Bruce Norris is joined again this week by Dyches Boddiford. Dyches is one of the most recognized and trusted names in the real estate industry. He went through college, got a degree in physics and computer science in the early 70s. In the 1980s, he began to purchase properties, first his own home. By mid-80s, he also began to purchase notes. In the early 90s, he retired from working for other companies to work on his own. He created loans for mobile homes, and he even bought and flipped them and carried the financing. In the early 90s, he began teaching about the subjects he’s most well known for, holding properties and trusts and corporations and LLCs.
Bruce and Dyches continued with their hard money conversation. The Norris Group has had its hard money loan business for a little over 20 years. One of the things that was brought to the business from a gentleman he was borrowing a lot of money from him was this led him to decide to open a hard money loan business and have him come to work for the company. They don’t take any broker referrals, which is interesting since almost 100 percent of the problems come from that. Being in the business of teaching investors what to do has always been the source of their deals. People taught the business to come to The Norris Group for their deals directly, so it’s always been new loans directly to investors. It never has anything to do with owner-occupants or a broker referral.
Back in the 80s, Dyches worked with owner-occupants since they didn’t have any laws that really applied to them in that area. As soon as the Safe Acts and Dodd-Frank acts came into play, especially in the early 90s, they had licensing laws for making loans to consumers coming into effect. But, you had it a lot sooner in California. At this point, he quit dealing with owner-occupants.
When Bruce first saw the need for having a money source, it was about ’91 or ’92. He began by buying a lot of REOs and going to HUD auctions to buy 10 houses. He ran out of cash and a personal credit line fairly quickly. He had never heard of a hard money loan business, and he had a guy doorknock a bunch of lenders. He found one Craig was working for, and they lent one hundred percent to owner-occupants in the second position. That was their business. Bruce asked them what they would loan him on the purchase of a home he bought; for example, an REO. He checked with his boss about a 65% loan. At the time, Bruce was buying everything for 50 percent or less, which excited him. He had two loan docs he wanted to get funded that he had already just closed. When the loan docs were ready and he was signing them, he asked the lender if it bothered him that he’s loaning him more than what he paid for the property. He almost had a heart attack. He checked with his boss, and he said they were OK since it was still at 65%.
He could tell they were nervous. He made six payments in advance on each loan, and the bell went off in their head that he was not a typical hard money customer. They gave Bruce a $1 million credit letter that he would take to the HUD auctions, and they would honor it. Every time he bought a house for around $60 grand, they would cross through the million and write $940 left. It made his buying life really easy and opened up a whole new avenue for that lender. They thought the investor was a riskier proposition than an owner-occupant, and it isn’t true. Bruce got into the hard money loan business by being a borrower and then figuring out he could source it as well.
Bruce next asked Dyches how he got into teaching. He said he was president of the local real estate group, so it was right when he went into real estate full-time. He kept having people call him up and asking him how they could use corporations since they didn’t have LLCs at that time. They kept asking him about the entities, and he spent 30-45 minutes on the phone talking to them and telling them there’s more to it than that but that these were the basics. From here, started teaching a little evening class. He taught a three-hour evening class and a Saturday class before going into a whole weekend class. He then had another real estate group ask him down in Florida to come to speak to them, and he went. One thing led to another.
He enjoys dealing with people and watching them light up when they realize they could do something that they didn’t know how to do before. He has been teaching since 1991. He teaches about four or five-weekend classes a year, and he might teach somebody else a time or two. Other than that he does his own real estate and hard money lending, and he enjoys a little bit of semi-retirement. Bruce is on the same path in a way. Aaron does a lot of the daily work and investing.
Bruce next asked him if he ever got into new homebuilding. He said when he took on some borrowers who built property, he had to take over and finish out the houses a couple of times. However, in general, he has not been a builder. He has been a developer and developed a high-end subdivision over on Edisto Island in South Carolina. He found developing the property to be much more lucrative than the houses he built. You would have to have some pricey land for that to be true, and California can certainly work. When you’re on the water, prices typically go up. He had recently bought a 13-acre tract of land for about $550,000, and then he had $100,000 to develop it. He sold off the waterfront lodge for $400,000 apiece and the interior lodge for $100,000. With an investment of about $700-$800,000, they had a total return of about $2.4 million.
