Utah Real Estate Investors Association

There's both good news (for some) and bad news (for many) as we round the corner into December.

And I'm not talking about our culture, or politics, or sports, or anything like that.

I'm talking about TAXES.

I'll start with the good news. This is applicable to some of my readers only, but it is nice news for business owners in certain high tax states.

One of the difficult aspects of the TCJA was the "SALT" (state and local tax) deduction limitations. Specifically, in high-tax states, this represented a difficult setback in what could be deducted.

Well, one semi-sneaky way around this limitation has just been tentatively approved by the IRS in Notice 2020-75: paying these taxes on behalf of the owner or partners through an S-corp or partnership (pass through entity), and enabling them to be counted as a business expense.

This workaround immediately came into effect in MD, LA, CT, NJ, OK, RI and WI. Four more states already have legislation on the dockets: AL, AR, MI and MN. And (perhaps not surprisingly), NY and CA -- the two biggest states in this category -- are expected to act quickly.
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While we’ve only covered the basics of wholesaling (and there are A LOT MORE ISSUES to understand), you’re well on your way to completing your first wholesale deal. The easiest way to wholesale is to just assign the contract. It’s clean and simple and doesn’t cost anything or require any other documents.

But, if you’re working with bank, like REO properties and short sales, they will not allow you to assign the REPC. Some sellers and agents also that won’t allow you to assign the contract because they may think it’s somehow fraudulent. Or, maybe you’re looking for more privacy in your transactions. Then you many want to consider using a disposable LLC or real estate trust.

When you assign a contract, the named buyer actually changes, so the bank and seller will see that at the closing table. But using a disposable LLC or trust as your initial buyer (on the initial REPC you sign with the seller) will allow you to pass on the right to buy the property WITHOUT changing the named buyer.

The process is similar. But first, you set up either an LLC that will be used just for this deal or a real estate trust. Next, you name that LLC or trust as the buyer on your REPC with the seller. Then, instead of assigning the contract from you to another buyer, you “sell” that LLC or trust to your final buyer. Once your buyer “owns” that LLC or trust, they have the right to buy the house because that LLC or trust IS the buyer on the REPC. Your assignment fee then become the “sales price” of that LLC or Trust and is listed on that form. The only thing that’s changed is who owns these entities, which is done behind the scenes.
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This is our fourth blog on beginning wholesaling. If you haven’t read the earlier ones, make sure you go back and do so.

Before you start out on your first wholesale deal, there are some things that you should take into consideration. First is privacy. We touched on this in our last blog: keeping your wholesaling fee and final buyer private. Many wholesalers will use trusts for privacy purposes. We’ll discuss this more in the next blog.

You should also be aware of seasoning issues. FHA loans and some other lenders will look at title transfers occurring within three months before a retail sale (your post-flip sale). This could affect things if you do a double close (more on that below). If they see a couple of title transfers close together, they could ask questions or delay loan approval until the property has been in one owner’s name a certain length of time.

Also understand that your wholesale fee is an “add on” fee that your buyer will pay at closing, like paying an invoice. It is NOT an increase in the purchase price because that will also affect the price the seller is getting. This is a common mistake on the assignment part of a wholesale deal. Yes, the fee increases the “cost” to your buyer, but it doesn’t change the purchase price of the house.
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"Fear has a large shadow, but he himself is small.” -Ruth Gendler

When the dust settles on this year, chances are good that there will be a bunch of non-profits who have had to close their doors. Between lockdowns, massive unemployment, and general decreases in charitable deductions ... it's not easy out there.

Which is why it would be very wise for you to get "ahead of the game" if you are one of these organizations.

So, to do so, I suggest that you put these items on your "list" before Thanksgiving, so you're not caught in the flurry of holiday madness and year-end. Yes, we're already halfway through November...!

1. Have your staff update tax withholdings.
   Nobody likes to get hit with a big tax bill in April, or be unnecessarily "loaning" money to the US Treasury. Encourage your team to check on their withholdings and adjust as needed.
2. Get info for any individuals/contractors to whom you paid more than $600. 
   You'll need to file a 1099 for any individual or contractor that you paid more than $600. Remember, professional fees of $600 also require a 1099, even if they are a corporation.

