It is rare to see an attorney with multiple licenses, especially if he has ones that are very difficult to be bar certified for. This is why Scott Smith, Owner of Royal Legal Solutions, is considered to have the royal touch in real estate investing. He has been a lawyer and a real estate investor for over a decade which helped develop and sharpen his strategies to protect assets from lawsuits using his experiences in litigation and keep hard assets insured for note investors. Scott shares the importance of looking at all your assets and separating the ones that could have any liability attached to it.
We’re excited on this episode to have one of my good friends and also one of my attorneys that I use on a pretty regular basis, Scott Smith. Scott is the head honcho over at Royal Legal Solutions here in Austin, Texas. Now Scott’s licensed to do business, not only here in the Lone Star State, but also the Empire State with New York. Scott shared a couple solutions to help you to protect your assets. We also talk about a way to protector your assets of equity stripping with some second liens and some other things that Scott really gives some great advice on as well about asset protection and have an attorney review a lot of your documents, as that’s one of his specialties as being a real estate attorney for real estate investors. You’ll enjoy this. Make sure you check out Scott@RoyalLegalSolutions.com. He’s got some great advice and also treats his clients very well. We’ve got quite a few of our students who are clients of his who do a tremendous job on the day–to-day activities with their deals and contracts. Enjoy this episode.
Listen to the podcast here:
The Royal Touch with Scott Smith
We are excited to have the royal touch. We have our friend, Scott Smith, from Royal Legal Solutions join us here on the show. Scott, how are you doing?
I’m doing great, Scott. I think we did a show a few years ago, so it’s great to come back.
We had you on one of our Note Night in America webinars about a year and a half ago and he helped me out with some great stuff and my series LLC, and you’d help out a few other students with some other things. We’re excited to have you back because you have an interesting aspect of things. You’re licensed to do business in Texas because you live here, but you’re also licensed to do business in New York, right?
Yeah. As attorney, it’s pretty rare to get multiple licenses, especially in states where it’s difficult to get bar certified in. I guess I’m just really, really ridiculously smart or something. Seriously, what’s been great is getting licensed in those two states, but then finding out as we built a law firm is that you can actually help out clients anywhere in the country, as long as you’re not appearing in court or trying to hang a shingle in other states. That really blew up our firm when we found that out, and I don’t know why more attorneys aren’t doing that. It’s been great now because I’m on great shows like yours and other podcasts for anything real estate related. Basically you’ll find my name associated with it and helping people all over the place. It’s been a lot of fun in the last two years.
You’ve been in business longer than two years, let’s just get that right there for everybody, right?
Yes. About five years we’ve been specializing in asset. I’ve been specializing in asset protection, but the last two years is when things really blew up. Once we discovered the power of internet and being able to help people in different stages of their investment.
What’s great too is that Texas obviously is one of our larger markets for our clients and our students, and New York is actually in the top three as well out there, California is also there. Let’s talk about some of the things that we were talking previously beforehand about what you want to talk about. There’s a couple of different interesting ways, the whole title of notes or do other things with notes that you’re talking about. You want to talk about that as we kick things off this morning.
Because I’m an asset protection guy, the first piece that I always look at is what’s the worst case scenario of when things blow up on us? What kind of situation are we going to be in with that? When I talk about owning hard assets, any of us note investors almost always end up owning some hard assets eventually. In those types of situations, you’ll always want to be well-insured and then have the properties protected inside of LLC’s to be able to make sure that even if insurance fails, your worst-case scenario is still very manageable, and it’s more of a play in from an investing standpoint to look at, saying, “How do we avoid losing capital?” Because making back money is much more difficult after you have lost it, than it is to say, “Let’s take a little bit less return and make sure that we don’t lose.”If we look at what’s going on with just pure note investing, we’re not splitting the real estate stuff aside, what we should always be looking to do is taking all of our assets and separating it from anything that could have liability associated with it.
What I’m speaking with that is what’s a minimum company structure that we should be looking at for note investors, is one LLC to actually hold all of the notes that we have, and a different LLC that we’re going to be doing any type of litigation or anything that’s going to attach liability to those notes through it. What you’ll see people do that are savvy, as a whole, all of everything in one company and they’ll say, “123 Main Street, I got to foreclose on that property, so I’m going to transfer it over to a completely separate LLC and then do the foreclosure through that LLC.” Why? Because if you foreclose on somebody and you screw it up, you don’t want them to be coming after all the assets you own. You want them to be limited to just the assets of that one company, which is that one note. That would say if that would be like the minimum benchmark, and that’s what you would want to be doing.
