OK, you are thinking of starting a new venture.
You want to ask for advice.
Who do you go to?
You ask your mom and dad, and your BFFs.
They all agree, “Talk to a lawyer, banker and accountant. They’ll be able to give you professional advice!”
When someone tells you this, run, run, run away.
Because lawyers, bankers and accountants know a lot about the law, banking and bookkeeping or taxation, but nothing about being in business or living the life of an entrepreneur. When I say nothing, I mean zero, zip, de nada.
Here’s an example of why 98% of lawyers give the other 2% a bad name.
Charles (not his real name) wants to buy a piece of land at 2468 County Road 29 in the township of Anyplace. Chuck has just gone through a divorce. What’s the fastest way to get poor?
So he has very little money, but a decently performing industrial business repairing boats, RVs, anything that requires fixing up skins made of fiberglass. He uses fiber gel products in his work.
In his divorce, he’s lost his home and his workshop. This is bad for business because in a cold-weather northern city like the one Charles lives in, a heated workshop is a necessity six months each year.
So he wants to make an offer through his realtor for the subject property at
2468 County Road 29 for close to asking: $150,000. The property already has commercial zoning plus it has an existing shed on it that can be renovated, insulated and turned into a workshop.
His plan is also to roll a mobile home next to the shed where he can live temporarily, and some day build a permanent residence there too. Fortunately, the zoning allows residential use as long as it is
accessory to the main (commercial) one, which clearly it will be.
He tells his realtor, Freddie, “It has to be a lease-to-own kind of deal because I don’t have much cash.”
“I don’t believe in lease-to-own agreements,” says Fred. “They’re way too complex, and end up costing the buyer–you–a lot more.”
“Oh,” says a disappointed Chuck.
“Hey, don’t worry. I’ve got a better idea,” replies Freddie who is never short of good ideas or conceit and hubris. “Here’s what we’ll do: make an offer at $150k with a $1,000 deposit, $4,000 more on completion, and ask for a seller take mortgage for the rest.”
“What’s a seller take back thingamajig?”
“It’s like the seller is your bank,” answers Fred.
“You know, like in the movie Dumb and Dumber? When Lloyd Christmas finally gives up the briefcase at gunpoint (while Mary Swanson looks on), there’s no cash in the briefcase only IOUs.”
“Yeah, that was pretty funny.”
“Here’s what Lloyd said to arch criminal Nicholas Andre:
That’s as good as money, sir
Those are IOUs
Go ahead and add it up
Every cent is accounted for
Look, see this?
That’s a car
Might want to hang on to that one
“How do you remember stuff like that, Freddie?”
“I studied the classics.
“Oh and yeah, did you know that when Lloyd holds up the IOU for the Lamborghini he’d bought along with his partner, Harry Dunne, with Ms Sawnson’s money, he says it’s for ‘275 thou’, it’s not. It’s got a face value of $875,000.”
“Must have missed that joke. So I give them an IOU for the balance of what I owe?”
“Exactly, only it’s on a piece of paper called a first charge or first mortgage. It gets registered on title so the sellers have more protection than just a bunch of scraps of paper with the initials LC or HD on them.”
“They’ll never go for it,” says Charles.
“You don’t know that. It’s the lost art of seller take back financing. Let’s bring it back.
“By the way, I’ll also put in that you’re going to pay off your seller take mortgage at a rate of $1,000 per month, but solely on account of principal, which means you’ll have a 0% interest rate over its five year term. After that, you’ll have paid off nearly half of the principal, and your divorce will be ancient history, so you’ll be able to refinance the property, and pay off the balance of your mortgage.”
“I’ll bet,” says Chuck, “I can pay off the whole thing in five years.”
“Alright, I’ll make sure that your mortgage is fully open so you can pay it down either in whole or in part at any time without notice or penalty.”
“OKIE, DOKIE. Let’s give it a go!”
So Freddie submits an offer.
Lo and behold the sellers’ realtor, Lois, calls Freddie to tell him, “They’ve accepted your offer. The only change they’ve made is that they want to keep some of their chattels.”
Life is good until the sellers’ lawyer, Arthur, gets involved.
He picks apart the deal saying to Freddie, Lois and the buyer’s lawyer (Steve) on a conference call, “Look my clients didn’t know what they were signing. They thought it was an all cash deal, and they didn’t know that they were paying such a high commission. There’s no money in the deal even to pay commissions!”
“Um, excuse me, Arthur, did you even read the agreements?” Freddie asks incredulously. “My commission is paid out in monthly installments over the first year. I did that to make sure there was enough money in the deal to cover everything including your legal fees.”
What Arthur is mainly worried about, Freddie thinks, is not that there is not enough cash in the deal to pay real estate commissions; he’s worried about getting paid himself. That’s all that most lawyers ever care about, Freddie says meanly in his head.
“What about the back taxes owing?” Arthur asks.
“There’s more than $17,000 in back (property) taxes owing to the township,” Arthur discloses for the first time.
“Shit!” say Freddie and Steve simultaneously.
Property taxes outrank even mortgage holders (and legal bills), so their collective client Charles could, if he and Steve are not careful, have the rug pulled out from under him when the township does a tax sale of the property.
So now the real reason the lawyer wants to tank the deal is apparent–he knows his legal fees won’t get paid.
“What if,” Freddie asks, “the $1,000 per month goes to pay back property taxes instead of to your client, Arthur, until those are paid? My client has perfect security since: a) it’s his money anyway and b) we’ll get a standstill agreement from the township. As long as those monthly payments are made, they agree not to take any action.”
“I will have to recommend against this arrangement,” Arthur haughtily and inexplicably says, at which point Freddie responds in an angry tone:
“I think we are looking after your clients’ best interests better than you are! They’ve had this lot in the middle of nowhere for sale for four fucking years. Your clients are elderly, and in obvious financial difficulties. Can you please explain in simple terms how getting $150,000 over five years from our client is worse than having no money at all, having the lot offered for sale for the next four years. Oh and yeah, they won’t have it for sale for four more years. Long before then, the township will tax sale their property, and some shark of an investor will pick it up for back taxes plus $5k, and your clients will get nothing. How is that better?”
Arthur had nothing to add.
THIS STORY ISN’T YET CONCLUDED
NOTE: I just received this update–
Freddie, I went to the property only to be kicked off; they told me the deal
is off in their opinion. Their lawyer must have filled their heads full of shit anyway. Talk soon, Chuck
@ profbruce @ quantum_entity
postscript: just so you know, if the lawyer acts to frustrate the deal, Fred’s lawyer, Steve, could register his agreement on title, which means no one else can buy it without first dealing with Freddie. So there.
postscript: names and numbers have been changed to protect the privacy of the people involved.
postscript: it has also been my experience that some lawyers and other “professionals” will intentionally give their clients bad advice. You might find out (years later, as I did in one case), that they’ve had a friend pick up the property for a fraction of its value, who then turns around and resells it. Profits are split between them. I’m not alleging that this is what is happening in this case.
postscript: here’s that priceless Lloyd Christmas riff:
Still one of the best pieces of writing in comedy in a long time.
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