If you don't have their W-9, ask for it now.
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Now that you’ve read the first two blogs on Beginning Wholesaling, you know what it is and some of the licensing issues. But if you want to become a wholesaler, you will need to understand the core transaction. In the simplest of terms, wholesaling is about “assigning” contracts.

Yes, you will need to learn how to market for properties, run number to determine the deal, negotiate with sellers and sign a purchase agreement. But that is something that all investors do and applies to just about any type of investment transaction. What wholesaling does is extend that one more step: assigning that purchase agreement to another buyer. You will then also need a list of potential buyers who will take the deal.

So, the process starts with you (or preferably, your wholesaling LLC) signing a real estate purchase contact (REPC) with the seller where your LLC is the named buyer. Your LLC will then “assign” that REPC to another buyer. This assignment is done for a fee. This fee is your compensation for finding and contracting the deal. In a common transaction, you will use an assignment addendum that transfers all the rights under the REPC from you to another buyer. Simply, this just swaps out the buyer so the new one can close and buy the house. It’s that easy, but let’s take a closer look.

First, can you assign all contracts? The answer is that all contracts are assignable unless they state that they are not. Many state-approved forms (including Utah!) are NOT assignable. So, if you are an agent using the Utah REPC, you will first need to make it assignable by way of an addendum that the seller signs approving your right to assign it. Do NOT just use “and/or assigns” on the buyer line. This is not sufficient. Use an addendum that clearly states the buyer has the right to assign the REPC without further approval from the seller. This way, you are free to assign the contract whenever you want. If you are using a simple contract, it should have clear language that it’s assignable already in the form.
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“When you know better, you do better.” -Maya Angelou

Ah, November. Cool weather, Thanksgiving, football. Even though 2020 still seems to be chugging along in all of its particular form of glory, we can at least get productive and distract ourselves from the political war games by making a positive impact on our financial world. Although, in Utah, Governor Gary Herbert is making Thanksgiving plans by Skype video.

Here are some things to consider as you do:

1) Look ahead to 2021. By that, I mean: what will your income potentially look like in 2021? For some, ANY income after a very rough 2020 would be welcome. But once you have that landed ... should I accelerate possible 2021 income into 2020 for tax reasons? Because the best of both tax worlds is to reduce your taxes in both years.
So take a look to see what you think your income will be looking like by the end of this year (including any investment year-end payouts, gig work, gambling winnings, etc. ) and what you expect it to be in 2021 (more, less or about the same). Next, check out the tax brackets and evaluate whether you need to defer current taxable income or accelerate write-offs into 2021 or vice versa. Keep more take-home through proper planning!
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In our previous blog, we explained how wholesaling has become a major real estate investment strategy and thousands of investors are engaging in it. But all that notoriety has brought the practice to the attention of state real estate governing boards. This blog will discuss some of the licensing and other rules regarding wholesaling.

The first thing you need to understand, is that wholesaling is when you get paid to find a seller of a property and then find a buyer to purchase it. That sounds a lot like what real estate agents do: connect buyers and sellers for a commission. Because it looks like you’re acting as an agent, real estate licensing agencies all over the country are taking a close look at the practice.

So, the first thing you need to confirm is how your state handles wholesaling. A few states have banned the practice altogether. In those states you cannot wholesale a deal unless you are a licensing agent. Other states allow non-licensed individual to wholesale but have some regulations. And other states have said nothing at all. Further, all these rules can and probably will change over time.

Utah falls in the middle. You do NOT need a real estate agent’s license, but there are rules that you need to obey. Most importantly you need to disclosure to the seller that you may not be the actual buyer and that you may assign the contract for a fee. There are other important disclosures like the seller understands that the home is being sold at a discount and they could make more money by listing the home on the open market. The reason for the disclosure is to help ensure that the sellers are not being defrauded.

Fraud is also a big deal. Many wholesalers are really good at negotiating a low purchase price. But there is a line you can cross if you misrepresent the actual value of the property. The Division really gets hot under the collar when they see that that may be the case. Be very careful in your negotiations! Remember, you will be held to a higher standard as a real estate investor because you have greater experience and knowledge of property values.

