Materials 1 - The State Bar of California



Materials 1 - The State Bar of California
The State Bar of California Real Property Law Section
and Co-sponsor The San Diego Central Library
The Top Ten Mistakes by Real Estate Investors & How to Avoid Them
Tuesday, March 1, 2016
12:00 p.m.-1:30 p.m.
Elaine Andersson, Attorney, Of Counsel Lubin Olson & Niewiadomski LLP.
Leonard Baron, MBA & CPA.
Gary M. Laturno, Esq. Goode Hemme & Peterson
Points of view or opinions expressed in these pages are those of the speaker(s) and/or author(s). They
have not been adopted or endorsed by the State Bar of California’s Board of Trustees and do not constitute the official position or policy of the State Bar of California. Nothing contained herein is intended to
address any specific legal inquiry, nor is it a substitute for independent legal research to original sources
or obtaining separate legal advice regarding specific legal situations.
© 2016 State Bar of California
All Rights Reserved
The State Bar of California and the Sections of the State Bar of California are approved State Bar of California MCLE providers.
Top 10 Real Estate Investor Mistakes –
And How to Avoid Them!
# 1 - Believing in “Easy Riches”
What do ‘get rich quick
in real estate’ schemes
have in common with
the Feejee Mermaid?
# 1 - Believing in “Easy Riches”
They make promotors
# 1 - Believing in “Easy Riches”
High risk
High return
Low risk
Low return
# 1 - Believing in “Easy Riches”
• Carry costs
• Unexpected delays
• Remodeling costs
• Market risk
• Tax Treatment: Ordinary
Assuming employed, making
100K in wage income
# 1 - Believing in “Easy Riches”
Resale costs (9%)
Holding costs
Gross Profit
Federal Income tax
State income tax 9.5%
Social Security tax
Medicare tax 2.9&
“Reality” TV
# 1 - Believing in “Easy Riches”
Get Rich Quick schemes to avoid:
◦Rent to own
◦Investor “clubs”
# 1 - Believing in “Easy Riches”
Relatively ‘easy’ riches
◦Live within your means
◦Take advantage of
employer matching plans
◦Invest in index funds
# 2 - Hoping for Appreciation Instead of
Buying Cash Flows
Most ‘investors’ buy for appreciation
 SMART Investors buy Cash Flow properties
 Not all properties produce the same cash flows
◦ Skip negative cash flow properties
◦ “Prize Property” usually = Negative Cash Flow
◦ Let Others Brag About their Fancy Properties
Pencil out the target property
 Determine cash on cash returns
 Cash Flow is King!
◦ Icing on the Cake – Appreciation, Tax Benefits,
# 2 - Buying Cash Flows: Asset or Liability?
Both Properties
Achieve Similar
You Can Pencil
Out Your Deal:
One Will Drain,
The Other Will Fill
Your Bank Account
Which One Would
You Prefer to
# 3 – Losing Control & Misplacing Trust
Risk: Lack of control over the deal
◦ When things go wrong, people protect their
own interests first
Purchase You Control – Most Secure
 Private Deal Family/Friend – They Care
 Private Outsiders – No Control
 Partnerships, Crowd funding, TICs
 --- When You Wire the Funds Out:
 Who are You Wiring Money To?
 Will You Ever See a Dime of Your Money Again?
 References, Credit Check, Tax Returns?
# 3 – Losing Control & Misplacing Trust
Real Estate Investment Trusts
 Private REITs
 Public
◦ Exchange Traded
◦ Subject to Sarbanes-Oxley + other
◦ Required to pay 90% of taxable income as
# 3 – Control & Trust
# 3 – Control & Trust
# 3 – Ability to compare
# 4 – Failing to Do Physical Due Diligence
Property Inspections
◦ Land
 Residential - Natural hazard disclosure
 Commercial
 Environmental issues
 History
 Phase 1 & 2 reports
◦ Improvements
 Building inspections
 Attend
 Review
 Price repairs
# 4 – Failing to Do Physical Due Diligence
Lessons learned
◦ Risk: Cost
 “ONLY” so much usually = So Much +++++++
 Fixer Uppers – Rarely sell at a large enough
 Home improvements - Rarely add more value than
they cost
 Getting bids is time consuming
 Beware:
 Most home inspectors do not need to be licensed or
 They don’t supply the critical information: How Much will
it cost?
