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Q&A From the August 2018 MAREI Meeting

Posted by davisrk on August 15, 2018

This past Tuesday night, I had the privilege of speaking to a room full of real estate investors at the monthly Mid-American Association of Real Estate Investors (MAREI) meeting that took place at the Holiday Inn & Suites in Overland Park, Kansas.  Attendees at the MAREI meeting had the opportunity to submit questions using their smartphone during the presentation and several questions were addressed during the presentation.  With that being said, there were numerous questions that did not get addressed.  This blog post will address those questions and provide some basic guidance on the questions posed.

Please note that all answers are for informational purposes only and are based on the very limited facts set forth in the question posed.  Additional facts not included in the question may result in a different answer and the answers provided may not apply to all situations.  For these reasons, we recommend that everyone retain counsel to provide information specific to their situation and never rely just on a general presentation at meetings such as MAREI.

The providing of this information does not create an attorney-client relationship between this firm and any attendee of the MAREI meeting or visitor to this webpage and an attorney-client relationship can only be formed through the execution of a retainer agreement and payment of any applicable fees for the legal services.

What is the typical interest rate and loan period for a private loan?

This will vary depending on the specific transaction.  Rates for private loans are generally higher than a traditional bank mortgage and terms are generally shorter.  With that being said, it is up to the individual parties to determine what rate and term make sense for the individual transaction.  The best way to learn about what terms to include in a private loan is to talk with other people who have used or provided private lending through groups such as MAREI or Winvestors.

Should a borrower pay for supplies in advance for his contractor?

If you can structure your contract so that the contractor is not paid until the work is completed, this is always preferable as it provides the best protection for the person hiring the contractor.  With that being said, contractors will not always agree to this arrangement.  If you are providing supplies in advance for your contractor, I would recommend purchasing the supplies directly and having them delivered to the job site so as to have the most control over the project.  Furthermore, I have been brought into situations where the person hiring the contractor ordered supplied directly, but the contract removed them from the job site when he was fired.  After numerous attempts to convince the contractor to return the materials, we are now engaged in litigation with the contractor.  Moreover, these were custom order materials so it is unlikely the contractor has any way to use them on other projects, but he is using the materials as leverage to attempt to get paid for the remainder of the contract.  With this in mind, I would recommend that you do not purchase all of the materials up front, but rather purchase the materials as it corresponds to milestones in the project.

Whether it be material costs, payment, work schedules, or work quality, many disputes with contractors can be avoided by having a well-drafted contract from the onset.  A good contract does not contain a lot of “legalese” but rather states the terms of the job clearly and plainly so as to ensure all parties have the same understandings.  Even when you have worked with a contractor before, spelling out the basic terms can help ensure you continue to have a good working relationship with the contractor.

What percentage of private lenders sell loans on note market?

I don’t have any facts or figures on this question.  Private lenders do definitely sell notes, but there is a good number that do not as the loan is short-term for an investment project or to a friend or family member.

If you’re a private lender, can one set up an LLC to lend through? If so, is it a good idea to do so?

A private lender is a someone who lends his or her own money to others with whom he or she has a personal, professional, or familial relationship.  If you lend money through an LLC, you are not lending your own money, but rather our lending the money owned by the LLC.  Also, the issue of whether you are operating a mortgage lending business become more complicated if you are lending through an LLC, which is a business entity.  For these reasons, an LLC may not be an advisable business structure.  Furthermore, the purpose of an LLC is to shield the person from liability if sued.  The risk of being sued as a lender is smaller than if you own property where someone might slip and fall or injure themselves.  Therefore, a good liability insurance policy and strong business practices related to your lending would do a good job of reducing liability.

How can a first-time flipper find promising properties?

This isn’t a legal question, but I think step one is attending meetings such as MAREI, Winvestors, the other networking groups geared towards real estate investing you can find on or through bigger pockets.  I would also recommend spending time listening to the podcasts from bigger pockets and reviewing the articles and discussion boards.  Most importantly, when you go to networking meetings, such as MAREI, talk with as many people as you can but spend the majority of the time listening.  You can learn a lot by listening to what other people do and implementing it into your own business model.

What is the difference between quit (claim) deed and warranty deed?