The third area wholesalers need pay attention to is their wholesaling business. When you treat wholesaling like a real estate brokerage, you may run into trouble. Sending an acquisition manager to negotiate terms and even sign a contract on your behalf DOES require a license! This has always been true and has nothing to do with wholesaling. Someone is negotiating a real estate purchase contract with a seller on the wholesaler’s (or the wholesaler’s LLC) behalf. That’s what agents do: negotiate on behalf of their buyer-clients.

You can negotiate with a seller directly on your own behalf without a license. But only an agent can negotiate terms for you! And because the act of wholesaling does not require a license, the Division is taking a hard look at wholesalers who look like real estate brokerages. So, if you are using acquisition people to do this, they need to be licensed.

If you are an agent, you can also wholesale. All the above rules still apply to you, as well as some additional ones. You need to use the state-approved real estate purchase contract and disclose that you are an agent. You are held to ALL other licensing rules! If you want to wholesale, you should also discuss this with your broker and get their approval to do deals outside of the brokerage.

Once you understand the licensing rules and have the disclosures down, you’ll be great. Make sure to check out my next blog on wholesaling next week!

Note: this blog article is not meant to be legal advice. Please consult your own, local legal counsel.

Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
www.reimasteryu.com
jeff@bregliolaw.com
(801) 560-2180
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"Every new beginning comes from some other beginning's end." -Seneca

There's a famous study, often referenced in business focused productivity/success books and podcasts that you probably have heard about in some form or another:

[Edited excerpt from Wikipedia]

Mischel's famous research study, "The Marshmallow Test," showed the importance of impulse control and delayed gratification for academic, emotional and social success.

In the 1960s at the preschool on the Stanford University campus, Mischel put marshmallows in front of a room full of 4-year-olds. He told them they could have one marshmallow now, but if they could wait several minutes, they could have two. Some children eagerly grabbed a marshmallow and ate it. Others waited, some having to cover their eyes in order not to see the tempting treat and one child even licked the table around the marshmallow!
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Wholesaling! The big new (sort of new) real estate investing strategy. Wholesaling has, in fact, been around forever. Investors and non-investors have been able to assign contracts as long as there have been contracts. Many states (including Utah) have standardized forms to assign the contract. But it’s been more recently, in the last 4-5 years that wholesaling has become its own cottage industry within real estate investing.

Wholesaling is the strategy of finding a great deal and locking it up by putting it under contract. The wholesaler is the buyer and the property owner is the seller on that agreement. But then, instead of the wholesaling actually purchasing and closing on the home, she “assign” or passes the contract—the right to buy the house—to another buyer for a fee.

It is possible to assign a fix & flip project, a buy & hold project, a seller-financed deal, residential or multi-family deals, or a commercial deal. Wholesalers are generally very good marketers and negotiators. In other words, they are good at finding deals, negotiating great terms, and getting a signed purchase agreement. So that’s where they focus their time and energy.

Wholesaling is way you can get involved in real estate with no experience and no money. If you don’t have the experience to flip a house, no problem! Just assign the deal to a good flipper and get paid. This is why it has become such a booming industry. Newer investors all over the country are jumping on the wholesaling bandwagon.
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"Not only must we be good, but we must also be good for something." -Henry David Thoreau

Too many entrepreneurs are blind optimists. (And yes -- too many accountants are blind pessimists, I admit.)

Aside from the financials of a new venture, there are obviously other factors that play into its outcome. And my gut is that the people on your team already know what they are. They're probably not writing a book or preparatory articles about it (yet), but they probably have some good ideas.

Over 50% of U.S. businesses fail in the first four years. Many that linger past that point are alive in name only. Yet very few entrepreneurs actually believe they have a less than 50% chance of success. They are convinced that those statistics only apply to the other person's ideas.

The concept of a pre-mortem was designed to help overcome these natural human tendencies to ignore real threats to a business plan. A related concept, the postmortem, or autopsy, was coined by the medical community to determine the cause of death.
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