLC Operating Agreements and LP Limited Partnership Agreements must be amended to pre-appoint a Partnership Representative.

Who can be the Partnership Representative?

The Partnership Representative must be an individual with a substantial presence in the United States. Initially, we typically appoint a General Partner of an LP or a Manager/Member of an LLC to fill this role.

If the IRS later conducts an audit, a CPA or tax lawyer, who does not have to be a Partner or Member, can be appointed if desired. A professional firm can serve in this role but an individual with a substantial U.S. presence must also be identified.

Again, if you don’t appoint one, the IRS can do it for you, which is not in your best interest.

Can I opt out of these new rules?

Yes – but we don’t suggest it. Partnerships with no more than 100 eligible partners (and not one ineligible partner) can opt out and be governed by the old rules. However, ineligible partners include single member LLCs and living trusts.

Virtually all of our clients currently or in the future will use a single member Wyoming LLC and/or a revocable living trust for their asset protection and estate planning goals. These strategies involve ineligible partners.

If you opt out and a single member LLC or a living trust becomes a partner then you are back into the new rules. But because you didn’t amend your documents and appoint a Partnership Representative, the IRS now gets to pick one for you. You don’t want to give them such power.

Will there be greater IRS scrutiny of those who opt out?

Yes, as the IRS has posted on their website:

“To ensure that the election out rules are not used solely to frustrate IRS compliance efforts, the IRS intends to carefully review a partnership’s decision to elect out of the Centralized Partnership Audit Regime. This review will include analyzing whether the partnership has correctly identified all of its partners for federal income tax purposes notwithstanding who the partnership reports as its partners. For instance, the IRS will be reviewing the partnership’s partners to confirm that the partners are not nominees or agents for the beneficial owner.”

To stay compliant on the opt out, every year your CPA must provide the IRS with the name and tax ID of each partner. If they forget to do so you are under the new rules (without an appointed Partnership Representative). The IRS scrutiny and consequences of a simple error are not worth the supposed benefits of opting out.

What if a Partner owes money for year 2020 but is no longer a partner after an audit in year 2022?

A very good question. In many cases, the LLC or LP will pay the tax and assess the partners. What if a year 2020 partner is long gone? We have included language in the amended documents which allows a general partner/manager to go after former partners.

We have also included language to identify who will be responsible for prior year tax obligations upon a transfer of interest. But under the new rules there is a risk that current owners could be responsible for the taxes of former owners.

When do the new rules take effect?

The new rules apply for tax years beginning January 1, 2018. LLC Operating Agreements and LP Limited Partnership Agreements should be amended before that date.

What should I do now?

You should work with your attorney to amend your documents. You should discuss with your CPA that you are accepting the new audit rules. Once your documents are amended all Members/Partners should sign them in order for the transaction to be valid.

What does Corporate Direct charge to do this work?

As a service to our clients, we are charging just $295 for an amended and restated document. We will also include meeting minutes in which all partners approve of the new rules. It is your responsibility to make sure everyone signs the new agreement.

This is a minimum price and may be higher due to complexity and number of owners. For your friends and family members who are not our clients, the minimum amendment price is $670, which included one year of registered agent service in the domestic state.

Corporate Direct has also created a new service to better protect Wyoming LLCs. An explanation of our Armor8™ service is found on our website. Because the Armor8™ service also requires an amendment to your Wyoming LLC Operating Agreement, we will include such amendments to our existing clients at no extra charge through March 1st, 2018.

Please take the time to call your Incorporating Specialist at 1-800-600-1760 to arrange for the amendment of your documents before the end of the year.

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Out-Of-State Investor Tips From a Veteran Property Manager

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By Anita Cooper

Investing out of state can be nerve-wracking, especially when you’re unfamiliar with the nuances of the markets you’re investing in. A property can look really good on paper, but does that automatically translate into a great buy?

Not necessarily.

That’s where due diligence comes into play. A knowledgeable broker can help you fi nd a good investment property, but that doesn’t always mean the broker can help you make the most of that investment.

The perfect option then, would be an investment savvy real estate broker who is also a highly effective property manager.

Pam Blanco, real estate broker and Owner of Professional Asset Management and Sales (PAMS), is that perfect option for investors who are interested in Texas properties.

She knows first-hand the frustration of finding a true partner who can help make the investing journey easier. When asked if she’d ever considered investing out of state or overseas, Pam shared a frustration that’s common among out of state investors: finding knowledgeable and professional industry contacts where they want to invest.

Anita: Have you ever considered investing out of state or overseas?

