Because of the budget shortfall, this system has had to be streamlined. The county has instituted a furlough day on the third Wednesday of each month, when all of the courthouses are closed. According to probate Judge Reva Goetz of the Los Angeles, Superior Court, “In Central we have very heavy calendars and are otherwise in trial.” She goes on, “Due to the hiring freeze our probate attorney [the court’s staff attorney] resources are spread more thin…and it is taking longer to get the probate notes out.” Additionally, “In Central, our matters are being set at least ten weeks or longer [from the time of filing the petition], depending on which court is hearing the matter.” Lawyers currently conducting business with branch courts report that it is taking twelve weeks from the time of filing the petition to be heard in Santa Monica.

With regard to sale confirmation hearings downtown, Judge Goetz affirmed that, “The Court sets petitions to confirm real property sales within thirty days of the petition being filed.” In contrast, attorneys specializing in probate matters report that branch courthouses are taking up to six weeks to hear theses petitions.

Members of the probate bench are aware that time delays can hurt real estate transactions, and they are working hard to buffer probate sales from any additional delays. Judge Goetz further points out that the court is making every effort to accommodate time-sensitive and complex transactions, such as short-sales or pre-foreclosure purchases. She states, “If it is a true emergency a matter can be set for an expedited hearing in five days.” However, estate planning attorney, Jim Morris of Morris & Associates warns that “it must be a genuine emergency. The probate court’s view of emergency does not normally involve the sale of real property and the possible loss of a buyer.” Brokers should not abuse the expedited hearing option.

Despite the layoffs, the courts are still providing probate sale petitioners prompt and compassionate service, but with further layoffs yet to come, it remains to be seen if increased delays will begin to erode the prices offered for properties sold through this process.

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Drew de la Houssaye is a residential property specialist at Rodeo Realty, Inc.. Rodeo Realty is the elite real estate firm, specializing in luxury homes. Drew has advised on real estate transactions in ten counties in California and is currently active throughout the San Fernando Valley, Beverly Hills and Los Angeles. He can be reached at Drew@RodeoRE.com or (310) 903-7866. For more information, visit BelAir-Capital.com.

It is incumbent on brokers to manage the sale confirmation and bidding process, thereby easing some of the burden on the courts.  Here are some key tips and reminders: 

Median home prices in Los Angeles reached a peak in August 2007. By February 2008, prices had dropped 16.5%. Homeowners, investors, realtors, homebuyers, builders, mortgage companies, banks and everyone working in any industry dependent upon home sales and construction want the answer to the same question…”Where is the bottom?”

Word on the Street

There is a lot of noise about the housing market. TV commentators, newspapers and water cooler chatter…everyone has an opinion about when we hit bottom. Some of the predictions seem to be predicated upon hard data. See the nice chart below that clearly shows that 2008 will bring an end of the huge wave of subprime loan adjustments causing all of these foreclosures.

Note: this chart was from June 2007. So we are “not here” but two-thirds of the way through the bulk of the ARM adjustments depicted in the chart.

Based upon this information, one could argue that home prices might bottom in 2009. That was the interpretation of Lawrence Kudlow on his CNBC politics and economics show, Kudlow & Company, on April 16, 2008.

As the Federal Reserve steps in to cut interest rates and bail-out financial institutions crippled by the credit crunch, the stock market rallies, and commentators pronounce that the market is a lead indicator that the home price bottom is only 6 months away.

Even on the front line, I see anecdotal evidence that the bottom is near. More and more investors are applying for financing to pick-up bargains, and investors are forming numerous private money funds to get them the money they need. I hear talk everyday about the bargains to be had in bank-owned properties, foreclosures, short-sales and rehab flips. Surely, investors are on the sidelines just waiting to jump in at the bottom. Meanwhile, home sellers are stubbornly resisting lowering their asking prices because the bottom must be right around the corner. Moreover, Fannie Mae and Freddie Mac can now offer jumbo loans. “We are saved!”

Everybody is wrong.

The Facts

All of the empirical economic data predict that home prices will continue to drop for at least another 4 years. And, that is the optimistic forecast. Realistically, home prices will continue to decline for a total of 8 to 10 years. During this decline, home prices in Los Angeles will drop nearly 50% from their highs of August 2007. Robert Campbell, a leading California real estate economist, predicts that this will be the largest decline in home prices since we began keeping records in 1890.

Recent History

In order to fully explain why the home price downturn will be protracted, I must first give you a quick recap of how we got into this situation in the first place.

In 1988 US home price began to drop after a run-up fueled by Wall Street’s takeover of mortgage lending from sleepy old savings & loans. This drop continued for 9 years, until 1997 when median US home prices finally began to rise again.

In 2000, the Federal Reserve was concerned that the Y2K bug would seize the country’s computers, and the banking system would fail. As a safety measure, they flooded the economy with currency, and lowered interest rates. This had the unintended result of homeowners who were previously upside-down in their mortgages, flooding mortgage companies with applications to refinance into a better rate.

