Author: Jeff Breglio (31 articles found) - Clear Search


Wholesaling for Beginners #5

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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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Wholesaling for Beginners #4

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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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Wholesaling for Beginners #3

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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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Wholesaling for Beginners #2

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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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Wholesaling for Beginners #1

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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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Understanding Short-Term Rentals #4

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OK, this is our fourth blog on understanding rentals. If you haven’t, go back and read the previous three for a better understanding. We covered the possible local laws restricting short-term rentals, how they are taxed at the federal level, how to hold title and how to save money on the self-employment tax.

This article is going to discuss another surprise tax that many investors don’t understand: sales and lodging taxes. These are the taxes all hotels have to pay, and they are at the city, county and state levels.

Short-term rentals, like those offered on services such as Airbnb and VRBO, have always been required to collect and remit sales and lodging taxes. Historically, the large vacation rental websites viewed these occupancy taxes as the responsibility of the host or homeowner responsibility, not the platform.

The platform was positioned simply as an advertising website or marketplace, and transactions occurred directly between homeowner and traveler. These taxes, however, were often overlooked and not well understood by homeowners and hosts.

As the short-term rental industry has continued to grow, these lodging taxes are increasingly part of the industry narrative and becoming much better understood. Short-term rentals are now ubiquitous, which has sparked pushback in some communities, with a new and heightened focus on regulation and lodging taxes.
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Understanding Short-Term Rentals #3

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In the last blog, we learned that the rent from short-term rentals is considered ordinary income (like flips) and not passive income (like long-term rentals). That’s a big deal because ordinary income is subject to the self-employment tax of 15.3%. In this article, I’m going to teach you how to hold title to the short-term rental and how to save on the employment tax.

First, you want to hold title (who “owns” the property as listed on the county land records) in an asset-holding LLC, like a “series” LLC. If you’re unfamiliar, go back and read the blog, “The Series LLC” from September 18, 2020. This LLC is taxed either as a sole-proprietorship (single member) or a partnership (multi-member). It is NOT taxed as an S-corp. (no S-election!!)! This is important. And ALL your rental properties should be owned like this!

So, there is no difference in how you hold title or own your short-term rental. Own it just like all your other rental properties. But, because this rent is taxed differently than the rent you collect on long-term rentals, you going to structure the “renting” part differently.

The first thing you will need to do is set up a “property management” LLC. This is NOT the LLC that owns the rental! This is set up to do nothing more than manage the short-term rental (you can also use it manage your long-term rentals and deflect liability!). Then, your LLC that owns the short-term rental will lease it to the property management company on a long-term lease (can even be more many years!). The property management LLC then does the short-term leasing and property management.
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Understanding Short-Term Rentals #2

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Last week we talked about short-term rentals and the need to confirm the licensing and zoning issues that may apply. Here we are going to talk about the taxation of short-term rentals. What follows is a summary of some tax issues. This is NOT meant as tax advice. Please consult your own tax professionals.

Rented for Fewer than 15 Days During the Year– When a property is rented for fewer than 15 days during the tax year, the rental income is not reportable, and the expenses associated with that rental are not deductible. Interest and property taxes are not prorated, and the full amounts of the qualified mortgage interest and property taxes are reported as itemized deductions (as usual) on the taxpayer’s Schedule A. This would only apply if you rented out your residence or a vacation property on occasion.

The 7-Day and 30-Day Rules– Rentals are generally passive activities. However, an activity is not treated as a rental if either of these statements applies:

  1. The average customer use of the property is for 7 days or fewer—or for 30 days or fewer if the owner (or someone on the owner’s behalf) provides significant personal services (like cleaning). This is the important one.
  2. The owner (or someone on the owner’s behalf) provides extraordinary personal services without regard to the property’s average period of customer use. This probably wouldn’t apply as you won’t be providing these kinds of services on a long-term rental.

If the activity is not treated as a rental, then it will be treated as a trade or business, and the income and expenses, including prorated interest and taxes. IRS Publication 527 states: “If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service.” Substantial services do not include the furnishing of heat and light, the cleaning of public areas, the collecting of trash, and such. So, the “rent” you receive from typical short-term rentals is considered “ordinary” income (just like flips!), and you’d want run the income through an “S-elected” entity.
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Understanding Short-Term Rentals #1

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There has been a big push for landlords to look into short-term rentals (think, Air BnB) as opposed to longer-term (monthly or yearly) typical rentals. The reason for the push is that renting a property nightly can bring in much more per month—even including vacancies. It has become almost an entirely new real estate investing technique.

While a great way to make additional rents, there are things that you should understand before jumping in with short-term rentals. The first is legality. All rental properties are regulated by the city in which they are located. You will also see county or state-wide regulations. But typically, state laws govern the relationship between landlords and tenants and other larger matters. In most jurisdictions, the specifics of what types of rental properties are allowed are done at the city level.

This city-sponsored legislation arises because cities are charged with protecting neighborhoods and the “look and feel” of their respective cities. And they have a lot of authority on rentals. Most cities require landlords to register ALL their rentals properties, pay a licensing fee and make determinations as to how many unrelated tenants can live in a give property. If you are a landlord, you should take a serious look into your city’s regulations!

But, short-term rentals are a new and different kind of rental. Cities certainly accept renters in their jurisdiction. But short-term rentals fall under the same category as hotels. So, if you have a short-term rental property, you are a hotelier, not a landlord. And most cities do not want hotels and the transient nature of hotel guests in the middle of residential neighborhoods.
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3 Keys to Converting a Single-Family to a Commercial Property

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Hopefully you’ve learned there are a lot of ways to make money in real estate! Forcing appreciation and “best use” are common terms. How do you make a property more valuable than it currently is? That’s the real question and there are a lot of ways to do it. One way is to change the “use” of the property. Below are 3 simple keys to evaluating a deal where you take a single-family residence and turn it into a small office space.

Obviously, there are a lot things to consider during the entire process, but these keys will help you evaluate the property to see if it will even work.

Key #1 – Zoning: This should make sense. You need to find a property that is in a zone that allows the conversion. You see things like “mixed use” or other classifications unique to the city. The best place to start looking is on wider, more congested streets where there are family residences or where you see these kinds of conversions already existing. This is usually due to the changing nature of that part of town. Many cities will re-zone those areas into mixed use to encourage a change in use. If you don’t’ have the right zoning, either you can’t do the deal or you’ll have to get the lot re-classified. While possible, it can be a much longer and expensive process but one worth looking into.

Key #2 – Parking: Assuming you have the right zoning, you may not have the right property. Commercial buildings mean that customer or employees will be coming to the building. That means more parking needs. In fact, your zoning laws will dictate how many parking stalls you will need. You can bet that the number will be bigger than what will fit in a standard driveway. For a 2000 square foot property, you could see up to 7 or 8 stalls needed. And remember, there are setbacks, turn around area and most likely even a handicap stall which is almost twice as big as a standard stall. The parking is often the one issue that will kill your conversion.
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