PAM: Not necessarily overseas, but out of state, yes. I struggle a little bit with management companies and REALTORS®. So for example, I find a good agent, but they don’t know a whole lot about property management, or I find a good property management company, but they can’t tell me what sells in a particular neighborhood, so it’s kind of frustrating.

Anita: What types of properties do you specialize in?

PAM:I do single family and multi-family. In fact, I would say, you know, I kind of grew up in the multi-family realm. I worked my way up through the ranks, so I understand multi-family very well.

In fact, we actually manage a smaller multi-family; it’s a specialty of ours, but we also do single family home. For first-time investors who are just getting into the business, and they’re looking for liquid properties, we help guide them through that. But I would say, more importantly, we just try to counsel them on good areas to be in. We help them find properties that are going to profit.

Anita: Please share with us how your program works and why it’s so unique?

PAM:We have a team of full-time researchers who do all of the research on potential investment properties, then put together ROI sheets for investors every week.

When an investor chooses a property they like, we actually draw the contracts for them, represent them in the sale, and then we do the rehabs for them as well.

So typically, when we put an ROI together, we’re budgeting the rehab, then performing the rehab for them, and then managing the investment afterwards.

We kind of have a vested interest in the property to perform as we specified in our ROI sheet, so it’s really important to make sure that we do that.

In addition, we also counsel investors on what type of investment they want. Some people want a long term hold, while others are just looking for their kids’ college education, so they may be looking at a five-year or a 10-year hold, so it just depends. We put together a plan for them and their portfolio based on what their actual goals are.

Anita: So what is your favorite part about the business?

PAM: “I’m going to say probably the deals and the people. So I guess to me — maybe, I am a deal junkie — but you know it’s the thrill of that chase, finding the best deal, getting properties that work for investors, and then managing them to make sure that it does work.”

Anita: Where would you say you see yourself and the biz in the next 5 to 10 years?

PAM:I would like to see the company in multiple states. I’d also like to see the number of investors that I work with pretty much triple and then open it up to multi-state.

As of this writing, PAMS manages more than 500 properties for its clients; a large proportion of them out of state investors. Individuals who are interested can reach Pam Blanco at 817-907-7347.

Anita Cooper is the founder of Northwoods Writer, a marketing resource for real estate professionals. She lives with her family in beautiful Wisconsin.

WHAT MAKES PAM DIFFERENT?

A true turn-key opportunity: Using knowledge and skills gained from many years working with both property management and investment companies, Pam Blanco has designed a “one-stop shop” for investors looking for profitable investing opportunities in Texas.

10 Things You Have to KNOW Before CLOSING a Multifamily Deal

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By Tom Wilson, CEO of Wilson Investment Properties

There are so many reasons to get excited about owning a multifamily property that it can be easy to overlook one or more critical areas of due diligence. I’ve been investing in real estate for five decades, and I love multifamily products. My best performing asset is a multifamily that I purchased 17 years ago. And the worst deal I ever owned was also a multifamily asset.

Often deals look amazing with the proforma (projected returns with ideal conditions and assumptions) showing high cash flow and high IRR (Internal Rate of Return) projections. These returns are indeed the goal; however, you need to determine if they are just virtual (on paper) or if they can actually reach your pocket. I’ve seen the good and the bad, compiled my experiences, and would like to share the top ten things to consider before closing on your next multi-family deal to maximize your success.

1) LOCATION LOCATION LOCATION.

The metro and the sub market are critical. What is the traffic count? Visibility? Is it on the right side of the freeway, or in the path of progress for its city or town? What do its neighbors look like? Who is shopping in the local stores? Would you walk the streets at night?

The answers to these questions are going to be indicative of your experience if you purchase the property.

2) GREMLINS INSIDE?

Every property has surprises. Some good, mostly not. While a smart purchaser always includes contingency and reserve accounts, certain multifamily properties hold more surprises than others.

The foundation, age of chillers and boilers, environmental review, roofing and all deferred maintenance can be major red flags of potential deal-breaking capital expenditures. Make sure your team walks every unit, not just a sample. Twenty percent of the units can chew up 80% of your rehab capital. Also, who is actually living inside your potential property? Review every lease and check if they are really representative of the area. Did the seller fill up the property with low qualification residents just to show a high physical occupancy?

3) JOB & POPULATION GROWTH.

How good is the metro? Any multifamily property requires stable or growing rents and tenancy to be a successful investment. Good tenants have jobs and pay their rent on time. Look at individual job growth statistics. Is the city growing faster than the state or nation? What about in your sub market? Good job markets attract people, while bad markets see net negative population growth.

If your property’s market is stagnant or on the decline, chances are your occupancy rates will follow.

4) ONE HORSE TOWN?

