Bernard Zick's

Advice for the Impatient Investor

For real estate investors who don't have time or money to waste!  

August 2004

Editors: Bernard "Barney" Zick bernard@zick.com, Karen Zick and Amy McIntee

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In this issue:

Real Estate Mortgage Business Builder Boot Camps in 2004

Getting Started

Advanced Strategies

Independent Contractor or Employee?

Cash to Invest

Upcoming Events

Getting Started

Q. How could I use lease options to invest in commercial property (apartment buildings/business property)?

Thanks,
L. G.

A. You master lease the entire property then operate it like you own it. The option lets you buy it once you have increased the income.  Look for properties that are under-rented, are not good at collections, don’t watch expenses, and have shorter term higher interest mortgages. If you raise the value enough, you can either flip the property to another investor (maybe a good idea for a beginner), or sell half to get the down payment and keep the other half.

BZ

Q. We bought a house "subject-to" today. We did a simple Warranty Deed. We tried to add our company name to the homeowner's insurance policy but because the seller told them that the house was sold, they said the policy was immediately canceled. I called my insurance agent and she said that she does not cover vacant houses. Do you have any ideas for a company that will insure this house?

As of right now, it is uninsured.

S.C.

A. 1. Have anyone stay there and you can get insurance. I once had my son stay in a house to get the insurance in place quickly. 2. Get it rented and get a landlord policy, or, 3. Get a construction policy for the time you are doing the rehab. They are not cheap but you will be covered.

Next time, as a part of the buying of the property, tell them that you will add your name to policy and take over paying it. Tell the insurance company to add your name to the policy “as an additional insured as your interest may appear.” Your insurance will only be good for 30 days if no one is in there (generally, check the policy) so get busy and do one of the above.


BZ

Advanced Strategies

Q. 1. We rolled over a 401k into a regular IRA, which we've had for three years. If we now put all or part of that money into a Roth IRA and pay the taxes, can we use the previous three years towards our five year waiting period that is required before we can take funds from the Roth IRA?

2. We have filled the papers for an LLC. We are in the process of making an offer on a piece of commercial property which should produce income. How do we go about getting the LLC into a Roth IRA? There are three members of the LLC.

S.B.

A. I have an IRA administrator that answers all my questions. If you had your IRA with him, he could help. I’ll get this one answered for you but I’ll have him send you information on his services in case you have another question. My best guess is yes, it counts toward the five years. I hope so, because I will be in the same boat soon. Age 59.5 will be a new “threshold” birthday for many people!

Secondly, if you have owned the LLC, you cannot move it into YOUR IRA. If the three people in ownership are NOT disqualified people, you can buy the stock with your IRA.

If they deal is really good and you want the money in the IRA, just pay the tax! It is cheap in the long run.

BZ

Quincy, we defer to your expertise…

A. Quincy says: The answer to the first question is no, you cannot count those three years towards the five year rule for qualified distributions from a Roth IRA. However, remember that the five year clock starts from the first tax year you had a Roth IRA, so if you have had a Roth IRA anywhere that counts toward the five year rule.

Barney answered the second question correctly. Once you own it outside of your IRA, you cannot transfer it into your IRA. Additionally, the rules for entity investing are reasonably complex and you would need to get a good lawyer familiar with the plan assets regulations of ERISA to help you with the transaction.

You may also want to go to the IRS website at www.irs.gov and download a copy of Publication 590 which deals with traditional and Roth IRAs.

Quincy Long

P.S. from Barney: send me an email to bernard@zick.com and put “IRA” in the subject field and I will tell you how to get a good home study course on IRAs AND send your name to Quincy so he can send you info on doing your IRA the right way. I like dealing with him because he does answer my questions!

Q. It was a real pleasure to finally meet you and Karen in person at the Dallas seminar. You were correct when you said that you were born to teach. It was abundantly obvious that you were in your element as you worked the room. By the way, you made a real impression on my son, Alex.

I was on the TeleHelp call this evening (very informative!) and you discussed a foreclosure situation. But I couldn't quite catch everything you said. I have had a pretty good response to two mailings I did to people in foreclosure (mailed about 150 letters, received about six calls). The challenge is that most are calling me with about two weeks before the sale. So I am trying to get my hands around how to deal with this very short time window.

Did I hear correctly in that you suggested getting a letter of agreement (not a contract) with the seller, get a signed deed, contact the trustee and get them to postpone the sale, then get an option on the house with an option period that may extend after the sale? [Bernard Zick] No, get the option first, than contact then bank.

