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