The primary goal of flipping houses is to make a profit. Investors seek out properties with the intent of making basic improvements and reselling them. An experienced flipper with a skilled crew can turn a distressed property into an attractive turn-key investment opportunity. However, there are several traps that await the investor/flipper. Even a technical violation of state contractor licensing requirements could expose the investor to substantial risk of serious financial consequences.
In addition, if the contractor you hired is not licensed, or does not have workers’ compensation insurance, the workers brought onto the job site might be classified as employees of the property owner! Check – and double-check – whether your contractor is currently licensed and has proof of workers’ compensation insurance!
Many states, such as California, require anyone who does any improvement work on real estate that requires a permit must declare they are licensed as a contractor, or demonstrate that they are exempt from the licensing requirement. Some investors seek to take advantage of the “Owner-Builder” exemption and bypass the need to hire a licensed general contractor, doing some of the work themselves and hiring subcontractors as necessary. For those investors with the required skills and know-how, this could result in significant cost reductions and boost the profit margins. For those whose experience is limited to watching a few episodes of “Flip this House,” it could result in a disaster.
Qualifying for the Owner-Builder exemption is not easy. The Contractors State License Board (CSLB) division of the California Department of Consumer Affairs provides a checklist for Owner-Builders in a brochure appropriately titled: “Owner-Builders Beware!” Among the requirements is that the Owner-Builder must register with both the State and Federal Government as an employer, and be responsible for complying with various payroll withholding requirements. Most importantly, the Owner-Builder must provide Workers’ Compensation insurance. The Owner-Builder is responsible for supervising the job, obtaining building permits and all inspections, and making sure that all workers and material suppliers are paid.
Moreover, in order to qualify for the exemption, the Owner-Builder must sign an affidavit, under penalty of perjury, affirming they have read, understood and agree to comply with the applicable provisions of State law. The declarant must affirm that the property is your personal residence that you have occupied for 12 months prior to completion of the work; that the work must be performed prior to the sale of the home; and the exemption can only be used twice in any three-year period. For those flippers who seek to turn properties more often, the exemption is not available.
When hiring a general contractor or subcontractor, investors, flippers and homeowners are cautioned to check and confirm that the contractor is licensed and in good standing before signing the contract, and should recheck to ensure that the contractor remains in compliance at all times for the duration of the work. This can be done by checking the CSLB website (www.CSLB.ca.gov) and checking the name and number provided by the contractor. It is very important to confirm that the name the contractor is using on the contract is the same, exact name registered with the CSLB. Also, check to confirm that the contractor has a workers’ compensation policy in full force and effect for the full duration of the contract.
If a contractor’s workers’ compensation policy expires and is not renewed, the contractor’s license is automatically suspended. Although this would prohibit the contractor from recovering any compensation under the contract, it may also expose the property owner to liability for any claims from any of the contractor’s workers or subcontractors! Private lenders involved with rehab projects should be aware that if a contractor’s license expires or is automatically terminated for technical reasons (i.e., expiration of a worker’s compensation policy; improper transfer to a different entity, etc.), the contractor may be required to disgorge all compensation received under the contract. (B&PC 7031)
Having an experienced contractor can make a big difference in the success of a rehab project. Taking a few minutes to confirm that your contractor or subcontractors are properly licensed and in compliance with state requirements can be the best investment in your investment project.
UPDATE: Earlier this week, the United States Supreme Court granted Certiorari to consider whether or not an arbitrator acts within his powers under the Federal Arbitration Act or in excess of those powers by determining that the parties had affirmatively agreed to authorize class arbitration simply on the basis of broad contractual language that required arbitration of any dispute arising under the contract as a precondition to litigation. Oxford Health Plans LLC v. John Ivan Sutter M.D. This development is further evidence of the need to carefully consider the consequences when signing arbitration clauses without considering the range of consequences!