You see that in New York and Texas. Is that what you recommend on those or all across the board?
All across the board. That is just a general legal strategy, that it didn’t matter where you live. Especially when you’re looking at laws that we can’t quite understand fully what they are, like Dodd-Frank and whatnot. We don’t know exactly the full gamut of how those are going to play out. We have to be really careful whenever we’re doing any type of enforcement action on those, because if we look at it and if a note is performing, it means it’s doing well, there’s not lawsuits that spring up at that point. Typically what you’re going to find is I have a note that’s not performing, so then I want to start the foreclosure process on it, and it’s in that moment everybody starts digging into what kind of defenses can I have. That’s whenever all of the legal strategies start coming out of the woodwork. That’s when I say, “We know that’s a time bomb. Once we say that there’s something going wrong there, let’s transfer it over to a different company. That way if it blows up, I’m still okay. I’m not losing anything.”
One thing I always get because we’ll probably get people listening from California is like, “You mean I got started a new LLC all totally for the properties I’m foreclosing on? I got to pay the $800 filing fee every year with the state of California?” What would you say to that?
I would say that California with their franchise taxes. There’s no real way around that besides the fact that you’re going to say that something has to take the risk. Either that’s going to be an LLC or that’s going to be you personally. With a lot of my clients, we talk a lot about how to make how to make ourselves judgment proof, and that’s a legal term that’s used in the litigation field to talk about, saying, “Scott Carson technically shouldn’t own anything at all. Only Scott Carson’s asset holding companies should, and that owns all of Scott Carson’s wealth.” If you say, “I have one LLC, and that’s what I can afford, is that $800 per year for that one LLC? I can’t afford this whole other LLC.”
Transfer everything you own into that asset holding company, besides maybe your operational cash, which you need to live day to day. Then do the foreclosure in your personal name, knowing that if it blows up, your worst case scenario is that there’s this lawsuit attached to you, but you don’t own anything anymore. There’s nothing they’re going to get out of you because you can’t get blood out of an empty stone. If you can’t afford it, there’s some other riskier ways of doing it that are better, but it’s like a cost benefit type of analysis there.
What would you say if somebody asked a question on here about filing a UCC against having one entity that’s holding your assets, and then another entity that goes and files a UCC lien against everything else? Now they’re a preferred creditor, so if somebody is foreclosing against your assets, they’re in a junior lien position. Have you ever handled that?
That’s a process that we typically refer to as equity stripping. You can do it in that scenario, you get a perfected lien against an asset, and then have that in first position. That way, if there’s ever a judgment against it, it’s the first lien position that always gets paid off first. In a real estate context that you were having this with hard assets, what you would do is that you have a separate LLC that would be your own mortgage company. It would issue your own mortgages on your own properties for more than the full value of the property, so that way if there was ever a lawsuit against that property, your own mortgage company gets paid out all of the equity and then whoever got the judgment doesn’t have anything.
In the note context, you could do that with a UCC filing and be able to get the same type of result. I got to warn everybody when you’re doing this stuff, it’s going to feel a little bit like legal ninja work, because you’re in there doing some stuff that everybody looks at and says, “That’s a little shady that you’re doing that.”The reality is when you’re doing that type of legal work, you have to make sure that all your I’s are dotted and T’s are crossed, because it has the implication of feeling shady. Then we’re really relying on the fact that, “No, I followed the law, and so you have to uphold it,” because people are going to find ways to make it where you don’t get out of this Scott-free in a way.
Let’s talk, let’s do it smart because I’ve actually used the lien against the property to overcome the assets. One of the things that I teach people to do. Let’s give it a very normal example. Somebody buys a note, they foreclose, and they take the property back. There are no liens on the property because the foreclosure has wiped it out. What are they doing most of the time? Then they start fixing the property. What happens, some of the time, you get some unethical rehabbers, they do a shoddy job, and you’re like, “I’m not paying you.” Then what are they going to do? They’re going to slap a mechanic’s lien on the property to get paid for their crappy work.