Three months later, the dot-com bubble burst, and the Federal Reserve, again concerned about the economy becoming disrupted, lowered interest rates again. This cheap money caused home prices to continue rising and caused even more refinancings.

A third crisis hit in 2003. 9/11. In the aftermath, the American consumer was paralyzed. GM couldn’t give cars away, and the Federal Reserve stimulated the economy with even more interest rate cuts. It worked. The economy didn’t stall.

However, home prices were now on an upward spiral fuelled by the perception that home prices always go up. They were also help by the availability of cheap money the Fed was pumping into the economy and easy credit terms. Everyone knew someone who was becoming rich just from owning a house. This caused a huge demand for new housing. As home prices continued to spiral upwards, people began to refinance just to take cash out of their homes to finance consumer spending. “Who cares? The house is just going to keep going up in value.” Homes had become personal ATMs.

The demand for home loans was so great that the mortgage industry and Wall Street had to hire a huge number of people to handle all of the processing. These were mostly twentysomethings with virtually no experience in mortgage lending, underwriting, securitization or risk analysis. They were told, “Let’s close these deals as fast as possible, and you’ll make a lot of money. Just copy what the guy next you is doing.”

Sure some well intentioned, smart people knew that home prices were unrealistically high, but they couldn’t do anything about it. If they refused to do the loans, their competitors would take the business instead. If a loan officer wouldn’t lend to a consumer, a different loan officer would. If a mortgage company would buy a portfolio of questionable loans, and different mortgage company would. If a ratings agency wouldn’t give an investment bank’s mortgage bonds a AAA rating, another one would. If a hedge fund manager didn’t give his investors the profits promised by these bonds, they would find another fund manager.

Why didn’t the regulators put the lid on things? In my opinion, the regulators were deliberately looking the other way. Everyone wanted this to happen: consumers, lenders and investors. There was no constituency asking for this to stop. Everyone was making money. Who is the injured party? In my experience, regulators who call for preemptive measures are usually shouted down, and ridiculed for predicting that the “sky is falling.” There is seldom political will to fix a problem until events actually achieve crisis levels.

The housing and mortgage markets were completely out of control.

By 2006, the mortgage industry had lent money to virtually every qualified borrower, but no one wanted the party to stop. In order to keep things going, lenders began to put the least qualified borrowers into the most risky loans, and they did this at a time when homes were at their absolute top value.

Wall Street simply stopped buying these bad loans, and more than 100 mortgage companies failed in the first three months of 2007.

It is these risky loans made during 2006 and 2007 that were the first to fail. These failures eroded the values of their neighbors’ homes and caused a domino effect of foreclosures. Moreover, these failures exposed that fact that ratings agencies were not properly evaluating the riskiness of these mortgage bonds, and called into question all bond ratings. All types of credit to froze up. It was August 2007, and the credit crisis had begun. Jumbo loans nearly vanished, and home values in Los Angeles (largely dependent upon jumbo home loans) began to tumble.

That brings us to today.

5 Reasons for Declining Home Prices

Here are 5 empirical reasons why home prices in Los Angeles will drop nearly 50% over the next 8 to 10 years:

1) The Easy Credit is Gone
2) The Recession
3) Housing Affordability Ratios
4) The A-Paper Loan Crisis (hasn’t happened, yet), and
5) Housing Bubble Symmetry

Much of the boom in housing prices was a result of easy lending terms offered by the mortgage industry. The biggest culprit was the stated income 100% financing loan. Virtually, anyone with a pulse could get into a home, without having to prove their financial responsibility or having to invest their own money into the home. Many borrowers deliberately misled lenders, by buying numerous homes under these terms claiming that each was a primary residence, when in fact they were purchased for speculation.

Over 100 mortgage companies have failed, and both Fannie Mae and Freddie Mac are technically insolvent.

The credit crisis has also caused a shortage of funds for jumbo mortgages, which comprise a major share of financings in the Los Angeles area.

Now that this easy money is gone, jumbo loans are scarce and people have to actually invest their own money and/or prove their financial qualifications, demand for homes has shrunken and home prices will continue to decline.

The housing boom financed the majority of growth in our nation’s Gross Domestic Product. Mortgage equity withdrawals (MEWs) measure the amount of money people took out of their homes to pay for consumption. During the previous housing cycles, MEWs financed only 12%-17% of the growth in GDP. During this housing cycle, 66%-100% of the growth in GDP was funded by people spending the equity in their homes. In other words, if people hadn’t borrowed against their homes to buy stuff, real growth in GDP would have barely achieved a 1% growth rate.

Homeowners have depleted much of their equity either because of MEWs or because of falling home values. So, they can no longer borrow against that equity to make new purchases.

The housing downturn means a loss in jobs in construction, real estate, related retailers, and service companies. With this loss of employment, and the loss of economic stimulation in other sectors financed by mortgage equity withdrawals, a recession is inevitable.

Unemployed people don’t buy new homes. Neither do people who can’t sell their homes because they are owe more than the house is worth. This contraction in demand will put further downward pressure on home prices.

