ARE YOU HOLDING YOUR REAL ESTATE THE RIGHT WAY? GARRETT SUTTON
I disagree.
owned free and clear. That is a much more
inviting target for the attorney. The tenant and
Look at our next chart:
the attorney have a judgment against the LLC.
To satisfy it they get a court order to sell the
property. At a swift fire sale price they get
$210,000 and the attorney pockets $70,000.
That makes some sense for the attorney. What if
the tenant and the attorney take over the
property themselves? It becomes their rental unit
on a 2/3 – 1/3 basis. That also makes sense for
both of them.
As we are seeing here, debt is a form of asset
protection. In the first example, where only
All the tenant can get is what is inside the 4 plex
$100,000 in equity was available, the target is
LLC. That LLC is the one he rented from. He has
lessened due to the debt of $200,000 against the
no claim against the 8 plex LLC or the other
property. But in Attack #1, with a claim against
assets. And so you do have asset protection in that
the LLC and the LLC holding a free and clear
the tenant’s claim is only against the one entity. He
property worth $300,000, you have a more
cannot get beyond that 4 plex entity to the other
inviting asset to target.
assets.
Please know that a charging order doesn’t apply
Will the attorney go after the equity in the LLC?
in Attack #1. The Attack #1 claim is an attack
Maybe. Remember, the attorney is most likely still
against the LLC itself, so we don’t even get to
on a contingency fee basis. To force a sale of the
the charging order. As well, the Attack #1 claim
property, deal with the bank and probably end up
plays out the same in every U.S. state. Whether
with a discounted sale price, involves a lot of work.
you have a weak California LLC or a strong
Assume that after commissions and fees and fire
Wyoming LLC doesn’t matter. The inside attack
sale pricing the $100,000 in equity is brought down
is against the entity itself and the claimant can
to $30,000. Is the contingency fee attorney going
get what’s inside the LLC no matter what the
to all that trouble to make one third of that, or
state of formation. But again, they can’t get
$10,000? Not likely. There are too many other
what’s outside the LLC, a beneficial measure of
surer cases to pursue.
asset protection that’s true in any state.
But what if the equity in the house was the full
Okay fine, you say. So where does this special
market value price of $300,000? In other words,
charging order come into play?
there was no loan against the property and it was