Most contracts nowadays contain an “Arbitration Clause,” which the parties often unwittingly sign without considering the consequences. After all, if a dispute arises under the contract, would it not be better to resolve the dispute in an efficient manner that is faster and more cost-effective than going to court? It could take years for a case to get to trial, and then there’s post-trial motions, appeals, and on and on. With arbitration, the matter could be submitted, argued, and decided by a experienced judge or lawyer with specialized knowledge of the subject area and selected by the parties themselves! What could go wrong?
Ever since Calvin Coolidge signed the Federal Arbitration Act (FAA) in 1925, parties to a dispute could utilize arbitration as a method of “alternative dispute resolution” or “ADR” as these types of proceedings are often called. Designed to allow the parties to resolve their disputes without the usual delays – and costs – of a lengthy trial, the arbitration process steadily grew more popular over the years. According to a recent article in the California Real Property Journal (Vol 30, No 3 2012), authors Paal, Block and Roland note that by the late 20th Century, all 50 states had adopted arbitration statutes. They note that concerns over court congestion and runaway jury verdicts raised interest in arbitration.
However, Paal, Block and Roland note that arbitration procedures have become more formal and “judicialized,” but lacking the court’s procedural and evidentiary rules, the arbitration process has become as “uncertain, costly, and time consuming as ever.” (Citing Thomas J. Stipanowich, “Arbitration: The ‘New Litigation.’” 2010 U. Ill. L. Rev.1). The Journal article goes on to note that at the 2009 National Summit of Business-to-Business, “seven out of ten participants believed that arbitration [fell]short of expectations in terms of efficiency and economy at least 50% of the time.”
There are several practical reasons that individuals considering contracts in real estate transactions should not agree to mandatory arbitration. For example, the judicial relief afforded by a Lis Pendens - a Notice of Pending Action – is not available under an arbitration clause. Neither is injunctive relief. Or an action in Unlawful Detainer – which affords a landlord a relatively prompt, judicial process to evict a defaulting tenant. In some instances, arbitration actually could take longer and end up costing much more than if the matter had simply proceeded through the litigation process. It should be noted that almost all State and Federal Courts require that parties to litigation attempt one or more of several alternative dispute methods as part of the litigation process, ranging from Early Neutral Evaluations to Mediation and both binding and non-binding Arbitration – all under the jurisdiction and time limitations imposed by the Court.
For better and worse, the Courts have upheld the enforceability of the contractual provisions of an arbitration clause, even if the applicable statutory law would yield a different result if tried in Court. In a recent decision by the United States Supreme Court, the noncompetition provison in a contract with an arbitration clause had been ruled invalid by a State Court, but the high Court ruled that subject to the terms of the contract, only the arbitrator could make the determination, not the State court. (Nitro-Lift Technologies LLC v. Howard). The Court noted that the Federal Arbitration Act “declare[s] a national policy favoring arbitration,” and provides that a “written provision in … a contract [providing for arbitration] shall be valid, irrevocable, and enforceable.” In other words, if the contract declares that an issue in that contract is subject to arbitration, the parties must resolve the issue through arbitration.
Is there an alternative to this “alternative dispute resolution” process? Paal, Block and Roland suggest that Mediation is fast becoming more popular, and “has, for all intents and purposes, replaced arbitration as the preferred method of dispute resolution.” [Citation] Certainly, there are many advantages, not the least of which is that the proceedings are subject to confidentiality. In Mediation, the parties are encouraged to work out their own, final resolution of the dispute, with the assistance of the Mediator. The process is conducted informally, and the process is subject to strict confidentiality. In Mediation, the parties can restructure the deal and fashion remedies that are not available through the judicial process.
Some newer contracts contain “Mediation Clauses” that provide that the parties first attempt to mediate a dispute prior to initiating litigation. Some contracts also require arbitration if the parties are unable to resolve the dispute through mediation. In some instances, especially in real estate matters, it would be prudent to carefully consider the consequences of agreeing to mandatory arbitration before signing the contract. As always, consult with an attorney before you make the commitment.