Since World War II, median home prices in Los Angeles have averaged 4 times median income. This is what is normal for the area. The city has been running a housing price fever, though. At its peak, August 2007, median home prices was 10.5 times median income. To return to normal home prices must drop back to the normal 4 times median income.

The combination of low interest rates and easy credit caused an a-typical disconnect between income and home prices. Now that the conditions that caused this disconnect are gone, median home prices will inevitably return to their historic mean of 4 times median income. This implies up to a 57% drop in prices from the August 2007 high, with a small portion of this correction coming from a rise in income.

Los Angeles housing prices have reverted to this mean ratio of 4 times income after each of the last two housing bubbles: in the 70’s and the 80’s.

A lot of people are calling a bottom to housing prices in 2009. They are, like Lawrence Kudlow, looking at charts depicting the re-setting of sub-prime ARMs, and based upon the fact that the bulk of these resets will be over in 2008, predicting that the worst of the housing crisis will soon be over.

They are looking at the wrong chart.

There will be another wave of foreclosures caused by the re-setting of the Option-ARM products sold in 2006 and 2007. In a rising interest rate environment, it was one of the few ways to actually lower a borrower’s monthly payments. The resets on these loans will occur in 2010 and 2011, and they will set off a 2nd wave of foreclosures. This time, they will be A-paper foreclosures, and we will see significant foreclosures for the first time in affluent communities like Brentwood, Beverly Hills, Pacific Palisades, Encino, Calabasas, Bel Air and Malibu.

Communities already hit with the sub-prime foreclosures, like Sacramento, the Central Valley, Inland Empire, Palmdale, Lancaster and San Diego will have another round of foreclosures. This time it will directly affect A-paper borrowers who can’t refinance their Option-ARMS because falling home prices have left them with no value in their homes.

These 2010 and 2011 A-paper and Alt-A foreclosures will approach the same level of the sub-prime implosions that we are currently experiencing. For this fact alone, it is highly unlikely, that we will see a turn-around in home prices, before 2012, and as I’ll demonstrate next, there is a good reason to expect the decline to continue another 3 – 5 years beyond that.

Look again at a historical chart of US median home prices. You will notice that the housing price bubbles in the 1970s and 1980s were both symmetrical. That is to say that home prices decline over about the same number of years that it took for them to rise. In the 70s, the price pattern made a symmetrical chart pyramid, and in the 80s, it formed a nicely rounded mound. This isn’t good news, because this phenomenon predicts that the current downward slide in home prices will continue about as long as the price climb took. That price climb took 10 years. Since the peak in Los Angeles housing prices was in 2007, prices could decline until 2017.

Human nature being what it is, a lot of people reading this will say that this is a wild “end-of-the world” scenario, but let me remind you that the last decline in home prices lasted almost as long, for 9 years, 1988 to 1997.

There is also another precedent for this long symmetrical decline. After a 14 year price decline in Japan, their housing market finally began to rebound in 2005

Housing price data since 1890 have been graphically incorporated into a clever roller coaster video. Watch the video below. It will give you a visceral sense the number of ups and downs of US home prices over the last 120 years, and of the current price decline. Pay special attention to the last part of the ride; it represents our current situation. If you still have any doubts about the direction the housing market is headed, it will make you into a believer.

Click here to open video window

Still in Denial?

The evidence is overwhelming, but human nature is what it is. Most people reading this will tell themselves that the market in general may act like this, but that their own circumstances are different. Unfortunately, there isn’t a strata of the housing market that is immune to these price pressures.

Demand for homes at all levels is interconnected. It’s a kind of food chain. In order for demand to be fueled at the top, there must be demand at the bottom, pushing everyone upwards. First-time home buyers must be able to afford and qualify for financing to purchase entry-level homes. This allows the sellers of these homes to use their equity to move up into a nicer neighborhood and a bigger home. That purchase, in turn, allows people in the middle of the market to climb their way into the best homes in the best neighborhoods.

Unfortunately, there are dislocations at all levels of the housing market. The 100% financing option was originally intended to help facilitate first-time home buyers gain access into the housing market has been greatly reduced. They are harder to obtain and offered by fewer lenders. The middle of the market has glut of inventory, from homeowners attempting to escape unmanageable payments and with banks trying to dump repossessed properties. Moreover, many of the loan products which allowed these consumers to purchase a home, no longer exist. It will take years of demand to absorb all of this excess inventory. Consequently, with no upward pressure on home price in the middle, demand from middle market homeowners trading up into premium neighborhoods will also subside. The top of the market isn’t already without its own problems. There is already a shortage of jumbo loan financing, and many middle-class people used the aggressive Option-ARM loan products to move into the best neighborhoods. When the maximum payments on these loans re-set in 2010 and 2011, there will be a rash of foreclosures collapsing prices in the best neighborhoods, as these overreaching, middle-class homeowners get a dose of financial reality, and their mortgages implode on them.

