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Friendly Liens and Equity Stripping (WARNING!) - YouTube
Channel: Clint Coons Esq. | Real Estate Asset Protection
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- Hi, Clint Coons here with
Anderson Business Advisors
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and in this video we are going
to discuss friendly liens
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or what some people call equity stripping.
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All right, let's get started.
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(upbeat music)
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Okay, so I met this individual
at an event last week
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and they came up to me after
I got done presenting on
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the first day and they
said, "Yeah I understand
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"the benefits of limited
liability companies
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"and why you should be setting them up
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"to protect your properties.
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"But here's the thing I'm
having a hard time with, Clint.
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"I went to a different
event at a local Rio
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"where this presenter was
telling us, you don't need to
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"complicate your life with
limited liability companies
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"to protect your real estate.
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"That there's a much
simpler way and all you have
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"to do is file friendly liens
on all of your properties."
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Now, if you're unfamiliar with the term,
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what it means is this, you're
gonna loan money to yourself
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and you're going to encumber
all of your own real estate.
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It can't get any more
friendlier than that, right?
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As long as you get along with yourself,
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you can put these deeds of trust
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or mortgages on your own property,
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because of course, you're not going
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to foreclose on yourself
if you forget to pay.
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And in many cases, you're
never moving the money.
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Let me show you how the strategy works.
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So what these people
will typically tell you
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to do is you have your
properties right here.
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Let's say I have three properties.
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They tell you to set up
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a limited liability company over here.
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Now this property here
has $100,000 equity.
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This one here has $75,000
equity and this one has $30,000
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equity inside of it.
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They'll then tell you to
add up all the equity here.
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That's $205,000.
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Then enter into a promissory
note, line of credit agreement
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with each of the, with for
each of these properties
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with yourself for $205,000.
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And in exchange for that,
you agree to give that LLC
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a first, or this case would
be a second deed of trust
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because you have another
lender in front of you,
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against each of these
properties for 205 K.
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So we'll put a 205 K deed to trust there,
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205 K deed to trust here,
205 K D of trust there.
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So those are second deeds of trust
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that get recorded cause the
banks standing in front of you.
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Now, in this particular property here
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that has a hundred K in equity,
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let's say it's fair market value is 200 K.
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This fair market value here is 150
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and this one over here is one 120.
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So if someone were looking,
the whole premise behind this,
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this thought process of using
this for asset protection,
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is that if you get sued,
right, somebody comes after you
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and they sue you and they
wanna go after your assets,
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they're going to see that your
assets are fully encumbered.
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I mean, look at this one has 200,000
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and, oh I mean 100,000
fair market value versus
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what your equity is, $100,000
that's owed to Wells Fargo
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and another 205 that's owed to this LLC.
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$305,000 debt on this one property.
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That's only worth 200 K.
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Oh, just it leave it alone,
it's not even worth going after.
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Or the second property here, same thing.
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It's got $275,000 in debt.
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You see where I'm going with this?
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So, so they're telling you is
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that it discourages people from wanting
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to take your properties.
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Now, there is some truth to that,
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that if a creditor is
aggressive or coming after you
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and they're not an aggressive creditor,
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they may look at that and say,
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"All right, we're not gonna touch you.
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"We'll just let you off the hook
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"and you're free to go."
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However, remember, you never
actually loan the money here.
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So that deed of trust
that gets recorded against
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the property only sticks
to the amount of money
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that was actually transferred.
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So since you never loan the money,
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let's assume an aggressive
creditor does come after you
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and they want to foreclose
on this property,
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and so they bring it to a
sheriff sale and it's sold
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and 200,000 is brought in.
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What's gonna happen in that scenario?
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You're gonna bring in 200 K,
100 K of that is going to go
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to pay Wells Fargo, who's
the bank who loaned you
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the money to begin with.
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That's going to leave $100,000 left over.
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So then what they're
gonna do is they're going
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to contact your LLC and
they're going to say, we see
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that you a have a second deed
of trust against this property
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for $205,000 how much is
still outstanding under that?
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Now, this is your chance.
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You've got to either, you're
either gonna commit fraud
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and you're going to lie, perjury,
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or are you going to tell him the truth?
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I'm telling you, tell them the truth.
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You're gonna say zero.
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So they'll say, oh great,
so you don't know anything
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perfect. We just needed to know that.
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So then yours is extinguished.
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They take that $100,000 and they give it
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to your creditor and they're
gonna do the same thing with
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the other properties as well.
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So if you had a $300,000
judgment against you, boom, boom,
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you've just lost all of your real estate.
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Let's see, a lot of
people who look at this,
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they that give you this
types of strategies,
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they're only focused on one thing.
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They're focused on equity, right?
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I don't know why you invest,
but I know that the equity is
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the icing on the cake for me.
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I invest for cashflow.
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Equity is great and I want
my properties to appreciate,
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but I'm looking for that mailbox money.
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I want that money coming in every month.
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And if I lose my properties,
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my standard of living is going to go down.
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So I want to make sure I'm protecting it.