Let’s face it – everyone objects to paying for advice; after all, our parents probably provided more than we ever wanted to hear when we were younger. Conversely, very few object to paying for emergency care after a disaster has struck. It is human nature to ignore or downplay the warning signs when you start your hike into the wildnerness; it is also human nature to spare no expense demanding a helicopter rescue when you’re trapped in a ravine with a painful broken leg, night is falling and so is the snow.
Here’s a critical fact that most people fail to grasp: the hourly rate your attorney charges doesn’t change. However, the number of hours of legal service that you will require can be dramatically different, depending whether you are meeting with your attorney in his office before the transaction takes place, or in the courtroom after the transaction went sour! Like the injured hiker stuck in a canyon with a broken leg, the cost to extract you from a legal mess is of secondary importance to the need for an immediate rescue. So, if it costs less to get the advice in advance, is it possible to get relevant legal advice for free?
The answer is a qualified “yes.” It is important to distinguish “legal advice” from “investment” and other forms of advice. Recently, I saw an article titled “How to Avoid Drowning,” and quipped: “Don’t go near the water.” Accurate, guaranteed, and free advice, but neither helpful or practical. Good legal advice is designed to put you into the best position – from a legal perspective – to protect your interests while allowing you to achieve your objectives. Staying away from the water will protect them from drowning, but does little to help them achieve their objective of having a fun day sailing, surfing or swimming. By analogy, the answer to the question “How can I protect myself from risk in a real estate investment?” would be “Don’t invest in real estate.” Again, accurate but useless advice.
For real estate investors, there is no shortage of “advice” provided in books, articles, seminars, workshops, and classes, as well as a virtually unlimited amount available on the Internet. You already knew that, or you wouldn’t be reading this! If you take the time to review this material, attend courses, and identify your investment objectives, learn how to accurately calculate return on investment and account for expenses, and develop a plan that is designed to achieve your personal and financial objectives, you will drastically reduce the range of variables that need to be considered when assessing your legal risks. Further, understanding the importance and value of assembling a team of professionals: brokers, contractors, property managers, insurance agents, and accountants, you will develop decision-making methodologies designed to optimize your personal situation while identifying and – hopefully – minimizing the degree of risk involved.
In addition to assembling a team of professionals, you should join a local Real Estate Investment (REI) association that meets regularly and features guest speakers on different topics related to real estate investing. By listening carefully to these speakers, as well as interacting with like-minded individuals who attend the meetings, you will learn a lot more than you can imagine! Stick to REIs that offer educational programs, and steer clear of those that sell books, investment packages, etc. However, when you meet someone who specializes in selling certain types of real estate investment products, remember you are the customer. You can ask questions, check references, and do your due diligence to further minimize your risks. Make certain you get all agreements in writing. After a careful and objective analysis, if the proposed investment appears to help you achieve your personal and financial objectives, you will have accomplished the single, largest and most important element of reducing your exposure to liability or loss. Ignoring or postponing this analysis could be extremely expensive and, in most instances, futile.
And that, dear reader, is very relevant, practical — and free — legal advice. But it only works if you use it!
Fact checking is popular sport during election season, but as psychological studies repeatedly demonstrate, people will believe what they want to believe. There are many theories, but it boils down to this: we’re all human, and therefore subject to human foibles. Whether it’s attributed to selective perception or redactive devalutation (where one side simply refuses to believe anything the other side says), or whether we’re all prone to confirmation bias – where we give greater weight to information that is consistent with our predetermined beliefs and devalue or ignore evidence to the contrary – as Spock would say: Humans are illogical. Yet, we manage to function, albeit not as efficiently as some would hope.
The importance of managing our investments is no less critical than the importance of managing our jobs, indeed our lives. Making the correct decisions as we go through the day requires discipline, wisdom, and focus – not unlike the choice whether or not to have a second helping of chocolate ice cream because, well, it’s right there in front of you! It matters somewhat that you saw your photo tagged on Facebook and initially wondered who was that chubby guy, but you blame the cell phone camera and pick up the scoop, rationalizing that you’ll do an extra 5 minutes on the exercise bike in the morning. Besides, you tell yourself, you missed lunch. Logic. I crave, therefore I am.