# 5 – Failing to Do Legal Due Diligence
Title and title insurance
◦ What do you own?
 Legal Title
 Exceptions to title
Loans and liens, but also:
Restrictions; covenants, HOAs, etc.
HOA Due Diligence is Beyond Complex
 Title to rights you need?
 Driveway or other easements?
# 5 – Failing to Do Legal Due Diligence
Title and title insurance
◦ What do you own?
 Property Description
 Parcel – check against the recorded map!!
 Metes and bounds – need to close
 How is it insured?
 CLTA- standard for urban residential
 ALTA – standard for commercial, rural
 Requires a survey
 Survey specifications (Table A items)
Every Commercial Purchase Has a Lawyer Assist in These Issues
Residential Buyers – 99% - Do No Review – Just DocuSign It!
# 6 – Not Thinking Through Ownership
Buying as an individual
◦ Your funds alone?
◦ Separate or community property?
◦ Management?
 You or a manager?
 Documenting responsibilities
◦ What happens if something happens to you?
 Estate planning
 Life insurance
# 6 – Not Thinking Through Ownership
Buying with other(s)
◦ Same issues as above, PLUS:
◦ Who has contributed what?
 Equity + credit
◦ What are responsibilities for future expenses?
◦ What are rights to future income?
 “Waterfalls”
 Exit strategy
# 7 – Not Getting and Maintaining
Adequate Insurance
Theoretically you don’t need property or
casualty insurance … as long as you are positive
nothing will go wrong!
Your property insurance
Homeowners policy
Investment Property
Condo HO-6 policy
Umbrella Liability
Earthquake Policy…Flood Policy
Commercial Property Insurance
 Reconstruction + income
Simple Residential Insurance Binder Coverage Declarations Page
Is That Enough =>
Is That Enough =>
<= Higher =
Lower Premium
You Need to Ensure that You Have the Right
TYPE and AMOUNT of Each Category of Insurance!
# 7 – Not Getting and Maintaining
Adequate COMMERCIAL Insurance
Your tenant(s) property insurance
◦ Commercial property
 Reconstruction of improvements and fixtures
 Business continuation (so they can pay you)
Liability insurance: injuries to others
◦ Your policy as an owner
 Single purpose entity
 Inadequate insurance allows “piercing the corporate veil
◦ Your tenant(s) policy
◦ Your tenant(s) contractors
# 7 – Not Getting and Maintaining
Adequate Insurance
How much is enough?
◦ What can go wrong?
 Who might get injured?
 What will it cost to support them?
 What would they have earned
 What might get injured?
 What would it cost to repair or replace?
 What do you own that you could lose if your
insurance were inadequate?
MIND Your Insurance Annually
CANCEL if Needed
# 8 – Not Minding Your Leases
Picking the wrong tenant, the wrong lease,
and/or failing to track and enforce lease
 Residential v. Commercial
 Commercial
◦ What is your goal as a landlord?
 Stability and market increases
 Minimizing vacancy, commissions and TIs costs
 Synergy and increasing sales
# 8 – Not Minding Your Leases
◦ Lease form
 Retail (NNN) versus office (gross) versus industrial
 Concerns: ADA; continuous operations; utilities;
 Terms:
 Rent and free rent; Percentage Rent
 Tis and fixtures; subordination to SBA debt
 Expansion, contraction or renewals;
 Security and credit enhancements
 Security deposit, letter of credit, guaranty; lease bond
# 8 – Not Minding Your Leases
◦ Vetting the tenant
 Business track record
 Financial statements
 Viability
◦ Improving the property and tenant mix
◦ Tracking and enforcing rights and obligations
 Write it down
 Security deposits and letters of credit
 Rights of first offer
# 8 – Not Minding Your Leases
◦ What is your goal as a landlord?