If this forecast were true, wouldn’t it be reported in the news media? Well, not necessarily. The first reason is that news organizations report events which have already occurred. They are not in the business of making predictions. The second reason you won’t see this forecast in the news is that the media gets its housing data from organizations that have an interest encouraging people to buy more houses: institutions like the National Association of Home Builders, the National Association of Realtors and big banks like Wells Fargo. Otherwise detailed economic reports from these institutions either avoid the topic completely or equivocate about the expected depth and duration of the housing downturn. The CEO of Wells Fargo was on TV yesterday. When the housing downturn was brought up, he began his reply by saying something like, “At some point, we will reach a bottom and housing prices will stabilize.” That’s a pretty vague response from someone collecting a huge paycheck from his shareholders to know the exact answer to that question. He was vague by design. If he went on national television and predicted the bottom was 10 years away, loan applications for new home purchases would immediately fall-off.

Stay Smart

To track how far home prices have to fall in a particular city, you can find price-to-income charts at Housingtracker.net and additional charts at MacroMarkets.com. Look for the 1997 price-to-income ratio, and compare that to the current ratio, and you will have a good estimation of how far home prices in that city have to fall. These charts can also tell you when home prices have reversed and started to rebound.

I was pleased last March to see that Congress was not overreacting to the problems in the subprime markets, and allowing the free markets to correct themselves.

Well, that pleasure was short-lived. Yesterday, HR Bill 3915 was sent to the House for approval. Though well-intentioned, this bill as written, will further tighten credit just when homeowners need it the most. It will disqualify many from obtaining loans, limit competition, create regulatory barriers to innovation, exacerbate the rate of foreclosures and cause further billions of dollars of homeowner equity to vanish.

Everyone will be effected if this legislation passes. Many of you who are employed in the mortgage and real estate industries should be concerned about your jobs. Those of you who are not, are homeowners or dream of someday owning your own home. And, everyone has a stake in a quick economic recovery. If people can’t afford their homes, they will stop spending on consumer goods. Since US consumer purchases drive the world’s economy, this has the potential to push our economy into a broad and deep depresssion.

According to Representative Barney Frank, the House of Representatives will vote on HR Bill 3915, in February or March.  CONTACT YOUR CONGRESSMAN BY PHONE OR EMAIL, RIGHT NOW, and express you desire for him/her to VOTE AGAINST THIS LEGISLATION, unless certain wellmeaning but misguided language is corrected.

1) Sign the petition to Congress. http://www.petitiononline.com/Fix3915/petition.html
2) Contact your Congressman . http://capwiz.com/namb/dbq/officials/
3) Forward this email to everyone you know

There is another popular “No on HR 3915 petition addressed just to Arizona representatives. If you have already signed that one, please sign this one as well. This one is addressed to the entire congress.

The National Association of Mortgage Brokers has created a webpage that will allow you to look-up your congressman and quickly compose a letter from their template expressing your concern. It is at http://capwiz.com/namb/dbq/officials/ . Enter your zipcode and follow the link titled “ACTION ALERT! ACT NOW!”

For a thoughtfully considered summary and opinion of this bill, please visit the blog of a one of my Nevada colleagues: http://activerain.com/blogsview/258019/If-House-Bill-3915

The MTA is planning on building a train route, this year, to run along the long abandoned rail line on Exposition Boulevard from Downtown to Santa Monica.  Rather than build the train below grade (such as in a trench), they are building it at grade (at the same level as pedestrians and motorists).  This is the same way they built the Blue line which has already earned the title, “the deadiest train in America.”  

This proposed Expo line will send a train every 2.5 minutes though USC Homecoming Day pedestrians, through Coliseum event traffic gridlock, and within 50 feet schools with children crossing (at Dorsey)s at a rate of 105 students per minute. 

Gloria Jeff submitted a memo on behalf of the City of Los Angeles Department of Transportation protesting that the MTA’s safety estimates for crossings at Exposition Park ignored the massive increases in pedestrian and automobile traffic during Coliseum events.  She was fired the next day. 

The MTA’s solution for handing the 3:00 pm rush of student crossings is to create a “holding pen” for our children, until the train passes.  Several concerned citizens, myself included, immediately observed that if a collision where to occur, everyone standing in one of these “pens” would be directly in the path of a derailed train.

The Expo line will kill people, and unlike the Blue line (”the deadliest train in America”), it will kill en mass. 

A train at grade must sound it’s horn 100 yards before it enters every intersection.  That is 240 horn blasts per day.  Travel along the existing Blue line, and you will see “for rent” and “for sale” signs on homes all along its route.

This train will undoubtedly relieve east-west traffic on the 10 freeway.  However, as proposed, it will simultaneously exacerbate commuter gridlock on all north-south streets between Downtown and Santa Monica.

A train running below grade (in a trench), requires no horn blasts, no “holding pens,” no need for sound walls (graffitti magnets), no crossing gates and no need to slow the train down for intersections.  In fact, a below grade train would operate so efficiently, that its total cost to build and operate would be less than the current “at grade” plan.  