Do you make a condition of exercising the option that the seller leaves the home before you exercise? [Bernard Zick] Yes, you do NOT bring the loan current until the seller is out of the house.

Do you normally try to take the property "subject-to" the existing loans? [Bernard Zick] Yes, if at all possible. If you do, how do you talk to the trustee so that the bank doesn't exercise the "due on sale clause"? [Bernard Zick] Get a one time exception in return for bringing the loan current.

Lastly, you often talk about the seller just giving you the deed (i.e., in a foreclosure). Do you then actually have a closing at a title company? [Bernard Zick] No, in that case I just get the deed. I may delay in recording it. Do you get a title policy? [Bernard Zick] Depends. I always do if I have a lot of cash in it. If I have no cash in it and I am going to sell it I get the title report but don’t get the policy until I have a new buyer. What about inspections? [Bernard Zick] Most always. It is important to know what you don’t know and there is a lot I still don’t know about the mechanics of a house. In fact, I even get inspection reports on new houses just before the sheet rock goes on. Especially city code inspections? [Bernard Zick] That is a part of any inspection.

Thank you so much for your insight. We had a great time in Dallas. I'm looking forward to seeing you at an Options Boot Camp soon.

Sincerely,

S.C.

Q.  I got back to San Marcos to try the "Do you want all cash now or full price for a scheduled payments so you can do what you really say you want to do?" on five duplexes. The duplexes are 20 years old, but kept in tip-top shape. The owner had three 3-BR duplexes and three 2-BR duplexes. When I was in Dallas, she had two 3-BR and the three 2-BR units still available. Her rent is just about in the middle of the range -- could get perhaps a little higher per month. They could just cash flow at the current rent at 100% financing. i.e., PITI- at a 6-7% - came to less than gross income, but not much. Might not be positive when put in a factor for maintenance. Yet the shape of the duplexes was such that you could figure maintenance at "new" construction; i.e., these were in move-in condition.

Owner is getting $1700 gross income on the 2-BR units (both units together $850/month each) and asking $160,000 for each duplex. The owner really, really wants to get on to Dallas to be with grandkids- one of whom is sick and she feels that she needs to be there. She has had the duplexes for 10 years and is really tired.

When I got back, she had offers with conventional, all cash for the three 3-BR duplexes. She puts "for sale by owner" ads in local newspaper and was getting offers from both East and West coast. We started to talk. She started to say that she had offers for wrap-around mortgages, lease option, one woman who had made a really, really nice package to buy one unit outright and then lease option the other two until she could buy them.

But the Owner was adamant; she wanted to be brought outright - conventional. Owner couldn't see why people wouldn't want to pay $480,000 outright as compared to lease option over period of time. Capital gains didn't seem to be a consideration. The units were re-financed about 10 years ago. I never could get her to say how much, but she just said they were heavily mortgaged so she had to get the conventional financing to pay off the mortgage.

I was not successful. These looked like a good set to end up with as income-property.

L.F.
San Marcos, TX
 

A. The detailed approach to real estate buying is not fun but sometimes it works. For instance, you said that capital gains did not seem important to her. If you did a detail schedule of what she would net it might begin to make a difference to her! Most importantly, it would give you time to get deeper into her needs. For instance, she most likely wants the cash to build a new life. But what does a new life look like to her? If the next step after getting the cash involved finding some way to get cash flow, you might have a chance with owner carried financing or a lease options.

You see, most people only think one layer deep. “I have to have cash so I can know I sold for a profit and so I can decide what to do.” That thinking is short sighted but often the way people think. In our “Creative Financing Boot Camp System” we cover that and some examples of how to swing the conversation around.

Of course you could just buy the darn things. You might, next time, try 5% down, a 10% owner carry loan with a right to prepay at a discount, a big discount, and 90% of the price in cash from a new loan. If you are a real estate broker, buy in an entity name and add in 7% of a commission on top of the price. That assumes that the price is a really good price. If you use an outside broker, they could put their commission back in for a piece of ownership. I have done that before and would do it again. Done right, and with a good loan, you could be in for next to nothing.

In our “Hidden Profits” course we teach you the “Down Payment Partners” approach. This involves getting an investor to buy this for you to give a passive half interest in the deal.

In our “STP” course we show you how to buy this for nothing down, sell the owner carried paper and cash the seller out on terms that will look far better than what they are asking for now.