Getting information is not difficult. Making investment decisions without sufficient information is only part of the problem. The other part is understanding what information you really need. Your personal and financial goals play a bigger role in the process than you might realize, since they form the framework which helps determine more precisely what information you need to make a good decision. As individuals – and we are indeed individuals - each of us has a somewhat different focus or framework with which we process information. Just because your neighbor invested in precious metals doesn’t necessarily mean that you should, or that your decision to double-down on Facebook shares because, well, they’re so affordable right now, is necessarily crazy. Perhaps logical, but only time will tell.
The key is to develop and understand your own personal Goal, and seek out everything you can reasonably learn that will help you achieve that Goal. If an opportunity arises that will get you closer to your Goal, consider it. If the opportunity distracts or distances you from your Goal, determine if it creates a unique but unforeseen chance to achieve an even more attractive Goal – something you had not considered possible – and if not, discard it. Warning: extreme discipline required; stay focused!
Over the course of the next two months I will be participating in and attending four separate seminar/symposium events designed to provide individuals with the necessary educational tools required to make intelligent investment decisions. I know in advance that I will be inundated with the proverbial “fire hose” of data, charts, theories, and forecasts from some very, very intelligent people. When I am not presenting myself, I plan to sit back and take it all in. But first, I will need to reflect what among the treasure trove of information I need to focus on, mindful that I might hear or see something that will cause me to completely change my perspective. And that’s part of the fun of going to these events – you never know what you might learn if you keep your mind open. It’s not logical, but then, Spock was right. Hand me that ice cream scoop!
A recent legal decision involving a real estate dispute received some attention because the Court denied the prevailing party attorneys’ fees. The Third District Court of Appeal was attempting to send a message when it overturned the Trial Court’s decision awarding the fees. But there was more than one message in the ruling worth noting.
The case, Cullen v. Corwin, was certified for only partial publication, which severely limits the extent to which it may be cited. The key facts were that Corwin, who had purchased a residential property from Cullen, later discovered a serious defect in the garage structure that caused the roof to leak and resulted in several thousand dollars of damage. In the published portion of the decision, the Court notes that although the Sellers (Cullen) successfully argued that the Buyers (Corwin) failed to bring their case before the applicable statutes of limitation had expired, and were therefore the prevailing party, the Sellers failed to comply with the requirement that a party must mediate before they litigate.
While this requirement is most often used by Defendants against Plaintiffs who rush into litigation before going through the procedures required under most standard Purchase and Sale Agreements (including standard CAR forms), the Court noted that the actual language of the provision allowing recovery of legal fees contains a condition precedent that requires any party to first attempt to resolve the dispute through mediation, and not refuse to mediate in light of a request to do so, in order to recover legal fees. The Court noted that the Plaintiff’s attorney had twice requested the Defendant to mediate, and Defendants refused. The Court took note of the fact that the Defendant’s attorney had declared that they wanted the results of discovery first, so that any mediation would be more “meaningful.” The Court saw that tactic for what it was, ruled that the response constituted a refusal to mediate in response to a request, and therefore overturned the award of attorneys’ fees.
The Court went on to note that the mediation requirement is designed to encourage mediation as a preferable alternative to litigation, which can be costly and time-consuming. But in the unpublished section of the case, the Court found plenty of fault with the Plaintiff, who had clearly failed to take reasonable steps to protect their rights in a timely manner when they first discovered the defects in the roof. Moreover, the Court found several errors in Plaintiff’s pleadings, but in the end, the Court found the Defendants’ excuses unconvincing.