Now, here is the really annoying news.  The MTA had originally intended to build the Expo route below grade, and they would have qualified for massive federal subsidies, but they changed the plan.  When asked why they would do this, a Federal Transit Administration official called the MTA, “Unsophisticated.” Even though a below grade project would have a lower total cost (construction plus operating costs), the “at grade” plan was cheaper and easier to build (which ignores its higher cost to operate).  There is no free lunch.  Someone always pays, and entire communities will pay for it with reduced home values, increased noise pollution, snarled traffic and avodable deaths.

USC doesn’t want this train at grade level.  The LA Unified School District doesn’t what this train at grade level.  Culver City doesn’t want this train at grade level. Homeowners don’t want this train at grade level.  Parents don’t want this train at grade level.  And, when they announce the plan for Santa Monica, I’m sure they won’t want it at grade level, either.   Yet, the MTA board is continuing with this deadly plan. 

Please help us convince them to pursue a safer and more economical solution. Please take a minute to visit http://www.fixexpo.org/ and to sign the petition at http://www.PetitionOnline.com/EXPO/petition.html .

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Drew de la Houssaye is the Managing Director, Real Estate Capital & Investments at Source 1 Financing. He has over 20 years of experience in financing, investing and managing both residential and commercial real estate. Need more information? Please, contact us.

The Goldman family has been unable to collect much of the money that was awarded to them by the judge in the wrongful death case against OJ Simpson.  So, it looks strange to most observers when they see the aerial news photos of OJ’s Florida home, and photos of him enjoying a nice round of golf.  It looks like he has plenty of money.   So, why can’t the Goldmans collect?

Before delving into the topic, Mr. Stein made sure to clarify two initial points. The first point is that asset protection isn’t about secretly hiding assets overseas, through sham transactions.  There has been much speculation in legal circles that Mr. Simpson’s defense attorneys over-billed him for his legal fees and stashed away some money for him, overseas.  The Goldman family’s attorneys are very good, and they have found no evidence that this has actually happened.  If it had occurred, it would be an illegal act, and at a minimum, his attorneys would be risking their licenses.   Proper asset protection is about openly using common legal entities to make assets within those entities judgment proof.  A creditor may be able to see all of the settlor’s assets, but he would still be unable to force a transfer, even after winning a civil judgment.  This is the position that the Goldmans find themselves vis-à-vis OJ Simpson.

The second point is that there is a difference between privacy and asset protection.  Actions taken to keep a property owner’s name out of the public record may succeed in providing a reasonable level of privacy from the general public, but those privacy measures won’t withstand a vigorous discovery process by an aggressive civil litigation attorney.

Privacy

Celebrities and wealthy individuals have very particular privacy interests when purchasing a home.  They need to keep their names out of the public record and away from potential stalkers, obsessed fans, kidnappers and other troublemakers.

Normally, when someone purchases a home, the county records the buyer’s name, an address for tax billing and the transfer tax amount (which can be used to estimate the property’s sales price.)  The county gets this information from the grant deed.

The key to keeping one’s name and the purchase price of one’s home out of the public record is to make sure neither appears on the grant deed.

The simplest way to keep one’s name private is to purchase the home in the name of a trust.  A trust is a private contract that appoints a trusted friend or attorney as the trustee.  His job is to look after the beneficiary’s assets.  The beneficiary would be the individual using the trust to obscure his ownership.  The name of the trust would appear on the county records, and if the trust has a non-descriptive name, like the “Sunshine Trust”, it would adequately protect the privacy of the beneficiary.  The county will also ask for an address to send the tax bill.  Just be careful to use an address that doesn’t betray the identity of he homebuyer.

Anyone searching the tax roll can also estimate the price paid for any given property, by dividing the amount of the transfer tax by the tax rate.  If a homebuyer doesn’t want the purchase price made public, just instruct escrow not to include the transfer tax on the grant deed.  It doesn’t have to be included.  Make a note on the grant deed where it asks for the transfer tax amount, “See attachment & don’t record the tax.”  Include the necessary attachment, and the county will not record the tax.

What about personal property?  A boat? Cars?  How does one keep one’s name out of the vehicle registry?  Mr. Stein recommends holding these assets though a limited liability company (LLC.)   The vehicle registry will show the name of the LLC, only.  The Secretary of State’s records will only show the name and address of the agent for service of process for the LLC.  Many principals choose their attorney to act in this capacity, and they record his office address as the corporate address, as well.  For most purposes, this provides and adequate level of privacy.

Asset Protection

Besides merely providing privacy, entities such as qualified pension plans, LLCs and trusts can also be used to protect property from creditors & legal judgments.  Because Mr. Stein was speaking to a fairly sophisticated audience, there wasn’t much need to explain the basic nature or obvious advantages of these entities.  He did, however, point out some of their lesser-known benefits.

When a creditor records a judgment with the county recorder’s office, a lien is automatically placed against all of the real property held in his name in that county.  The creditor doesn’t need to know the whereabouts of any of the he debtor’s properties.  