One of the reasons for studying this stuff is to get alternatives. But most importantly you need build a relationship with this lady. All your conversations are about price. We tell you in our “Negotiating for Real Estate Investors” that if you negotiate only on price and do not build a relationship, you will be stuck with offering more than anyone else to win. That may work but it is an expensive way to close deals.

So bottom line, you need to do more homework and get the skills that let you close the great deals when they come your way.
 

BZ

Independent Contractor or Employee?

Many of us have helpers for our business and some of these folks have taken on what may turn out to be 40 hour per week assignments. There is a point in time where the IRS will tell us these people need to be treated as employees for tax purposes. Here is the scoop.

Source: Internal Revenue Service/ www.irs.gov 

FAQs regarding Independent Contractor or Employee:

These frequently asked questions and answers are provided for general information only and should not be cited as any type of legal authority. They are designed to provide the user with information required to respond to general inquiries. Due to the uniqueness and complexities of Federal tax law, it is imperative to ensure a full understanding of the specific question presented, and to perform the requisite research to ensure a correct response is provided.


An individual is an employee if, under the common law rules, the relationship between the individual and the person for whom he or she performs services is the legal relationship of employee and employer. Code section 3121(d)(2). Generally this relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished but also as to the details and means by which the result is accomplished. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to do so. Section 31.3121(d)-1(c), Employment Tax Regulations.

An adult education teacher is a school district employee. In addition to her teaching job, she performs services of editing and layout for a school district newsletter. Is the compensation for the editing and layout work properly reported on her Form W-2 as wages for employment, or is she an independent contractor?

We do not have enough facts to answer this question. To determine if the teacher is an employee or independent contractor in the layout and editing job, the school district would need to look at the common-law rules, discussed in detail in Publication 15-A.

If the school district can control what will be done and how it will be done, the worker is an employee. This is so even when the employee has a certain amount of freedom of action. What matters is that the employer has the right to control the details of how the services are performed. Generally the determination involves questions of whether the service recipient has behavioral control and economic control, and of the relationship between the parties, including any written contract.

Concerning behavioral control, does the individual do her editing work on school premises, under supervision, or does she work at home on her own computer? Who has final say about the appearance and content of the newsletter? If the individual carries on an editing business and holds herself out to the public as an editor, this is a factor favoring independent contractor status.

Does the service recipient have economic control? Does the individual have a genuine possibility of profit or loss in the editing activity, or does she essentially receive a salary? Is the position covered by the teachers' retirement system? Does the individual receive any employee benefits in the editing job?

When analyzing the relationship of the parties, one of the main questions is whether there is a written contract stating how the parties view their relationship. The characterization given to the position in a contract is not determinative, if that characterization does square with reality, but in close cases it can be an important factor.

Employee or Independent Contractor?

Whether someone who works for you is an employee or an independent contractor is an important question. The answer determines your liability to pay and withhold Federal income tax, social security and Medicare taxes, and Federal unemployment tax.

In general, someone who performs services for you is your employee if you can control what will be done and how it will be done. The courts have considered many facts in deciding whether a worker is an independent contractor or an employee. These facts fall into three main categories:

• Behavioral Control – Facts that show whether the business has a right to direct and control.

These include:
o Instructions - an employee is generally told:
1. when, where, and how to work
2. what tools or equipment to use
3. what workers to hire or to assist with the work
4. where to purchase supplies and services
5. what work must be performed by a specified individual
6. what order or sequence to follow
o Training – an employee may be trained to perform services in a particular manner.

• Financial Control – Facts that show whether the business has a right to control the business aspects of the worker’s job include:
o The extent to which the worker has unreimbursed expenses
o The extent of the worker’s investment
o The extent to which the worker makes services available to the relevant market
o How the business pays the worker
o The extent to which the worker can realize a profit or loss

• Type of Relationship – Facts that show the type of relationship include:
o Written contracts describing the relationship the parties intended to create
o Whether the worker is provided with employee-type benefits
o The permanency of the relationship
o How integral the services are to the principal activity

For a worker who is considered your employee, you are responsible for:
• Withholding Federal income tax,
• Withholding and paying the employer social security and Medicare tax,
• Paying Federal unemployment tax (FUTA)
• Issuing Form W-2, Wage and Tax Statement, annually,
• Reporting wages on Form 941, Employer’s Quarterly Federal Tax Return.
 

For additional information, go to www.irs.gov, search Forms and Publications for "Publication 15-A" and on the second page of search results you should see the 15-A publication.  It has lots of good information on this subject.