Sometimes when it comes to land in California, it goes in reverse. In about 2004, Bruce got a call from one of his friends who was a builder. He didn’t have the money for this deal, but he said it was probably the best deal he ever saw. It was 93 finished building lots in California for $275 grand. The story was the lender had lent them three million dollars to create the subdivision. The bank went under when the paper went under. Then we had the crash. The note got sold for $100 grand, and Bruce was getting a chance to buy the 93 lots for $3 grand a lot. This included finished lots, street sewers, and everything. Just think about the lender taking a $2.9 million hit on a three million dollar loan. Land can go in reverse, that’s for sure. Dyches likes income-producing property to loan on or to buy himself. Many of the lots that he still has come out of buying at the high point back in 2006 and 2007, and he’s still holding on to them. These are waterfront lots, but they’re just not back up to the price he paid for them.
They next went on to talk about asset protection. He asked him what percentage of real estate investors have the protection that they need already in place. He said that’s a hard question to answer because there are a lot of real estate investors that have a little bit of what they need to be done, but they haven’t looked at their whole portfolio and their way of doing business to determine not only their best asset protection structure but the best tax structure to have as well. With knowledge of those two items, obviously asset protection protects what you already have. He likes to think of it as ratcheting up so that you can’t fall back too far. By saving the taxes and structuring things properly for taxes, that’s what the name of the game is and what they’re doing. They’re trying to build assets up, a lot of those assets being dollars by the time that we want to retire and take it easy.
Bruce asked what some of the most common liability issues are that come up for investors that hold rental real estate. He wondered what causes them to get sued. Dyches said tenants and contractors are the two biggies. One thing that people shouldn’t do is always represent themselves as the owners of the property when they deal with either tenants, potential tenants, or contractors. They should always be a “they sent me” person. W2 employees deal with other W2 employees better than they do with what they see as a big fat landlord, the owner of the property. Having the property in a land trust and maybe having an LLC as the beneficiary of the land trust is all determined by particular situations. There’s no one size fits all. But a structure similar to that, or in the case of a flipper property, it might be an S corporation owning the property either directly or through a trust. You, being the employee of those entities, are just a contract manager or the overseer for the work that’s being done when you deal with a contractor. For the tenant, you’re just the property manager.
You can’t authorize a new ceiling fan. You have to talk to the office about it, who can probably get back to you next week. This gets you away and gives you time to think whether or not they are good enough tenants who will be here long term. Also, consider whether the fan really needed to be changed or not. He can then commiserate with them a week later and ask if their money being and increasing rent would affect them wanting to put in a fan. He wouldn’t think they would want to agree to that. You’re not telling them a lie, you’re acting in different capacities. You act as president of a company or the contracts manager of a company. In the meantime, you sign on behalf of the company. You show what your capacity is that you’re signing it. It’s an effort to divide up the different capacities that you need to act in with property, or with loans for that matter, and represent yourself as whatever the best structuring is for that particular situation.
Bruce asked Dyches if he finds that certain types of properties lend themselves to more liability legally, like being units. Dyches said absolutely. Bruce asked what types these are. He said low-income properties, particularly low-income apartments, bring a lot of liabilities with them. There’s a lot of potential lawsuits to come out of those properties for one thing or another. You have people that always feel like they’re a victim. They’re always watching the Saturday Night Late Show where the contingency fee and personal injury attorneys are advertising. They’re always thinking about how they can get something that somebody else has.
The nice suburban single-family houses are probably the lowest on the liability scale. Ther’es a lot of them between the two ends. When a lot of investors start out, they want to start with the low-cost properties that might have fairly high rents coming in. People look at the ratio and see how quickly it helped them grow. However, what they don’t take into consideration are those low-end properties typically have a lot more turnover; and when the turnover does occur, they usually have to put in a new hot water tank because the old one walked away with the last tenant. In addition, the carpet may be dingy and needs to be replaced as well as painting has to be done.
The key is to get a nice long-term tenant and a nice suburban property where you might have the same tenant for 4, 5 or 6 years. The turnover is key. It’s not only liability, but your investment is determined by the kinds of properties that you have.
Bruce next asked what role liability insurance plays in protecting our assets. Dyches said you should always have insurance, both liability insurance, and hazard insurance. With a rental property, that’s a landlord policy. If it’s a flipper property, that’s a builders risk policy. You can have that is your first line of defense in case somebody comes after you or there’s a big loss that occurs on the property. Insurance is a cheap, cheap way of providing asset protection as a front line because the best attorneys in the country are on retainer by the insurance companies.
Having the structure and using the corporations, LLCs, and land trusts are a way to provide protection for you as a secondary fallback if insurance either doesn’t cover all the claim that’s made or you happen to fall in one of the claim areas that the insurance company decides it did not insure you for, so you have to defend yourself. It could also happen if you have a problem with a tenant that goes beyond where the insurance comes into play. You always need the entities and asset protection, but the insurance policies are the first line of defense.
