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.

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.

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.

Whoa, Nelly!  If you’re not suffering motion sickness from watching the Dow, you’re probably still recovering from the market’s overall poor performance over the past few years.  You’re not alone.  After a brief recovery, we’re back where the Dow was one year ago.  Meanwhile, real estate prices are a bargain, but getting a loan is still a major challenge.  Many people are discovering the benefits of using their IRA to invest in real estate.  To be successful, you need to understand the basics about both using your IRA and investing in real estate.  We’ve got two very affordable events coming up that will cover both!

A lot of people are taking a new look at using their pension funds to invest in real estate.  The process is relatively simple — you roll your plan funds (401k, SEP, 457, etc.) into an IRA with a custodian that allows you to invest in “Alternative” investments, such as real estate, businesses, notes, precious metals, etc.  Since 1974, the IRS has allowed individuals to use their self-directed IRAs to invest in anything except collectibles or insurance.  (IRS Publication 590).  There is a catch — it has to be an arms-length investment; the account holder cannot receive any direct or indirect benefit.  And, you may not use your self-directed IRA in a transaction involving yourself, your spouse, parents or children.  But the range of permitted options is extremely wide.

Using your self-directed IRA, you can purchase investment rental property, make private loans, purchase a percentage interest in a commercial development, or invest in a new business.  You can combine your IRA with others, and even borrow money using your IRA to leverage your purchasing power.  Investment opportunities are not limited to real estate; you can invest in oil & gas leases, businesses, and yes, even stocks!  The key is to find something you are comfortable with that will generate a nice return on investment for your IRA.  But there are special restrictions, and if you violate IRS rules, the penalties are severe!  On September 21, from 6:30 – 7:30 p.m., I will be joining Ron Ricard, Certified Exchange Specialist at IPX1031 at Intero Santana Row to discuss the use of the self-directed IRA for investing.  Additional details will be updated here soon.

Learning that you can use your IRA to invest in real estate is exciting, but it is easy to get overwhelmed with the range of opportunities, especially with real estate prices at bargain levels.  Even if you have some experience investing in real estate, the market has changed, and like new investors, you need to go back to basics.  On September 17, I will be moderaing a panel of experienced real estate investors who will provide an all-day JumpStart seminar in Cupertino on the basics of real estate investing.  Nothing will be sold — it’s all education and networking.  Topics to be covered will include the pros and cons of different types of real estate investments, how to find good deals, tax considerations, how to finance transactions, and exit strategies.  To attend the JumpStart program on 9/17, go to www.SJREI.org to register and get more information.  Seating is limited, so be sure to register early!

Learn before you earn.  Using a self-directed IRA is not for everyone, and you need to understand what risks are involved before making important decisions involving your pension funds.  The two programs are designed to provide you the basic information you need to make an informed decision.

Please join us as Bankruptcy Attorney David Trapp and I present at the Aug. 16 SJREI Association Mid-Peninsula meeting.

Register at SJREI

Myths and Realities about Bankruptcy – What Investors Need to Know

Attorney David J. Trapp will explain some of the fundamentals about bankruptcy law, particularly from the creditor’s perspective.   What is the difference between a discharge and dismissal? What can a private lender do if the borrower files for bankruptcy?  What if your Tenant files?  Why isn’t everyone eligible for bankruptcy protection?  How can an Investor take steps to minimize their loss?

Lawsuits Happen – How to Avoid High Legal Fees

Attorney Jeffrey B. Hare will discuss the anatomy of a lawsuit, and provide tips on how to avoid high legal fees; the fundamentals of dispute resolution; and common sense tips about asset protection.  What is a BATNA and how can it save you thousands of dollars?  What simple steps can investors take to protect themselves?  How will budget cutbacks affect your ability to resolve legal disputes?