The primary message in this case was that in order to recover legal costs and attorneys’ fees as a prevailing party, one must comply with the plain language of the requirement to make a good faith effort to participate in mediation. The secondary message appears to be “don’t overplay your hand.” The Defendants knew they had a very good chance of prevailing on the basis of the failure of the plaintiffs to meet the statute of limitations. Forcing the Plaintiffs to comply with discovery requests before agreeing to mediation would only drive up the Plaintiff’s costs, and not substantially change the outcome. But refusing to mediate was unacceptable, and on the basis of the Court’s interpretation of the contract provisions, sufficient grounds on which to deny recovery of their fees.
No matter how strong or righteous a case someone may think they have, public policy considerations and standard purchase agreement contracts require the parties to at least make a good faith effort to mediate. Arrogantly refusing to do so not only does not do your clients any good, but may end up costing you dearly!
Joshua Dorkin of The BiggerPockets recently reposted one of his earlier blogs emphasizing the importance of forming a team of advisors when getting started in real estate investing. He suggested that the team include a Mentor, Mortgage Broker, Title Officer, Accountant, Contractor, and an Attorney, among others. Many of the comments posted to Joshua’s blog were highly supportive of the concept. I also have posted similar comments in the past on the importance of using a team to consult as part of one’s due diligence.
Yet investors often choose to ignore this advice! Time and time again, I get phone calls from investors who decided to wait until after the disaster to get professional advice from an attorney. The reasons are simple: time and money. Most new investors get anxious about doing a transaction and feel compelled to rush or risk losing the “deal of the century.” Also, mindful of their budgets, the thought of paying for one or two hours of legal advice simply does not compute as a cost-effective strategy. Except in hindsight!
A few days ago I received a phone call from a very upset investor who had purchased a REO property with a bad history. It was an abandoned gas station (BIG Red Flag Warning!), and the city had proceeded under a nuisance abatement action to remove the deteriorated buildings, attaching a lien for the costs. The buyer ignored the notices from the City demanding payment, and penalties and interest costs mounted. (More Red Flag Warnings!). The buyer, upset at the City, chose to ignore notices of hearings and deadlines for appeals. Finally, after paying an attorney $8000 to make a phone call and write a letter to the City Attorney — which accomplished nothing, apparently — the buyer called me asking for a free consultation! Needless to say, we never discussed whether he had hired a consultant to determine if the abandoned gas station property was zoned for his intended use, whether there were any underground tanks remaining, or whether anyone had tested the soil for contamination — the typical due diligence questions that any competent real estate broker, attorney, or contractor should discuss with their client before making a purchase!
A couple of hours of legal advice before you make the investment can be a valuable investment in itself! But be realistic: most attorneys (including me) cannot read minds or forecast the future. Explain your investment goals and objectives, so that the attorney can tailor the advice to your needs. That alone will save you lots of time and money! Provide the attorney with all the relevant information and documents, if you have them. Leaving something out because you thought it wasn’t important is not a good idea! Also, let the attorney know what your deadlines are; it is often possible to negotiate an extension of time in order to complete the due diligence.
Lastly, don’t ignore the attorney’s advice. Chances are good that you can use it to negotiate a better deal, and even better that you can use it again in the next transaction, and the next. And that will prove to be a very valuable return on your investment!
The e-mail from the Nigerian Prince offers you millions of dollars in gold bullion makes you smile. All you have to do is send a mere $10,000 “good faith” payment to cover administrative fees. You righteously reach for the Delete key, but wonder: “What if?” Another e-mail beckons you with the words: ”Great investment opportunity! Act Fast!” You delete it as well. An hour later, you’re listening with great interest as your best friend tells you about a real estate deal he learned about at a seminar and is thinking of buying. ”There are only three left,” he says. Not wanting to miss out, and impressed by your friend’s confidence, you decide to join him.
Despite widespread publicity about Bernie Madoff’s scheme and countless of lesser-but-similar scams, individual investors continue to get ripped off by fraudulent operators. Agencies and organizations such as the Federal Trade Commission, the Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Retirement Industry Trust Association, not to mention State and local agencies, are busy warning investors to watch out for Red Flags. Frustrated by the stock market and facing an uncertain future, more and more individuals are seeking to trade caution for return. Certainly all these regulators have put an end to fraudulent schemes, you think.