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So that's a problem if
you're relying upon this,
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and you get an aggressive creditor,
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you're going to lose your properties.
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They're gonna come after them,
they're going to take them,
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and you're gonna lose your
cashflow that came with that.
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And for many of us, that's an
important aspect of investing,
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or that is the aspect of investing.
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So, that's the issue, number one,
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aggressive creditor can
actually go and foreclose
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and that thing's just going to disappear
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because no money changed hands.
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Second issue you have, maybe
they're not that aggressive,
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they're not gonna to go and
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try to foreclose on the property.
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Instead what they'll do, is
they'll just record the judgment
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in the county where their
properties are located.
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So this creditor, out
of $300,000 judgment,
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it's going to attach to that one.
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It's going to attach to this one,
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it's gonna attach to this one.
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So what is that doing for the creditor?
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Well, first off it's going to grow
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at a 10% rate of interest.
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So it's making money,
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but more importantly now
it's impaired your ability
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to do anything with that property.
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Now you'll continue to collect the income
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and you'll continue to
pay the mortgage down
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and build equity in the property.
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But eventually something's
gonna happen here.
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You want to sell the property,
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you want to revive the property.
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And when you want to do
either of those two things,
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the bank, title, they're
going to contact the LLC.
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How much is owed under that note?
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Nothing. Okay, great. We
don't need to deal with you.
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Then they're going to
contact your creditor.
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How much is owed under your note?
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$300,000 I've never been paid.
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Oh, okay.
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And then they're gonna pay that.
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So they're gonna tie your property up,
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the non-aggressive creditor,
just by filing the judgment
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in the county where the
real estate's located.
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And so now what you've
done by adopting this,
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equity stripping, friendly lean strategy,
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is you put yourself in
a vulnerable position
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or you've made sure
that all of your assets,
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are now at risk for one lawsuit?
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What I'm talking about lawsuits,
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we're not only focused on
the lawsuits that occur
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with our tenants, lawsuits against you.
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Let's say you're driving
down the road in the car,
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somebody in front of you stopped short
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and you run into the back of them.
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Boom, you hit them, they sue you,
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they get judgment against you.
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Down go your assets because
you own them in your own name,
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and so the people that tell
individuals to do this,
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engage in this type of strategy.
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My experience, they're not attorneys.
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I mean, they heard
something, read something
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and they take one little
piece of the puzzle
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and they go, oh, I've
just had an aha moment.
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Don't do all the rest of this.
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Just do this one component.
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You get all the asset protection.
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It's not true.
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It doesn't work that way.
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I'm not saying that you
can't use a strategy.
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I actually think this is a valid strategy.
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I teach this as one of the
asset protection techniques,
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that real estate investors should consider
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when protecting their property,
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but it's used in conjunction
with other entities.
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Such as, in this case,
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you would use a limited liability company
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to protect your property like that.
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Now, what would happen if a
lawsuit developed on outside,
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let's say we did that stop short.
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Well, heck, you're protected, right?
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They can't take these LLCs,
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if they're set up the right way from you.
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So you don't have to worry
about outside liability anymore.
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So now we just cut our
liability exposure in half,
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by using LLC.
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So now we're just gonna
focus on the tenants,
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that create issues.
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So now a tenant sues,
they'll just sue this LLC.
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So the only asset that is potentially
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exposed to harm is that one property.
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You see with the friendly lien,
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we had all three properties exposed,
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but now we just limited it to one.
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So now we've cut our
liability exposure by a third,
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in my example.
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Now on top of that,
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if you wanted to use the friendly lien,
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which is something I do teach,
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if you have a lot of equity
there, it makes sense.
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And here's why in this context,
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because now they're suing the LLC.
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And so here's an attorney coming after it.
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They only know there
was only one property,
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rather than three properties
they can go after.
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So that's going to diminish
their aggressiveness
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and looking for low hanging fruit.
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So that they see that,
that property is encumbered
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by a $100,000 with Wells Fargo,
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a second with this no name LLC
out of Wyoming for $205,000.
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They may tell their client, listen,
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they've offered their
policy limits of settlement.
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We can continue to fight
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but it's not going to get us anywhere,
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cause the guys under
water on this property.
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What do you want to do?
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Most people are gonna
say, let's just settle.
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I'd rather take my money now,
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than spend it all on attorney's fees.
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So you can use that as a settlement,
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a negotiation technique.
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Again, it doesn't have any valid effect
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cause if they did go against it,
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you never loaned the money,
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so you don't have any asset protection.
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Now, sometimes people do actually
loan them money and great.
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If you did loan the money,
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then you're gonna be protected
to the extent that you
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actually move the money
from here to that LLC,
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to support that line of credit
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and that deed of trust that's filed.
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So it's a smoke screen.
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It does work.
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We do set those up on occasion for people,
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who want to engage in this,
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but it should not be your only
asset protection structure,
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or you're just leaving way too
many assets in your own name
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and you're one lawsuit
away from risking it all.
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Want to learn more, definitely
come by our three day tax
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and asset protection event.
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I hope you've learned something here
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about how to use friendly
liens with your investment.
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(upbeat music)
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