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Many people ask me if these programs are legitimate, or if they are “too good to be true.” Sometimes promoted as “wholesaling,” they have been around for years. For the new investor with little or no money to invest, these concepts offer an opportunity to get started, learn a lot, and if you land the right deal, make some money. Here’s how one approach works: you search for a property owner who is highly motivated to sell for substantially less than the market value, make an offer to purchase, and get the seller to sign a legally binding contract. You then sell the contract to an investor – most likely a “rehabber” – and take the profit on the sale. Basically, you make up for your lack of cash with hard work – searching lists, making phone calls, and knocking on doors – to get the deal: a binding contract to purchase the property for substantially less than the market value. In theory, you could earn a fair income in real estate without having to pay a dime of your own money, replace a roof, or install a toilet. Slick marketing brochures and flashy web sites promise to teach you all the tricks, provide all the forms, and for only a few dollars more, be your Coach or Mentor.

Does it work? Like most programs that promise you the chance to make money in real estate, it depends on a number of factors, not the least of which is the integrity and reputation of the program and the people behind it. Other factors include the state of the real estate market, and changes to laws and regulations affecting the investors. Things have changed since the housing collapse in 2008, and wholesaling was being promoted by individuals like Robert Allen and Carelton Sheets. In a rising housing market, bad decisions and sloppy management will often be forgiven or ignored if there is still sufficient profit in the deal. But in a declining market, with tight credit and an overabundant supply of properties with little or negative equity, qualified buyers are scarce – and cautious. This is not to say that you can’t make money wholesaling, but you’ll have to work twice as hard for half the profit. You should be very skeptical of any claims or testimonials made before 2008!

Making the task even more challenging are many laws recently enacted by the California Legislature, mostly in response to reports of fraudulent schemes which were designed to take advantage of homeowners facing foreclosure. Many real estate programs from out-of-state failed to address the new California laws into account, while others merely provided lip service to the new California regulations. Unfortunately for the investor, the consequences for making a mistake could mean heavy fines or even going to jail! It is very common for these programs to recommend that you “get a lawyer on your team” as part of setting up your wholesaling business. Of course, the cost of legal advice is not included in the price charged for the seminar or “coaching” program! Also not included: the cost of legal representation if you decided to guess and guessed wrong!

So, what has changed? For one, the entire housing market. In the typical wholesaling transaction before 2008, a “no money down” deal would involve finding a homeowner with a large amount of equity willing to take less profit in exchange for the convenience of a quick, “as-is” sale. In a rising market, the property value continues to rise, and there is a good probability that the investor or rehabber will recover their purchase price and repair costs and still make a profit. Since the housing crisis struck in 2008, the percentage of sellers being forced to sell because they are underwater, facing foreclosure, unemployed, and unable to refinance or modify their mortgage, has steadily increased. Today, almost half of all home sales on the market are short sales, which not only means a much longer and contentious escrow, but the profit margins no longer exist. As housing prices drop, investors can afford to stand back and wait. For the wholesaler, it most likely means losing the deal altogether! To make it work, the wholesaler must cast a wider net, and inevitably will find themself facing compliance issues under the new regulations.

As a result of many fraudulent scams, California enacted new laws and toughened others intended to protect homeowners facing foreclosure from unscrupulous individuals trying to take advantage of homeowners. For example, a homeowner who had been issued a Notice of Default has a 5-day right of cancellation of a sale, and must be provided a special Notice of this right (CC §1695). The Attorney General requires individuals who offer “foreclosure assistance” to register as a “Foreclosure Consultant” and post a special bond (CC §2495). Violations could result in steep fines and even jail. In addition, the California Department of Real Estate started issuing Cease and Desist orders against unlicensed individuals for activities that were deemed by the DRE to require a real estate license. New and tougher laws, tougher penalties, and stricter enforcement definitely increases the risks and challenges for the wholesaler operating in California.