Some warning signs are almost too obvious, but should be repeated for emphasis: Promises of “Guaranteed” returns; limited offerings (going fast — only a few remain!); and “No Money Down!” are almost certain signs of trouble. As one advisor put it: ”Ask yourself why — if it is such a special deal — are they offering it to you?” Warning signs include sloppy documents (missing pages, typos, misspelled words), evidence of evidence of hurried “cut and paste” operations lacking professional oversight.
Get a professional opinion first. A client recently asked me to review an investment opportunity. The documents contained misspelled words and different fonts. Checking further, I discovered it had been prepared by a company formed by a disbarred attorney. The reviews told me all I needed to know.
In another case, a client was being pressured to purchase a REO multifamily project . When I suggested that my client get a property inspection, he objected; it would cost money and his investment partners wanted to close the deal. They had been looking for a deal like this for a while, and they only had a week to sign. Unable to locate an inspector, my client finally arranged to visit the property. He not only discovered exposed asbestos in the units, but learned a former tenant had sued the previous owner and another tenant was in the hospital with serious respiratory problems. Despite this evidence, the client told me his real estate agent was working frantically to get an extension of time to sign the papers.
Unfortunately, the worst risks are not strangers claiming to be related to Royalty or Nigerian bankers, but good folks you know from Church, or your buddy at the gym. Bernie Madoff’s “success” was that he suckered friends and associates from select groups, targeting some to serve as testimonials for the others, in what is known as “affinity fraud.” Playing on the human tendency to trust those whom others trust, he played the “affinity” card well. Barnum and Bailey knew there was a “sucker born every minute.”
For many deceived investors, the red flags are quite visible — in their rear view mirror. There isn’t a single person who has lost ten, twenty, or a hundred thousand dollars who hasn’t looked back and said “I should’ve known.” Many have told me “I only wish I had talked to you sooner.” The cost of a couple of hours of a professional review may seem expensive at the front end, but it often proves to be a bargain in hindsight!
It’s 2012, and the cheese is moving. Again. And it will affect everything you do. In the classic story “Who Moved my Cheese,” Spencer Johnson describes the plight of the characters caught in a maze who discover that their supply of cheese had disappeared. Their dilemma — commence a search for new cheese, or wait for the old supply to be replenished — offers a wonderful parable for investors and entrepreneurs alike. To the extent that our economic recovery is tied to job growth, the relevance to investors — indeed to everyone — cannot be overemphasized.
In a very carefully detailed case study, NYTimes authors Charles Duhigg and Keith Bradsher describes why the US lost out on the opportunity to manufacture the iPhone. The answer is not simply that the cost of labor in China is less than in the US; the problem is much more complicated, and worth a careful read. The story details how the need to make critical design and manufacturing changes in a timely manner required a coordinated effort involving setting up efficient supply channels, recruiting qualified engineers, and converting large manufacturing spaces in order to meet production timelines. A key component — finding an adequate number of qualified engineers — a process which would have taken up to 9 months in the US — took only 15 days in China. Adding to the problem is the fact that critical supply components, such as the hardened glass needed for the hundreds of iPhones, were being manufactured in the US. But the cost and logistical complications of getting these components to the manufacturing site forced Corning to move its operations closer to the assembly floor.
Some will accurately point out that many of the product innovations created by companies like Apple do, in fact, create jobs in the US. But the real crisis is the critical shortage of properly trained and educated individuals available to meet the demand. We go to great lengths to urge every high school student to apply for college, and each year about this time, parents all over the country sweat in anxiety that their child will get accepted, and then wonder how to meet the ever-growing tuition demands. But the larger crisis looms even beyond that horizon — will there be a job opportunity that will help pay the ever-increasing student loan debt load? How will the student who majors in Poetry with a minor in Philosophy find a job that will allow him or her to make those payments?