 Rent control jurisdiction - periodic turnover
 Non-rent control – stable long term tenancy with
no vacancy
◦ Lease form
State Association of Realtors
Apartment Building Owners Association
Local variations
Disclosures/ addenda
Terms: Utilities, notice of termination, renewals
# 8 – Not Minding Your Leases
 Finding and screening tenants
 Fair Housing Laws
 Craigslist
 Call screening
 Broker
Rental Application
Credit Check
Prior Landlord(s)
Keep applicant apprised
# 9 – Not Getting Good Tax Advice When
You Buy and Operate
◦ Transfer tax liability
◦ Reducing property taxes
 Buyer who can pay costs directly can reduce
assessed value - now and for years to come
 Making sure your seller pays taxes on their gain - or
you will have to!
◦ Supplemental Assessment – SURPRISE!
# 9 – Not Getting Good Tax Advice When
You Buy and Operate
Prop 13
◦ Prop 13 reassesses only on change of
ownership or new construction
 HUGE property tax advantage
 But disincentive to sell appreciated property
◦ Supplemental Assessment – SURPRISE!
◦ Prop 58 - Child/Parent Transfer Exclusion – No
reassessment - Up to $1,000,000 “Assessed Value”
◦ Prop 60/90 – Trade down to smaller property and
keep prior assessment - but
◦ Limited to personal residence, and
◦ County to county issues
# 9 – Not Getting Good Tax Advice When
You Buy and Operate
Tax implications of ownership
◦ Personal residence
 Deductibility of mortgage interest
 Deductibility of property taxes
 Exclusion of gain on sale: $250K for individuals;
$500K for married couples; every 24 months
◦ Mixed Personal/Investment
 Can treat % of property differently
# 9 – Not Getting Good Tax Advice When
You Buy and Operate
Tax implications of ownership
◦ Investment property issues
 Expenses: all “ordinary and necessary”
expenses related to operating your
 Complete Schedule E for Income Taxes
 First Year Depreciation Calculation
 Due to Unique Nature of Depreciation for Real Property
 Expense vs. Depreciation
# 9 – Not Getting Good Tax Advice When
You Buy and Operate
Tax implications of ownership
◦ Investment property issues
 Accelerated depreciation
 Cost segregation study
 Tax credits
 Energy retrofits
 Historic preservation
 Job creation
 Refinancing- not a taxable event!
 But can affect your 1031 exchange
# 10 – Not Getting Good Tax Advice When
You Sell or Die
1031 exchanges
◦ “Like kind” property
◦ Defer taxation of capital gain
◦ The “I don’t want my children to have to manage this”
 Exchange into NNN, or
 Wait and let them sell
Note: 1031s - You May Avoid Taxes – But
Not Transaction Costs! +- 10%
 And then you die
◦ Stepped up basis
◦ Community property
Recap: Top 10 Mistakes
# 1 - Believing in “Easy Riches”
# 2 - Hoping for Appreciation Instead of
Buying Cash Flows
# 3 – Losing Control & Misplacing Trust
# 4 – Failing to Do Physical Due Diligence
# 5 – Failing to Do Legal Due Diligence
Recap: Top 10 Mistakes
# 6 – Not Thinking Through Ownership
# 7 – Not Getting and Maintaining
Adequate Insurance
# 8 – Not Minding Your Leases
# 9 – Not Getting Good Tax Advice When
You Buy and Operate
# 10 – Not Getting Good Tax Advice When
You Sell or Die
Gary M. Laturno, Esq.
Attorney, Real Estate Broker & Mediator
Gary M. Laturno has practiced law for over thirty years and served as a mediator
in private practice and with the San Diego Superior Court for over fifteen years.
He also serves as legal counsel for a residential real estate company in San Diego.
Mr. Laturno has an AV Rating from Martindale Hubbell and was named to “Top
Lawyers in San Diego” by San Diego Magazine and “Top Lawyers in Southern
California” by the Los Angeles Times.
A former FBI Chief of Civil Litigation at FBIHQ in Washington, D. C., he supervised
ten litigation attorneys, handled complex litigation and personally represented
high ranking FBI officials, including the Director of the FBI.
Gary is a past co-chair of the Real Property Law Section of the San Diego County
Bar Association and a current member of the Executive Committee of the Real
Property Law Section of the State Bar of CA. He is also a member of the San Diego
Law Library Foundation Board of Trustees.