If you don’t have any other liens on the property when you go to foreclose, what’s going to happen? This lien pops up and it’s usually just easier to pay the lien off versus go take it to court. If you have a mortgage company that’s not in your name, slap a lien on the asset, the REO for more than what the house is worth, or if you’ve already taken your private investor and put them in a first lien position, maybe the house is worth 150 ARV. You’d borrow $50,000, you put the $50,000 down as the first lien then you have a mortgage company, write a second one for $120,000 as a second lien position. When that shoddy craftsmanship guy goes to slap a mechanic’s lien on the property, he’s technically only now in the third lien position, right, Scott?
That’s right. Then his SOL if after the value of the sale of the property doesn’t reach his lien position and still gets wiped out, then he doesn’t get paid anything.
The second lien can do a friendly foreclosure and wipe out his mechanic’s lien. We have done that. I’ve done that multiple times. It’s a great thing like, “I’m going to slap a lien. Go right ahead, there’s no equity there for you on the property.”
Those types of strategies that you’re advising people on are really advanced strategies, and are really great ones for people to be using because it’s really a way of using the law to your advantage. The law just states what the rules are, and it’s our job to be able to figure out how do we play inside of the rules to make sure that we’re going to be the best investors that we can be. Using those types of strategies isn’t wrong, I hear that a lot. The reality of the situation is if you really think that you’re doing something wrong when that craftsman was trying to slap the mechanic’s lien, you always have the option of paying that person, but it’s nice to have the option of not paying that person if they were the one that actually did something shoddy, that you removed the leverage from them. It’s not like using any of these types of strategies makes you a bad person. It just gives you the option of saying, “I get to act how I want to act, and that somebody else doesn’t have leverage over me to do something that I think is wrong, and saying that I have to pay somebody now because they did shoddy work in what was going on.”It’s really a more ethical position to take.
Asset protection is what it comes down to. I have dealt with situations where we have bought notes and there are some shady people that are watching, and then they go slap a fraudulent lien on the property for $8,400. They’re hoping that I’m going to write them a check for $8,400 versus wait the 90 days and have my attorneys take care of it, to have it removed from the property. This is the easy way, just literally over encumbered our assets, it’s like, “You’re in a junior lien position, but you’re not going to get anything when we get done with the property. We’re just going to do a friendly foreclosure to wipe it all out.”Obviously Texas is a little bit different than New York when it comes to foreclosure timeframes, right?
It’s not hard to do that here in Texas though, right Scott?
No. A lot of these things are pretty easy to do once you know how to do them. I really don’t think that there’s actually any magic sauce like lawyers get trained into them how to do it. A lot of times we’ve done it a couple of times before. That’s really great stuff if you’re able to train up the people inside of your program on how to do some of those easier types of legal work, that’s a huge amount of value.
We tell them to call an attorney. That’s why you’re on.
Anybody can be their own attorney. Just because you’re equipping somebody with the tools for them to be able to act and perform legal strategy, doesn’t mean you’re Scott Carson being an attorney. You’re just equipping them with tools and then they get to decide what they’re going to do with it next. I think that’s smart. Always tell people you should go talk to an attorney, especially if it’s your first time. Go get an attorney for your first time because then they walk you through it. Then on number two, you’ve already walked through it once, so you might be able to do it on your own with number two, three, etc.
It’s the same way that I use when I’m hiring CPAs for the lot of my tax prep work, I’ll get really expensive CPAs to be able to look at my tax return for one year, and then I get to be able to glean from them, “What are the types of strategies and rationales that they’re using for this?” Then maybe I don’t need a $7,000 tax return prep in year two. I think it’s really smart idea to be hiring high level professionals to start, and then repositioning afterwards to figure out how you’re going to actually streamline your business.
Any questions for the Scotts this morning on The Note Closers Show here for you guys? What’s the other strategy that you’d like to recommend to people as far as holding notes?
When you’re talking about at you’re at least at the very minimum, you want to be able to hold the notes inside of an LLC. There’s one step up from that which is going to be incorporating a series LLC, where you actually compartmentalize every single note for liability purposes. That way you can have note A unexpectedly blow up on you for any given reason, doesn’t even matter what it’s for, and it can’t affect note B, C, D, E, et cetera. The great advantage of the series LLC is that it literally gives you the ability to create new LLCs on your desktop. You get an infinitely expandable company at no additional cost. There’s no additional filing fees or any type of costs associated with it as you expand. We see a lot of savvy investors will take that extra ten minutes to deed the assumption of the note a little bit differently whenever they’re titling it over into the name of an individual series, have a one page print off of a series document, modified and signed.