While we accept the conventional wisdom that our current economic crisis depends on job growth, and certain sectors argue against imposing taxes on CEOs earning millions and millions of dollars on the assumption that they will stop creating jobs, we miss the real point — we are not doing enough to train and prepare our youth to qualify them for the very jobs we hope will be created. Other countries are miles ahead of us, and it explains why most of these major companies have no choice but to move their operations where they can find qualified employees.
The anecdotal story of the iPhone illustrates what has become an all-too-familiar refrain: we would prefer to be here (in the US), but we cannot do what we do here. To stay ahead of the innovation curve requires a combination of speed, flexibility, adaptability, and fiscal intelligence. Sitting back and waiting for the cheese to come back is not only pointless, but could result in starvation. Training people how to make new types of cheese would be a much more productive use of our resources.
There is a silver lining to sustained levels of high unemployment and a systemically damaged economy: it is the impetus to do more with less; to make every dollar count; and to reorder priorities. The survivors will be those who successfully find the right balance between independence and community. Freelancers Union projects some 42 million Americans – 30% of the workforce — make their living independently. But in truth, they can’t make it alone. Beneath the surface of the stories of thousands of laid-off workers applying for jobs are many who have made the decision to strike out on their own — to make a future for themselves — to become entrepreneurs and masters of their own destiny. The paradox is that they cannot succeed by themselves. But perhaps never have there been so many tools and opportunities for the entrepreneur to succeed.
To be successful, an entrepreneur needs vision, opportunity, and guts. On a practical level, the entrepreneur needs a functional structure, access to resources, and funding. For legal and tax reasons, today’s entrepreneur needs to give serious consideration to the right type of entity within which to operate, and it is relatively simple to set up a corporation or limited liability company (LLC). Thanks to the ever-evolving social media (SM) tools available through the Internet, such as Google+, Twitter, YouTube, Facebook, and Linkedin, not to mention the speed and ease of access provided by smart phones, tablets, and laptops connected by broadband and WiFi practically everywhere, today’s entrepreneur can quickly and easily get essential marketing and technical support, build customer bases, and with just a little effort, reach millions in moments as never before. Third, with banking institutions stuck in neutral, many investors are discovering the treasure trove of privately held funds looking for an alternative to the roller coaster ride of Wall Street’s offerings, and with an estimated $94 billion in self-directed IRAs, there is plenty of opportunity to go around.
1. Picking the right entity. The romantic notion of the sole proprietor rising to the top on his or her own volition is the stuff of many novels, but in today’s complex and modern environment, the entrepreneur is well-advised to protect themselves with a structure within which to operate their business. Concerns about liability and exposure to litigation may be a bit overblown by those who seek to alarm rather than inform, but there is more to forming a legal entity than just asset protection. The right entity provides a framework or structure within which to carry on a business properly, with due consideration for proper accounting and legal elements. Selecting the correct entity can help the entrepreneur confront and even take advantage of tax consequences. And last, but certainly not least, forming an entity enhances credibility and sustainability of the enterprise — both of which are very attractive features to investors!
2. Managing Resources. It takes a village. The common thread of all successful entrepreneurs is that they knew what they didn’t know, and knew enough to pick good people with the right skills to build successful teams of experts. Most everyone recognizes that everything is connected — the successful entrepreneur focuses on the points of intersection. In today’s online environment, where more and more resources are moving to the Cloud, the essential skill is not having the largest number of followers or Friends, but efficiently connecting with the mission-critical individuals and information necessary to achieve your objectives. Fortunately, the same forces that threaten to overwhelm your bandwidth also provide you with access to extremely skilled individuals who, in their own entrepreneurial way, can help you sort the wheat from the chaff, manage information, and handle the technical details.