Gary writes on legal topics and speaks at conferences, events, and national
webinars. He has been a guest lecturer at the University of San Diego School of
Law, California Western School of Law, and California State University at San
Marcos. He has taught continuing legal education classes for a number of local,
state and national continuing legal education providers including the State Bar of
California, San Diego County Bar Association, the San Diego Law Library and the
American Arbitration Association.
During the U. S. housing crisis Gary recruited and trained over 500 attorneys in
San Diego to counsel distressed San Diego homeowners. He himself listened to
and counseled over 2000 distressed homeowners. As a result of this experience,
he wrote two books, “The U. S. Housing Crisis – Lessons Learned” and “Three
Steps to Wealth & Financial Security – All That Glitters Isn’t Gold” both available
at See
A proud Dad and husband, he is the father of two grown daughters, Camille and
Marcy, a son, Mark, who is in college, and a granddaughter, Karley. Gary’s wife,
Vikki Kuick, B. S. Engineering, University of Michigan, MBA in Finance, ASU, serves
as the broker of record for their real estate brokerage firm, Laturno Kuick Realty
in San Diego. In his free time he likes to travel, play golf, work out and visit with
family and friends. He is a fan of Turner Classic Movies and HBO’s The Game of
Gary M. Laturno, Esq.
Attorney/Of Counsel
[email protected]
Elaine Andersson
Of Counsel
Lubin Olson Niewiadomski
Two Walnut Creek Center, 200 Pringle Avenue, Suite 470, Walnut Creek, CA 94596
Phone: (415) 981-0550 | Direct: (415) 955-5032 | Facsimile: (925) 938-3196 | | Email: [email protected]
Elaine Andersson is Of Counsel in Lubin Olson's Real Estate Practice Group. She represents
businesses and individuals in office, retail and industrial leasing, property management issues,
related contract negotiation, and real property acquisitions, dispositions and financing.
Ms. Andersson’s prior legal experience includes in-house positions with two publicly-owned real
estate investment trusts. At Boston Properties, she was Regional Counsel for the company’s 6.2
million square foot portfolio, including San Francisco’s Embarcadero Center, and oversaw all legal
matters, including leasing, property management issues, contracts, acquisitions, dispositions and
financings. Prior to that, she was Counsel at Cornerstone Properties, focusing on leasing and
property management issues.
Ms. Andersson spent over a decade as a law school professor and administrator, teaching Real
Property, Real Estate Transactions, Contracts, and Article 2 of the Uniform Commercial Code, as
well as Disability Law and Community Property. She was Associate Dean at Golden Gate University
School of Law, and has been a Visiting Professor at Hastings College of the Law and at the
University of Paris, France.
Ms. Andersson is a past Chair of the Real Property Law Section of the State Bar of California, and
continues to serve as an Advisor to the Executive Committee of the Section. She has also served as
the President of Commercial Real Estate Women-San Francisco, as Chair of the Government and
Public Affairs Committee of BOMA-San Francisco, and on the Board of BOMA California. For more
than twenty years, she served as the CFO of the Blum Foundation, a local institution that provides
financial aid to law students at San Francisco’s four accredited law schools.
She has been honored by Thompson Reuters as a Northern California "Super Lawyer" in the field of
real estate, and named one of the 100 Most Influential Women in Business by the San Francisco
Business Times.
Ms. Andersson presents, teaches and writes frequently on real estate and diversity issues.
Leonard Baron, MBA
Leonard Baron, MBA, is a real estate investor and owner who teaches real
estate buyers and investors how to make smart and safer real estate purchase
decisions by doing the proper due diligence. He has 20+ years of property
experience and has learned many hard lessons. He now teaches those lessons
to others so they can avoid making the expensive mistakes.
He is a senior loan officer at CalPacific, a division of Bay Equity Home
Loans, providing mortgage services to real estate borrowers in California.
His past work includes being a real estate lecturer at San Diego State
University, a CPA at Deloitte & Touche, a financial analyst at Freddie Mac,
and he was the San Diego Homebuilding Division controller at Lennar
Mr. Baron grew up in Virginia and is a proud graduate of James Madison
University in Harrisonburg, VA. He also has an MBA in finance from the
University of Southern California in Los Angeles, CA.
Contact him at:
Bay Equity Home Loans
Ph: 858.945.7842
Email: [email protected]
NMLS #: 1290043

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