From time to time I counsel people for a fee. A person who was in trouble contacted me for advice. His is almost a casebook study on what not to do.
1. He had assumed a non-assumable loan and paid more than market value for a house, which had already been sold to someone else whom and hadn't recorded the deed yet. He didn't know it had been sold, and he also didn't know the difference between taking title “subject to” a loan, and “assuming” a loan. By assuming the loan he was effectively co-signing the loan with the original borrower. If it were called, he'd have to pay it off.
2. He put the house into a Land Trust, which he copied out of a book he borrowed, in a State that has no Land Trust law without having any idea of the ramifications of this. He didn't know that putting property into a special Trust, like a Land Trust formed under the laws of his State which had no Land Trust law, could cause many more problems than it would solve and also remove any protection he might have had against liens afforded by Community Property laws.
3. Next, he failed to obtain any liability insurance and proceeded to name his wife as Trustee, but proceeded to obtain permits and to contract for repairs in his own name on property that was in Trust. This placed his wife in a precarious position and made his
application for permits in his own name fraudulent.
4. On the advice of an attorney, which he found in the telephone book, he signed an indemnity agreement protecting the seller from any adverse consequences to the deal. His agreement placed no duty on the seller to defend against any lawsuit, or to make claims on his liability insurance policy. This means that he if he or anyone else sues the seller, he'll have to pay the damages, but won't have the legal standing to assist in the defense of the seller.
5. He evicted the holder of the unrecorded deed who immediately sued his wife and the seller for damages; and requested a jury trial for “more than $50,000” in damages. The seller failed to appear at a deposition, but he and his wife did. He failed to tell his attorney about the indemnity agreement, so the attorney moved to remove him and his wife from the suit as innocent victims, and to make the seller solely responsible for any damages. If the judge refuses to do this, his wife alone must defend herself and explain to the court why all the things that happened took place, and why the court should not rule that he and his wife conspired with the seller to defraud the original holder of the unrecorded deed.
In fact, she was just a compliant wife who knew nothing about the problem
6. Meanwhile, even though he knew there was a problem, he proceeded to borrow $25,000 on his personal signature to improve the property while the suit was in progress. He didn't buy title insurance, and it never occurred to him that title companies might not want to insure title to any subsequent buyer. Now, he can't pay his debts, can't pay his lawyer, and can't sell the house.
7. Even though a $25,000 settlement had been offered by the plaintiff's attorney, his attorney has advised letting the case go to trial, and settling any liens afterwards. By waiting until judgment is handed down, he may well discover that the judge and jury will award a lot more just to punish him for all the mistakes he made.
8. What I liked most about all this was that he waited until after he had made all these mistakes before asking me for advice. I told him that I might have been able to help him avoid all the problems, which he had created for himself, if he had called beforehand, but
that I didn't do miracles.
I think the point of all this is that it's possible for almost anyone to make a lot of money buying, fixing, selling, and renting houses. The rules are pretty simple:
Buy and/or fix up a house for less than you sell it, and if you hold a house for long term investment, rent it for more than your costs. Unless you're buying at deeply discounted prices, make the seller get rid of any tenant and have the title company include an affidavit that there are no liens or latent claims against the property.
Don't deal with shifty characters.
Don't complicate a deal by putting the title into an entity unless you fully understand the tax and legal ramifications.
If you're going to hire an attorney, spend as much time selecting the right one, as you'd spend choosing a partner. You're both going to share in any rewards, but you're going to pay any losses all by yourself.
Last, but not least, don't look for miracles after you've made fatal mistakes. If you want advice, get it beforehand.