In addition, to protect homebuyers against unscrupulous “fly by night” rehabbers, the Legislature enacted AB2335, which requires local municipalities to enforce provisions requiring that all work be done by licensed contractors. An exception was allowed for an owner/rehabber, but only if they certified that they were an owner-occupant for 12 months. Further complicating matters, all States were required to enact provisions to implement provisions of the SAFE Act, which seeks to strictly regulate private lending practices by requiring those who originate or arrange loans to take courses, register and report all lending activities. Making the challenge even tougher, new reporting and disclosure requirements effectively make it difficult, if not impossible, for the wholesaler to claim a fee, let alone complete a double-escrow.

In short, these challenges, coupled with the evolving nature of real estate transactions, makes wholesaling a considerably more difficult way to get started in the real estate business. However, this has not appreciably reduced the number of individuals and companies from promoting seminars and sell books and CDs, and offer attractive discounts for “coaching” and “mentoring” programs. Before you write a check or given them your credit card, do your due diligence. Read the reviews. Make sure they are based where you want to invest your time, especially if it’s in California. And check the date – make certain the materials are current and relevant for today’s real estate market! There are a few legitimate and honest programs out there that do a good job of teaching new investors how to get started and survive in this turbulent market, and those who take the time to adjust and adapt to the new regulations will stay ahead of the curve.

The bottom line. Many factors have changed real estate investing. “No money down” deals – if they ever really worked – are complicated and scarce, and probably not the best choice for the new investor just getting started. At the same time, changes in the real estate market have created new opportunities not previously available, so keep your eyes and ears open. Join a reputable REI association; get to know other members, and listen with a critical ear. If a particular investment strikes you as interesting, apply the following tips.

Tips. Rule No. 1 is to do your due diligence. If the claims and promises sound too good to be true, they probably are. Rule No. 2 is to plan ahead, and be patient. In a turbulent market, everything takes longer. Delays can end up costing you money, if not the whole deal. Rule No. 3 is to be realistic. Get the facts from professionals – don’t rely on something your weekend buddy said, or something you got in an e-mail. Double-check and verify the facts. Ask yourself – do you have all of the relevant facts to make an informed decision?

According to the Superior Court of California, County of Santa Clara, ADR is a process in which a neutral person helps people who cannot agree, so that they can resolve their case. The types of ADR available for civil litigation include mediation, neutral evaluation, private arbitration, judicial arbitration, and early settlement conferences. In addition, if the case does not settle, a mandatory settlement conference is usually scheduled the week before the matter is scheduled to go to trial.

Mediation is described as an informal, confidential, flexible and non-binding process‚ in which the mediator helps the parties to resolve the dispute. In mediation, the parties are free to come up with whatever solution is mutually satisfactory. The mediator facilitates the discussion, but does not make rulings. A good mediator can help the parties consider options they and their attorneys might not otherwise have considered. The Courts are somewhat limited in what they can order the parties to do — the parties themselves have a lot more flexibility to fashion a remedy more suitable to their situation. 

 Arbitration‚ is similar to but less formal than a trial. The parties submit their respective arguments to a neutral  either an experienced attorney or a specially appointed Judge who will make a ruling based on the evidence and arguments submitted.  There is no jury in arbitration. The parties can agree (in advance) that this decision will be either binding or non-binding. If the decision is non-binding, either party may reject the ruling and the matter will proceed to trial. However, in many cases the arbitrator’s ruling gives the parties an idea how the Court might view the case. The primary advantage of binding arbitration is that is can be less costly and produce faster results than a trial. In complex cases involving large sums of money, the parties often will pay for special private arbitration, usually conducted by retired judges. 

Dispute resolution is very effective, and can be relatively inexpensive.  Over 90% of all cases filed in Superior Court in Santa Clara County settle before going to trial, sometimes, quite literally, on the courthouse steps. Many of the forms of ADR are offered by the Court to parties in litigation for free or for nominal sums. However, for one reason or the other, parties ignore these opportunities and instead spend considerable time, money and effort to prepare for trial.  By the time they are directed to participate in mandatory settlement, they sometimes feel  erroneously  that they have nothing to lose. They fail to take advantage of the opportunity to take control of the outcome, and ignore the real costs of trial, post-trial procedures, and appeals‚  which can take years!