If real estate holdings are transferred into one or more limited liability companies (LLCs) and out of the individual’s name, the judgment lien would not attach to such properties.

Let’s say the creditor is more aggressive.  He may have already discovered that the property owner controls his assets through a LLC, and he may have asked for and received a charging order from the court.  This would entitle him to claim any disbursements from the LLC.  It’s unlikely, though, that creditor would go through the time and expense of pursuing such an order, because the LLC’s management (i.e., the debtor) would simply elect to suspend disbursements.  Obtaining a charging order in this situation would be pointless, and the creditor’s attorneys would probably tell him so.

When we do see a creditor actually pursue a charging order against an LLC, it is usually when there is more than money at stake.  It’s usually because there is personal animosity between the parties: such as between the Goldmans and Mr. Simpson.  To protect oneself from an extreme situation like this, a property owner could elect to include a “poison pill” clause in the LLC’s operating agreement.  Such a clause would stipulate that in the event of the attachment of any member’s disbursements, the other members have the right to buyout his interests for some nominal amount.  This would make any charging order virtually worthless.

Limited partnerships don’t provide this same protection, because the general partner has control over when disbursements are made, not the limited partners.  Mr. Stein recommends holding limited partnership interests in the name of an LLC, to achieve a desirable level of asset protection.

Now, here is the most interesting part.  Since the owner of the LLC controls this entity though his ownership of an LLC interest, can’t the creditor ask the judge to attach these shares?  Well, the answer is, “No.”  By statute, interests in an LLC are not attachable. 

Contrast this with shares in corporations, which are attachable.

Though there are many types of structures and techniques offering a variety of asset protection advantages, the allotted time wasn’t sufficient for our asset protection expert to adequately discuss them all.  He did, however, make the point that most people are hesitant about entering into an irrevocable trust.  It’s not in most people’s nature to commit to something that is “irrevocable.”  For the purposes of asset protection, a settlor must use an irrevocable trust.  The term “irrevocable” means that creditors may not revoke the trust though legal action, but it does not mean that the organizers of a properly drafted trust would not be able to revoke. 

Revocable trusts provide settlors with no protection from creditors. 

Trusts should also include a spendthrift provision that prohibits the beneficiary from voluntarily or involuntarily assigning his interests in the trust, and it should be a discretionary trust, in which the trustee has discretion to make distributions.   Obviously, one should also appoint a friendly trustee.

Okay, back to OJ.  How is it that his football pension income is somehow magically off-limits to the Goldmans?  Well, it turns out that this is a universal feature of any ERISA qualified retirement plan, such as a 401k.

Jacob recalled an anecdote about a very thrifty embezzler whose ill-gotten gains couldn’t be attached because he had already transferred the funds into his ERISA qualified retirement plan.

IRAs do not qualify as ERISA plans, and do not offer the same level of protection, and sometimes, none at all.

Transferring ownership of liquid assets to an offshore LLC or trust is another way of shielding cash and securities, but it is not exactly bulletproof.  If a creditor can convince a US court that the settlor controls these foreign entities, the judge may issue an order to the settlor or the financial institution to surrender any funds in those accounts.  In these circumstances, if the financial institution is located in the US, it will most certainly comply.

To avoid this possibility, it would be better if the liquid assets were not just in the name of a foreign entity but also deposited into a foreign financial institution that has no branches or subsidiaries in a US jurisdiction.  This would provide the maximum protection.

Fraudulent Transfers

Anyone considering taking steps like these to protect assets should be warned that if the assets are not transferred into a trust, LLC or other entity properly, a court may find the transaction to be a fraudulent transfer.  This is certainly a possibility if the asset transfers are made after a lawsuit is filed.  It’s always better to make asset protection arrangements long before any threat presents itself.

Other Considerations

The recent headline news regarding the mortgage industry will have a widespread effect on home values and the availability of credit. 

Home foreclosures are projected to exceed $100 billion over the next six years (MSN March), and during the first ninety days of 2007, suddenly and unexpectedly thirty-six of the largest mortgage companies in the country have gone out of business.     

The foreclosure rate in California is already 200% higher than last year and projected to continue increasing though 2008.  Each foreclosure will have a negative impact on the value of surrounding homes.  Moreover, Congress and Wall Street are pushing us to tighten loan approval guidelines.   The combination of tighter loan guidelines and falling home values will make it harder to refinance properties in the next few months, creating what economists are calling a “liquidity crisis.”   Many homeowners who are qualified today, will not be eligible for a loan a few months from now.

Unqualified for a new loan and faced with higher adjustable payments, many more homeowners will decide to place their homes on the market, further weakening already falling home prices.  

Consequently, if you have family or friends who are facing higher adjustable mortgage payments over the next year, you should advise them to obain a stable and secure loan ahead of the market downturn.

   * * * 

Drew de la Houssaye is the Managing Director, Real Estate Capital & Investments at Source 1 Financing. He has over 20 years of experience in financing, investing and managing both residential and commercial real estate. Need more information? Please, contact us.

