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!

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!

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.

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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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