At any time, anyone may seek mediation to help them resolve a dispute and possibly avoid the cost, time and stress of litigation altogether. A key to saving money is to agree to mediation as soon as possible — before lawsuits are filed, if possible. The process is confidential, relatively inexpensive (especially when compared to the cost of lengthy litigation), and surprisingly effective. The ideal mediator should be knowledgeable about the subject area of the relevant law, experienced and trained, and skillful at getting the parties to explore all reasonable options.

ADR provides parties to a dispute the opportunity to control the outcome, reach an early resolution, and save thousands and thousands of dollars. Remember, the money you save may be yours!  If you need an experienced mediator who understands real estate, business, and common sense, please feel free to contact me.

If you haven’t already done so, you might consider using your Self-Directed IRA to fund a real estate investment.  For some people, it might even make sense to set up a “Checkbook LLC” so you can control the speed of the transaction process.

Based on some examples I’ve encountered over the past year, I want to emphasize that the use of your SDIRA must be compatible with your investment objectives. Restrictions on the use of your IRA — sometimes referred to as “Prohibited Transactions” under IRC Section 4975 — may be incompatible with your objectives.¬† For example, if you plan to purchase an investment rental for your son or daughter to live in while they attend college, you cannot use your IRA funds.¬† Another example is where you plan to use your IRA to fund a business where you are the key decision-maker (CEO, COO, etc.).¬† IRS and DOL restrictions will often make these types of investments impossible or extremely complicated.¬† But if you are simply looking for a bona-fide, arms-length investment that will provide a decent ROI, consider using your IRA.

First, you need to find a qualified IRA custodian who will allow you to invest in real estate, and not just “traditional” investments such as stocks, bonds or mutual funds. A truly “self-directed” individual retirement account  (“SDIRA”) custodian will allow you to “self-direct” your retirement funds into “alternative” assets, such as real estate, notes and deeds of trust, and business opportunities.  This isn’t new – it has been available to investors since 1974 when Congress enacted ERISA.  What is new is the nature of investment opportunities that are available.

Several custodians offer the opportunity to use your SDIRA to invest in real estate, but there are restrictions and regulations. The transaction must be arms length: the account holder may not receive any direct or indirect benefit (i.e., commission); and they may not sell or buy property that is owned by a direct relative or themselves (i.e., you cannot purchase your mother’s house or buy a condo for your daughter while she’s attending college).  In addition, you may not make personal use of the property purchased with retirement funds. Real estate investment property is generally ideal for using SDIRA funds.

With a SDIRA, your Custodian must control the disbursement of funds, and all proceeds (i.e., rental income or sale) must be returned to your IRA in order to maintain the special tax treatment provided for retirement plan accounts.  This means that all transactions must be processed through your SDIRA Custodian, which can result in fees and, in some cases, delays.  In some types of transactions, such as bulk REO sales, foreclosure sales, rehabs and flips, not only are there multiple transactions, but time is of the essence!

This is where a “Checkbook LLC” can help.¬† The process involves setting up a separate LLC funded and owned entirely by your SDIRA, and deposited directly to a checking account held in the name of the LLC.¬† As Manager, you would have the authority to issue checks to disburse funds for both minor and major expenses, pay fees, and generally manage the funds according to the time requirements imposed by the type of investments you are working with.¬† A classic example is the need for prompt disbursement when purchasing foreclosure property at the courthouse steps.

The “Checkbook LLC” is not for everyone, and there are some disadvantages when using SDIRA funds to invest in real estate.¬† The investor must be fully aware of and take special measures to ensure that the investments comply with the special restrictions, or risk losing the special tax benefits provided for retirement plan funds.¬† “Boilerplate” or “Internet” format LLC documents will often not be acceptable to SDIRA Custodians.¬† At the same time, don’t be fooled into paying thousands of dollars for unnecessary services, books and tapes.¬† Remember, your primary goal should be to invest your retirement funds in real estate, not gimmicks!¬† Always consult with a qualified professional, and take the time to learn more.