So you like the metro, employment is good, and population increasing. Now ask yourself “why?”. A good metro has good employment diversification that will weather storms and booms of economic sectors and individual corporations, while singular economy metros are more vulnerable.

Remote military towns can be shut down overnight by congressional base closures. Large corporate offices or manufacturing plants can be relocated else-where or even overseas with mass layoffs in the local area. Natural resource boom towns are vulnerable to single commodity prices and competition.

Even government offices can be moved to newer, cheaper areas, which can leave a non-diversified metro in shambles and hurt your investment. I like growing metros over 1 million people with a broad economic base.

5) PARKING LOT TEST.

Another surefire way to take a litmus test of a property’s tenants is to drive the parking lots at different times of the day and week. Good tenants have jobs and are at work, and the number of cars during the day should be pretty scarce.

If you find a full parking lot during mid weekday, chances are there are many tenants on various levels of subsidized or governmental support, who tend to live with less of a financial buffer to pay rent and care for their unit. This could indicate a higher likelihood for turnover, make-ready costs, and lower occupancy. Park at the property at night and watch. Who is coming and going? A lot of traffic on site that are not occupants could indicate illegal operations or extra tenants who are not on the contract.

6) SELL STORY.

Why is the current owner selling? Have they been struggling for years to make it perform and have just given up? Did they not have enough capital to mitigate deferred maintenance or to attract higher rent tenants? Perhaps the neighborhood is rougher than the listing broker is making it out to be.

I’ve passed on what appeared on paper to be amazing investment opportunities, simply by asking,“Why couldn’t the existing owner do better, and what makes me think I can outperform the current owners?”. Sometimes the property is good but the nearby properties are better, and it would take too much capital to just come up to par with the competition. Remember, the seller knows more about the property than you, so it is important to fully discover the history and challenges.

7) MANAGEMENT & MAINTENANCE.

A critical way to control the tenant density environment, improve service to tenants, and reduce costs is to have full time on-site property management and maintenance.

This allows you to better control who lives in your property and get prospective tenants to sign leases before finding other options. It also allows you to quickly evict problem tenants, and to get maintenance and other problems fixed with minimal wait times and maximum tenant retention.

Typically, a multifamily has to have $40-50 thousand minimum income to afford to have on-site management and maintenance. Any less or a parttime solution with less effective service can hurt your property’s performance. That is why I avoid small multifamily properties.

8) WEAK ASSET IN A GOOD NEIGHBORHOOD.

You can have a lot of control on improving a property, however, almost no control on fixing the neighborhood. I will look at C properties but almost always insist on a B- or better neighborhood.

You’ve heard one philosophy for buying houses to look for the ugliest house on the best block – the same can work for multifamily properties. Find a property for which added value and better management can take advantage of the lift from neighborhood. The sub market around you can help or hurt you. Choose it as carefully as you choose the property.

9) RECESSION REVIEW.

It’s easy to have a Midas complex in this bull market and start believing that everything anyone touches turns to gold. And it’s true, when the economy is on an up-swing, even mediocre properties with average management can be successful. This holds true until it doesn’t, and those who don’t plan accordingly will get hurt the most.

I look at the great recession performance years  (2007-2010),  and  see  how  the  product  and sub-market performed then. How much did the occupancy drop? Did the NOI crater? How did the sub-market’s population and unemployment do?

These are good tests on how the property and area will do in the next recession. And all expansions end, we just don’t know when. Select a historically resilient market and plan on having enough reserves and low enough leverage so your property will survive the next recession.

10) FRIENDS AND FAMILY TEST.

Lastly, especially if you are responsible for other investors’ money to help fund acquisition, ask yourself “would I offer this investment to my friends and family?”.

If the answer is “no”, or even if you have to pause and think about it, you likely already know the answer and should listen to your subconscious and walk away while you can. That final “gut test” is useful in overriding our mind’s uncanny ability to talk ourselves into a bad decision even when we know deep down it’s likely higher risk than we feel comfortable with.

This is just a sampling of the many important things to look for during due diligence before closing or even making an offer on a multifamily property. One of my top observations is that sub-markets vary a lot from the average of the metro, and the sub-markets and surrounding areas can be as important as the property itself in determining likelihood of success.

And lastly, don’t reinvent the wheel. Ride on the coattails of experts and utilize the experience of others. Even though I have almost five decades and 4,000 unit transactions of experience, I never do a new deal without consulting an expert for every aspect of the investment, including the sub-market and the asset class. Use those trusted advisors around you that have honed their expertise and judgment and you’ll greatly increase your probability of having a successful multifamily asset.

To your financial success,

Tom K. Wilson

CEO Wilson Investment Properties