By Drew de la Houssaye

Originally published by the Scotsman Guide 

With unstable rates and declining property values, it has become increasingly difficult for loan officers to refinance their clients’ mortgages without increasing the homeowners’ monthly expenses.  This is especially true when homeowners increase their loan balance by taking cash out during a refinance.   Continue…. 

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By Drew de la Houssaye

I had mixed feelings about attending Dwan Bent-Twyford’s seminar at the Real Estate Investors’ Club of Los Angeles.

Dwan practices and teaches an investment technique called short-selling. Essentially, she is a master at getting banks to agree to discounted payoffs on the properties she purchases…thereby, creating an instant equity position. She’s been doing it with a great deal of success, for over 17 years. It’s a strategy that is especially effective when the housing market softens, and we see a lot of homeowners going into default.

Now, my hesitation wasn’t because of some ethical qualm about taking advantage of people in trouble. “You’re never wrong making a profit.” My problem was that I was beginning to wonder if my forecast of the coming real estate market was wrong. Clients, fellow investors and friends have been asking me, “When are the foreclosures going to start?” I’ve been telling them, “This isn’t 1992.”

The last time people in California found themselves upside-down in their mortgages was at the end of the cold war. Congress had cut defense spending, and suddenly we had 20% unemployment in California. Our economy was heavy with defense and aerospace contractors. This drop in real estate price was caused by a fundamental change in the real economy.

The media has been warning that the mortgage industry has been heavily selling interest-only, adjustable and balloon payment loans, and that millions of borrowers will suddenly be unable to pay their mortgages. If they sell at once, they’ll cause a collapse in prices and a flood of foreclosures.

Well, I work in the mortgage industry, and I don’t know any reputable lender that wants borrowers to fail. We don’t want your house. Underwriters are painstaking in their analysis of a borrower’s financial profile, and they don’t make a practice of lending money to masses of people who are destine to default.

No, we will not have a rash of foreclosures because of the practices of the mortgage industry. If homeowners start to fail on their mortgages it would have be as a result of some fundamental change in the real economy…like in the 1990’s. So, I’ve been telling people, “Don’t expect a real estate fire-sale anytime soon.”

Now, I’m beginning to wonder if I’m wrong.

John Talbott, a former Goldman Sachs investment banker, published his take on the subject earlier this year, in his book “Sell Now! The End of the Housing Bubble.” He estimates that the artificially low interest rates of the last few years have caused a global overvaluation of real estate, to the tune of $30 trillion dollars. That’s an eye-catching number. I wondered, “Maybe he’s just trying to sell books.” I wondered, “Maybe he has an agenda to cool the market down.” I wondered, “Maybe he’s trying to create a panic.” $30 trillion overvalued! Then, I wondered, “What if he’s right?”

If he’s right, we are about to come into a biggest buyer’s market of our lifetime. If he’s right, you should be in cash…not real estate. You’ll need to be ready to buy when the prices drop, and you need to be thinking about the strategies that are most effective in a collapsing market. You should be listening to Dwan Bent-Twyford.

So, I decided to keep an open mind, and off I went to see what she had to say.

In a short-sale, the investor saves a distressed borrower from foreclosure and bankruptcy by getting the mortgage-holder to agree to a reduced payoff. For instance, if the home is worth $300,000, and the loan is for $295,000, the short-sale investor would get the bank to agree to accept $160,000 to payoff the loan. That’s a $140,000 profit for helping the bank get a problem property off of its books.

Dwan makes three points: 1) understand how a banker thinks, 2) plan your offers & counter-offer strategy in advance, and 3) have an exit strategy.

Bankers don’t want foreclosed houses on their books. 1) They cost money to carry, rehab and to sell, 2) they mess-up the banker’s quarterly statements (red flags to investors, regulators and other banks), and 3) they force the bank to keep up to ten times their value, in cash reserves. Banks don’t want to own a bunch of houses generating no cash-flow. It costs them a fortune to hold and dispose of them.

She recommends that short-sale investors avoid the novice’s mistake of making your best offer upfront. The bank is more likely to accept your offer if you plan on making up to three offers from the very beginning.

Offer #1: Distressed Borrower – Distressed Property

You offer 40% - 60% of the after-repair/full-retail value of the property. In this offer, you include a distress letter from the sellers. It explains why the sellers will never be able to continue servicing the loan, and that their attorney has advised them that bankruptcy would tie-up the property for more than two years. The letter goes on to explain that the investor’s offer is the best offer they could get, and urges the bank to accept it. Include documentation of all of the borrower’s hardships.  

This offer also stresses the property’s level of disrepair. Include photos, mold samples, code violations, etc..

Include the sales & purchase agreement.

Offer #2: Distressed Community

When the bank counter-offers, you counter with your second offer, and you back it up with documentation explaining why this property would be impossible to sell. Send a list of local registered sex offenders, newspaper articles about fires, crime statistics, and anything else you can find on the internet that makes the neighborhood seem unmarketable. The bank’s loss-mitigation office may have no first hand information about the community, and they may rely on the information that you provide.