3. Financing. The mother’s milk of all great ventures is, of course, financing. But for the vast majority who do not have ready access to venture capital or a loan officer on speed dial, finding working capital can be a challenge. To the rescue — self-directed Individual Retirement Accounts — held by individuals looking for an opportunity to earn more than what Wall Street has provided, and perhaps gain a bit of altruistic pleasure from helping a fellow entrepreneur. To be certain, there are rules and regulations, but with the banks and conventional lenders sitting on their hands, it is likely that more and more individuals will seek alternative sources of funding. It may be 0nly a matter of time before the sum of retirement funds assets held in self-directed IRAs — currently estimated at around 2%, or $94 billion — will expand as the opportunities grow. When self-directed IRAs compete, entrepreneurs win.
Crisis breeds opportunity. Motivated by the harsh reality of sustained levels of high unemployment, more and more individuals will be striking out on their own. Those who take the proper steps will find an interesting combination of new tools and resources, as well as access to financing, that was not available only a few short years ago. Combining vision, opportunity and guts with practical and professional legal and tax advice, today’s entrepreneur can significantly enhance the probability of success in these turbulent times.
Arecent decision by the Court of Appeal underscores the importance of the oft-repeated admonishment to “Get it in Writing!” In this case, the failure to do so had particulary drastic consequences for the real estate agent who did not get the buyer’s oral agreement to reconvey the property back to the seller reduced to writing. More significantly, the Court held that the four (4) year statute of limitations allowed the Seller to proceed against the Agent for Breach of Fiduciary Duty. Most real estate agents rely with false confidence on the more commonly-applied two (2) year statute of limitations for professional negligence. Here, the Court agreed that the plaintiff’s action against the agent for negligence was barred by the statute of limitations, but ruled that the failure of the agent to carry out the client’s specific request to get the oral agreement reduced to writing constituted a breach of the real estate agent’s fiduciary duty, allowing the plaintiff to proceed with the lawsuit for damages.
The facts are simple. The Seller made arrangements to sell her house in San Francisco to an investor to avoid foreclosure. The Investor/Buyer agreed to buy the house, pay off the liens, then reconvey the property back to the Seller in six months for a $10,000 profit. The Seller insisted that the real estate agent get the agreement to reconvey the property in writing, but the agent kept putting her off, eventually preparing a purchase and sale agreement but did not include the agreement to reconvey.
The Seller sued the Buyer for fraud, but the Court ruled in favor of the Buyer. The Seller then sued the Agent for negligence and breach of fiduciary duty, arguing that the failure of the Agent to follow the Seller’s request to get the agreement in writing resulted in her damages (loss of the house). The trial court ruled that the Seller’s cause of action against the Agent for professional negligence was barred by the 2-year statute of limitations, and also ruled that the cause of action for breach of fiduciary duty was also barred because the complaint had not been filed within four years of the close of escrow (June, 2004).
The Court of Appeal agreed that the Seller’s action for negligence was barred by the 2-year statute, but ruled that the gravamen of the complaint was not negligence or fraud, but the Agent’s failure to draft documents necessary to the real estate transaction. The Court declared that the “fiduciary duties of a real estate agency include the duties to obey the instructions of the clinet, and to provide diligent and fiathrufl service.” The Court went on to declare that the cause of action accrued, not when escrow closed, but when the Investor/Buyer sold the property to a third party – effectively denying the Seller the benefit of the agreement to reconvey. Since this occurred in or around November, 2004, and the Complaint had been filed in July, 2008, the Court ruled that the Seller could proceed since the four-year staute applied.
Obviously, this ruling, which was certified for publication on August 17, 2011, will create a stir among real estate agents who had been counting on the two-year statute as the upper limit of liability for any damages resulting from a real estate transaction they had been involved in. But it also sends a clear and unambiguous message that, to the extent reasonably possible, all essential terms of an agreement should be put into writing for the parties to review and make certain there is no misunderstanding of those terms. More importantly, the ruling underscores the importance of Agents to recognize that their primary duty is to their client, and a failure to heed that warning carries a very long tail — 4 years from the date any resulting damages might take place.