Bruce asked what likely entity the property would be deeded to if he were to take title to a property tomorrow. Dyches said if he were taking title to property now, he would want to put it into a land trust. The beneficiary of that land trust might be him, but more likely it is going to be an LLC if it’s a long-term hold property or an S Corporation if it’s going to be a flipper property.
Bruce asked him if he has a favorite state in which to originate the LLCs. He said the first LLC that anybody uses should come from their own state. Their strategy is to use some other states like Nevada or Wyoming, in particular, for a particular reason. But in the beginning, you should start with your own state because all entrust state strategies depend on that out-of-state entity dealing with an in-state entity, not with the public. If that out-of-state entity deals with the public in your state, every state has a requirement that the entity is filed with the state as a foreign entity. This defeats most of the reasons that you have an out-of-state entity to start with. The basic structure is that you should have the LLCs or corporation in your state to start with. As you add to that and build structures, you may use those other state entities.
Bruce asked what advantage an LLC has that a C Corp does not. Dyches said an LLC is a past entity for tax purposes. If you like that depreciation to offset other income taxes, then you want that to come through in its full amount. With a C corporation, for instance, it is its own taxpayer, so the depreciation stays in the C corporation. It doesn’t come through to help offset the income that you have in other areas on your personal tax return.
Bruce next asked about if he were holding property in a land trust with an LLC as beneficiary, gets sued, and loses. In this case, the property owner who is the land trust gets sued. The only asset of that land trust is that one property. If the property is free and clear, the land trust doesn’t owe anything on the property and somebody is able to get the judgment, they could possibly get that property. They would not be able to come through to you personally because you were not named as a part of the suit. They would have to figure out and pierce the Land Trust in order to find out who the beneficiary was. If the beneficiary is an LLC, now they have to try to puncture the LLC in order to get to you, the owner of the LLC. To do that, you would have to show the court that you did not treat that LLC as separate from yourself. In other words, the LLC was just an incorporated pocketbook for you and had no separate existence. That’s kind of a hard thing for someone to do.
A contingency fee attorney doesn’t want to take all the extra time it would take to get the court to agree with them. What they see a lot of times is if there is a suit and the dollars are relatively small, from a few thousand to tens of thousands, the judgment only gets in the name of the land trust. If this land trust owes money on that property and is encumbered by a conventional loan, then that judgment is going to go behind the conventional loan. The judgment holder is going to have to then petition the court to try to sell the property, which is another effort in itself. If there is insurance, they usually take the low-hanging fruit, take whatever the insurance company offers, and they move on.
Bruce next asked about charging orders. Dyches said if he and Bruce owned an LLC, for example, and he hits the attorney in the crosswalk using a contingency fee attorney. He sues, and he would get a judgment against the one driving the vehicle, in this example, Dyches. He might then ask how he is going to get paid on this judgment. If he looks around and sees that he doesn’t have anything in his bank accounts, is retired and not working, then what would he have? In this example, he may have an interest in an LLC that might own one or five or ten properties. He would then want to get into the LLC and sell one, three, or four of those properties and get paid. In most cases, the court would not allow him to get into the LLC from the ownership side. That’s where the court would give him a charging order, which says to the manager of the LLC that if there is ever any distributions, then this judgment hold will get one-half of the distributions that would have normally gone into Dyche’s, and Bruce’s part can still continue to go to him.
What they don’t want to do is to affect the investment between while harming you at the same time they’re trying to get paid for his judgment side. That’s what a charging order really means. Some states have better laws on the charging order than in other states. If the suit is not a big suit, usually whatever the insurance company is offering is what they’ll take. They don’t try to pursue the Charging Order because, typically, if two people were running this, they know each other. If you’re still doing distributions for a couple of years, they might think, “Let’s just keep reinvesting the money.” The charging order holder is not going to get any funds.
Dyches Bodiford will be speaking at a seminar in August to cover these very topics. Bruce wondered where this is being done. He said it takes place August 17th and 18th, Saturday and Sunday, in Atlanta near the airport. You don’t need to get a rental car or anything. They have a free shuttle line that goes between the airport and the hotel. He will be discussing the land trust as well as covering personal property trust. To a lesser extent, they will be discussing some of the corporations and LLC issues that you might consider when you’re holding property as well. But the main thrust is the land trust that can be used in any state of the U.S., including California. There are already some California people coming to that. Pete Fortunato has already let him know that he’s going to be coming to sit in on the class, and Lee Horner, an attorney out of Phoenix, Arizona, is going to also be in attendance as well. Finally, Aaron Norris will be attending immediately after coming back from Florida.
The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.