A warranty deed is a promise that the person owns the property and has clear title.  As such, if it is later discovered that the person doesn’t own the property, you could go back and seek damages from the seller.  A quitclaim deed does not include this promise.  In other words, the seller is saying “I may or may not own this property and I am giving you whatever interest I have, if I have any.”  A traditional home sale usually involves a warranty deed.  A quitclaim deed is often useful when there are title issues or the person transferring ownership of the property is unsure of its title status.  At least in theory, a buyer should pay more for a warranty deed than a quit claim deed, but in reality the deed is likely simply a reflection of the nature of the transaction.

If you are first lien holder can a second foreclose and discharge you? What about the other way around?

No, a second lien holder is “subordinate” to the first lien holder and cannot remove the first lien.  On the other hand, a second lien can be foreclosed or eliminated through a foreclosure action.  The second lien holder would have the right to bid at the sale and rights of redemption, but if it does not execute those rights the lien is no longer valid.  Once the lien is eliminated, the second lien holder would still be able to collect from the borrower directly.

How enforceable is a mutual release (quit claim deed) executed in advance at loan closing to reduce Foreclosure/recovery timeline?

This question is asking if you can have a borrower execute a quit claim deed that is held in trust either by the lender or another third party to be recorded if the borrower defaults on the loan obligations.  The answer to this question will blend real-world reality and the legal issues.  In the real world, if this deed is recorded and no one objects, ownership of the property has been transferred.  Therefore, to a certain extent, the answer is that is enforceable.  From a legal standpoint, however, most courts would view this similarly to a contract for deed (as in essence it is) and may require further legal proceedings to determine any equitable interest the borrower has in the property and/or to foreclose on that interest.

What happens when the deal doesn’t make a profit & you owe your lender a percentage of the profit?

This will depend on the specific terms in your contract with the lender and this should be addressed prior to you entering into the agreement.  If the contract simply says the lender is entitled to a share of profits, you likely don’t owe them anything if there are no profits.  On the other hand, unless specifically stated in the contract, the lender would not share in the losses.  In this instance, I would recommend you have the contract reviewed by an attorney who can provide more specific advice on what might be owed to the lender under your contract.

Off topic do you do evictions?”

I do not do evictions anymore.  I have decided to focus my practice on other areas of real estate law because the eviction process is a very specific process that is hard to manage effectively as only a small part of your business.  Another MAREI business member, Anderson and Associates does handle evictions and it is the central focus of their practice.  Whether you hire Anderson and Associates or another law firm, I would recommend you hire a firm that does a decent number of eviction actions.  I have seen many attorneys try to dabble in that area and do it poorly, resulting in additional costs and aggravation to the landlord.

How do residential brokers get away with standard form contracts then?

I am reading this question to ask why the real estate brokers use form contracts.  The answer to this question is that most of the transactions handled by real estate agents and brokers are standard transactions.  As such, form contracts can work well for those transactions.  Most transactions involving real estate investors are not standard transactions and include terms and conditions that are not covered well in a form contract.  Furthermore, I can tell numerous stories of litigation that has ensued because a real estate agent or broker tried to include custom contract terms in the few lines available for that on the standard real estate contracts.  In many instances, the litigation could have been entirely avoided by better contract drafting.  This is not said to in any way disparage real estate agents or brokers.  They do an excellent job and I regularly recommend my clients use real estate agents (and many are members of MAREI).  With that being said, they are not attorneys, and many times don’t have the skill or experience to draft custom contract terms.

This answer would equally apply to the question of why Fannie Mae establishes form mortgages, contracts for deeds, and promissory notes that are used for most residential transactions.  Again, the typical single-family home sold to an owner occupant using traditional financing is a standard transaction that a form contract can adequately cover.  If the transaction does not fit within that narrow description of a standard transaction, those form documents may not be adequate to protect both the borrower and lender.

Why would you not use quit claim in the documents for protection?

The answer to this question is similar to what was stated above.  Having a borrower execute a quitclaim deed at the time of the loan is an attempt to avoid the foreclosure proceeds and would be viewed that way by the court.  The borrower would have potential legal recourses to invalidate the deed and/or entangle the property in litigation.  In Missouri in particular, this would take much longer than the time it would take to conduct a foreclosure.  In Kansas, the timeline would be similar, but there are other options (such as a structured lease purchase) that might be a better option.

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