Then now they get this higher level of protection that says, “No matter what happens with that note, I know I’m going to be good for that purpose.”Also with that series LLC, once you go that route of it, if anything happens directly with anyone of the individual notes or a series on the foreclosure, arguably you wouldn’t even need that separate LLC, because you could foreclose directly out of, say, series A, that child series of the series LLC, and knowing that if that foreclosure is wrong, they can’t get to B, C, D, etc. It’s almost as if you have single purpose LLCs which is unheard of in the note game, because it’s completely inefficient where the margins are, but that’s a legal trick using the series LLC to give you that ultra-high level of protection.
What states are the series LLC recognized in?
There’s a difference between recognition and the ability to form it. You can form it now and in the eleven plus states, they actually have statutes on the books and allow you to file it to create it. My rationale is saying that where’s it going to be recognized in? It’s like asking where can a Delaware LLC be recognized. We’ve been doing that for a long time where a Delaware LLC now operates in all the different kinds of states. A series LLC isn’t LLC, it’s just an LLC with a small caveat. My viewpoint on it is that just like a Delaware LLC is going to be recognized in every other state and nobody bats an eye at that one, there’s no good reason to think that a Texas series LLC, Delaware series LLC, Nevada series LLC or anywhere else, used in a different state, that courts would really look at that fundamentally differently.
The weight of the history of states recognizing each other’s LLCs would be upheld. Then you actually find in that to just go ahead and beat this horse a little bit. You’ll also find in that same rationale that there wouldn’t be a really good reason to think that a lack of case law on the series LLC would be a weakness for it. That’s something I read a lot online who say, “We don’t know how this is going to go because that’s a lack of case law.”That’s just a bunch of people that don’t understand how the law really works. The law is what the legislature passes. Then a court case can only interpret what that legislature said, so the lack of case law when you’re incentivized, if you could win you can get a bunch of money off of this. Because you’d be able to attack that structure shows that the law must be clear, and people are highly incentivized to attack, and they don’t attack. What does that tell you? That could only mean that says, “The real consensus among the actual professionals in the field is that there’s anything, someone that’s worth attacking, so we’re not going to do it.”Is that some high level of legal knowledge?
Let’s talk about what’s costs on a series LLC? How does it get formed? Because I know you’re one of the experts at creating them here in Texas. When we talk about those that are looking to do that and kind of cost, the timeframe, and what’s so great about it? Am I paying filing fees for every series LLC or every subset that I’m filing?
No, so you don’t have any extra filing fees or no extra costs as you expand when you use the series LLC. You should be anticipating fees for setting some of this up. Anywhere between $1,000 to $2,000 I would think would be an appropriate range for setting up that type of company structure. For LLC it’s just traditionally setting those up. I see fees for those at around $850 if you want a professional to help you set that up and show you how to run it. You can get things set up cheaper, through LegalZoom and the other services that are like that. I would just say that those would be really good services to use if you already know what you’re doing really well. Because then you’re able to look at it and know how to use it, what you’re really buying, what the professional setting it up for you is all of their time that’s packaged into that to show you like how does it work, how to use it correctly, and all of those bits and pieces that go into it. I would think that, for under $2,000, you should be able to get yourself into a really high level of asset protection, even for under $1,000. If all you did was set up an LLC and move all of your assets to the LLC, and I’m not talking a series LLC, I’m not talking about adding in the benefits of having anonymity, which is how we stopped lawsuits before they start by hiding the assets. I’m just talking about just moving into an LLC, you are phenomenally in a better position with your life, and that’s under $1,000 you’d be able to set up something like that.
The price points when you start going higher than that make a lot of sense because you’re talking about one time costs that help protect you for the rest of your life and help streamline your estate plan and all kinds of other great things coming into. That’s what I’ve worked on really hard is to find out where are the high value pieces for real estate and note investors, particularly those all my clients are all real estate note investors, and how to structure that out. You’re going to find a lot of services out there, and I probably shouldn’t name them, but you’ll find a lot of other companies online that are asset protection companies that are going to be trying to sell services that are in the $7,000 plus range, and that’s not uncommon. I have something that’s probably an okay value.