Offer #3: Cash Analysis

Hopefully, your previous offers have been accepted already. If you have to make a third offer, include with it a cost breakdown of 6 months with no debt service during foreclosure, 2 years of no debt service during bankruptcy, tax & insurance expenses, trustee expenses, rehab costs, carrying cost and selling expense. At this point, they should come to realize that your offer today is better than what they’ll be getting 30 months from now.

Here are some of her tips for getting data for your analysis. Use Zillow.com for comps. They tend to give low-ball value estimates, and the site is free. Use EasyHud.com for estimates of regional closing cost and use HomeDepot.com for repair estimates. Home Depot’s estimated repair costs tend to be higher than what you can pay a handyman for the job. Remember, it’s like trying qualify for a home loan, but in reverse. Instead of presenting the bank with the best appraised value and borrower profile, you present them with the worst perspective on the situation.

Once the bank has accepted your offer, and you have the property under contract for substantially less than market value, you need to cash out. So, you need to have an exit strategy in place before you buy the property. Dwan gave some examples of exit strategies: rehab the property yourself and sell it retail, rehab the property and become a landlord, or assign your purchase contract to a professional rehabber for an assignment fee. She prefers the last technique. It has the advantages of requiring no real estate license, no rehabbing experience and no cash.

Finally, Dwan reminds the investors in the audience to always refer to the sellers by their first names, while speaking with the bank’s loss-mitigation manager. It humanizes them in the mind of the banker, and they are more likely to want to help them. Ultimately, that is why this technique works. It works because it helps people. It helps the borrower escape excessive debt obligations without destroying their credit, and it helps the bank maintain a healthy balance sheet, and if we are really headed into a hot buyers’ market, you might be able to use these techniques to help yourself.

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Drew de la Houssaye is the Managing Director, Real Estate Capital & Investments at Source 1 Financing. He has over 20 years of experience in financing, investing and managing both residential and commercial real estate. Need more information? Please, contact us.

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Source: PRNewswire
Publication date: 2006-09-19
MARIETTA, Ga., Sept. 19 /PRNewswire/ — House Buyer Network is North America’s largest home selling solutions company, catering specifically to those who need to sell a home fast. The company has been providing solutions since 2002 and annually processes billions of dollars in real estate.Today the company declared a bust in several U.S. real estate markets as real estate prices driven to unsustainable levels by years of activity by real estate speculators and increased reliance by homeowners on low down-payment, short-term ARMs have created a glut of motivated home sellers. That increase in homeowners needing to sell fast has, in turn, created great opportunity for both true real estate investors and real estate agents who specialize in quick sales.

In just the previous year, the amount of Arizona property processed by the company each month has soared by 235%, almost exclusively as a result of increases in cities in Maricopa County (243% increase). Surprise, AZ, showed the biggest increase with as many quick-sale homes in August 2006 as in all of 2005 combined. Mesa was next with a 400% increase, followed by Phoenix at 307%.

Florida has seen the second largest year-over-year increase — climbing steadily by 219% since January 2006 alone. The increase there was led by Dade County (400% increase), Lee County (338%), Palm Beach County (318%) and Hillsborough County (210%).

California saw a 196% increase in motivated sellers since August, 2006, but unlike Florida and Arizona, the bust in California has been more widespread with a full seven counties seeing motivated sellers triple or more: Alameda County (650% increase), San Joaquin County (450%), Orange County (375%), Fresno County (333%), San Bernardino County (300%), Riverside County (222%) and Los Angeles County (194%).

Emerging Bust Markets

In addition to being able to pinpoint today’s bust markets, the volume of real estate coming though the system every month also allows House Buyer Network to spot emerging bust markets six months or more in advance.

Today, the largest concentration of potential bust markets is in the Washington, D.C., area with six surrounding counties showing a significant recent surge in the number of motivated sellers: Virginia’s Fairfax County, Loudoun County and Prince William County, and Maryland’s Baltimore County, Montgomery County and Price George’s County.

Illinois and Massachusetts are also showing signs of weakness. Motivated sellers have started to climb in Cook County and Lake County in Illinois, as well as in Massachusetts’ Middlesex County and Worcester County.

Finally, individual pockets of real estate slowdown are beginning to emerge in other parts of the country as well, including Shelby County, TN; Hamilton County, OH; Bexar County, TX; and Kent County, MI.

Whether these areas emerge into a true bust market remains to be seen, but all show strong early indicators that a bust may be developing.

About House Buyer Network

House Buyer Network (http://www.housebuyernetwork.com/) is North America’s largest home selling solutions company. Since 2002, the company’s nationwide network of professional home buyers and real estate agents has helped more than 100,000 families and individuals who needed to sell a property fast-processing more than $20 billion in property during that time.

House Buyer Network

CONTACT: Duane LeGate of House Buyer Network, +1-888-888-3034, ormediarelations@housebuyernetwork.com

Web site: http://www.housebuyernetwork.com/