The problem is that what a lot of companies are doing is that they’re not necessarily overpriced, in the sense that they’re just using the wrong types of strategies. They’re just very inefficient. They’re using multiple LLCs and all of this layering to come in to be able to accomplish exactly what you could accomplish with a series LLC. One thing that we always do is we schedule a consultation with everybody that comes in and we’d give them a custom plan, saying, “This is where you’re at, this is where we think you’re going in the next five years from what you said, this is what we think you need. Does this make sense? Then if it doesn’t, then you know, whatever.”
For most everybody, we find that there’s always a place in there that seems to make a lot of sense for people into what they do. It’s a really craft full approach into what’s going on with each person, but I would say even if you don’t hire me, even if you don’t do anything else, get an LLC, put everything into it and make sure that is at least set up and being run correctly year over year and get that peace of mind. Because if you’ve never been sued, just talk to some friends who have, and they’ll let you know that it’s the worst thing that could happen to you in your life, at least in the top three. Just by having that one afternoon that you set everything up ten years ago, it can totally save you in that time.
I get people all the time like, “I want to buy this note in my own name.” I’m like, “No.” The only piece of property you should have in your own name would be your own primary residence for the most part. You’re not going to have that. Everything else should be going into an LLC of some sort, unless you’re buying for your self-directed IRAs. You guys do this all the time, you’re an active real estate investor as well, right?
Yes. I bought my first property while I was in law school as a commercial property, and then that’s what kind of gave me the real estate investing bug. It’s this year that we finally hit over 1,000 real estate investor clients, all every single one of my clients are real estate investors. We’re a small law firm. We’re actually quite big and the number of people we help, but we only help real estate investors. That’s that.
What’s the best way for them to get a hold of you, to reach out to you to spend some time on the phone with you or one of your colleagues there to go through a game plan?
You can always reach out to us by phone at 512-757-3994. You can reach out to me by email, which is Scott@RoyalLegalSolutions.com. Those are probably the two best ways to be able to reach out to us.
I want to say thank you for joining on The Note Closers Show. Those are two great tips for everybody out there they need to be doing. You need to have an attorney. We often talk about people say, “I’ll have my attorney review it,” and most people don’t have an attorney. You do reviews, you review contracts, you review a lot of things for your clients, don’t you Scott?
That’s right. What I do and what I think everybody should be looking for in attorney, is that you want somebody when you’re paying them $250 to $500 an hour, is that you want someone that’s going to teach you something. It doesn’t make any sense to hire an attorney unless you’re like a really big shots, like, “I kick it over to my attorney and he does everything,” As investors, we really need to be learning as we go, so we don’t have to keep hiring these really expensive people to come through. For anybody that wants that type of walkthrough of how do I think through a deal, what do I think in the particular deals are strong, weak, or whatnot? That’s all part of the review process I do with them, as well as the legal implications of it, because that’s the advantage of being an investor yourself.
One of the great things is I’m a client of Scott’s as well. Scott set up my series LLC, sitting over the forms and told me exactly how I need to do to add things, to add series, operating agreement. It was really, really phenomenal. Great service, Scott. You’ve been helped out quite a few of my students as well, my mastermind groups and things like that too, of being there to help them out, answer questions and guide them on their path to success and also avoiding legal doom.
I think it’s a big thing that when somebody buys something from a $99 website, it’s not always accurate for that state or county. You have generic documents, you’ve got some customization you’ve got to put into the documents, and that’s why it’s important to talk to the local attorney versus just an online website. Once again, Scott, thanks for joining us this morning, I appreciate it. I’m glad to see you’re doing so well, very proud of the growth you have.
That’s awesome, Scott. Have a great one Scott and thanks for having me on the show. It was great to have shared some info with you.
Definitely check out Scott Smith and his amazing team at RoyalLegalSolutions.com or you can contact him directly at Scott@RoyalLegalSolutions.com. He’s there to help you out. All of his clients are active real estate investors just like himself. Go out and make something happen. Give Scott a phone call. Get your crap in gear. It’ll save you a lot of heartache and money in the long run. Until we meet again, we’ll see you all at the top.
About Scott Smith
Scott Smith is the owner of Royal Legal Solutions, which provides business, tax, and legal solutions geared exclusively for real estate investors. I’ve spent 8-years deconstructing real estate investing and I’ve developed strategies to protect your assets from devastating lawsuits, maximize tax savings, and more.