And again, always consult an attorney before you do this, but I’m going to explain it. It’s going to probably make a lot of sense. So, equity stripping. This is the process of reducing the equity value of a real estate asset. It is one of the oldest asset protection strategies out there. Essentially, it entails encumbering a property with debt to such an extent that there is little or no equity for creditors to acquire. Now, think about this. You’re about to be sued. You don’t know it yet. Someone wants to see you. They go to an attorney.

The attorney goes, oh, tell me your story. They tell you the story. They, oh, I think you might have a case. Let’s see if the person you want to sue, which is more than likely you, and this is what you got to think about to protect yourself. Let’s see if they have any assets. So, he starts doing an asset search. He goes and sees your property. It’s a half a million dollar property and it’s got a $300,000 loan on it, which means it’s got $200,000 of potential gold for his client. So, there’s the key.

You’ve got that just sitting there in the wind. Okay. So, by giving another party a claim against the property, owners retain control over the cash flow. Okay. When we’re talking about another party, we’re talking about loan companies. Check this out. While making the property unattractive to those trying to perfect any type of legal judgment. Okay. We’re talking about that attorney watching. We want to make that $200 of equity that he sees disappear. Okay. So, although this is a seemingly straightforward approach, there are certain requirements that must be met in order to ensure its effectiveness.

Various ways of executing the strategy provide increasing levels of benefits to owners. Oh, and just so you know, none of this is legal advice, but I want you to go and talk to your attorney because some of you may be thinking, I’ve got a trust. We’re all good. I would not trust the trust. Why? The trust is a vehicle in order to carry assets from you down to your loved ones or another entity tax-free upon your death. If you do something wrong and someone sues you, go talk to your attorney and ask, can they penetrate the trust and get through and get to my assets? And I’m pretty sure your attorney’s going to say, yes, it does not protect your assets from if you are found guilty and a judgment is placed against you because you wronged someone else.

Okay. So, this strategy is an excellent way of doing this. Okay. So, not to be confused with the foreclosure remedy scam. Equity stripping or collateralization is affected in order to safeguard the ownership of real estate assets by making the equity in those assets valueless in the eyes of the creditors. Okay. Although there are many different equity stripping strategies, they all entail controlling real estate assets without having a large equity interest in them. By making the equity in the property difficult or costly to obtain, owners hope to insulate their homes and other property from attachment and legal proceedings.

The idea is simple, keep control and enjoyment of a property, but leave little or no equity for a creditor to get. So, at the same time, with any type of asset protection strategy, equity stripping must be executed well in advance of the time when the protection is required. You can’t find out you’re getting sued and then all of a sudden go and run down and get a HELOC against your property. It’s not going to work. Okay. So again, this is all about why you bought this course. You get ready so that you are ready so that when something bad happens, you don’t got to go get ready and then it’s too late.

Okay. This is where you’re saving money and you’re saving time and you’re definitely saving heartache. So, executing any asset protection strategy during a legal procedure will usually be considered improper by the courts. For example, trying to put assets into someone else’s name would be considered a fraudulent transfer done for the sole purpose of hiding assets and people do it all the time, ironically, and they always get in trouble. Traditionally, the most common form of equity stripping known as spousal stripping was to quit claim the title to a spouse who is less likely to be sued for financial reasons.

This previously effective strategy is no longer used since divorce is now a greater threat to assets than a legal liability. Let’s talk about it these few ways. HELOCs. These days, the most common way to reduce the probability of an attachment is by borrowing against the asset and giving another party a lien for the debt obligation. The most common form of borrowing is this home equity line of credit or a HELOC. With a HELOC, the lender is given a lien against the equity of the property, which serves as collateral for even an unfunded equity loan.

If you don’t have an initial draw and you don’t write a check so that the balance is zero, even though let’s say on our $500,000 house, you were given a loan for $120,000. That now gives you a $300,000 first, $120,000 HELOC on it. It now shows that you owe $420,000 at $500,000 house. You see now the attorney goes, there’s not a lot of money or meat left on the bone for me. You’re not paying payments on that, but the attorney doesn’t know because the entire amount is the lien against the property.

Most equity line of credits, they don’t charge a fee for using the funds or for not using the funds and are very cheap, if not free to set up a HELOC, make it much more difficult and costly for a creditor to get the actual equity in the property. Again, funding it with a HELOC and unfunded HELOC is my go-to way of doing equity stripping. Now let’s talk about the next one, pulling a second mortgage. A more effective, albeit riskier means of protection is to use funded loans in the loan is funded, like giving you an example, they give you the money, the lender receives a priority lien, which is a claim against the equity for the amount borrowed.

That supersedes judgment of any creditor. In this case though, the equity in the property is actually reduced by the amount, like we’ve talked about with the HELOC, which cannot be recovered through legal means, further reducing a creditor’s motivation. Here’s the problem, because it’s now funded, meaning you receive money, you have to pay the monthly payments on that. So that gets pretty expensive. If you need money, cool, but if you don’t, then why do it that way? Now using using homestead exemptions, many states have homestead exemptions, which limit the amount of a home’s equity that a creditor can seize to satisfy a financial obligation.

However, for most people, the homestead exemption will only protect a fraction of the home’s equity value. For example, a $400,000 home with no mortgage, and a $100,000 exemption would have a $300,000 of equity exposed to potential legal claims. In this situation, it would make sense to keep some type of loan on the property, so that the equity is never more than a hundred grand. If something happens and a judgment is entered, a creditor would look at the property records, appraise the value of the house, and decide that there is little to be gained by expensive legal action.

However, the issue of funding the loan is twofold. One, the property owner must find the use for the capital, like we said in the last example. Secondly, the owner must be able to maintain the loan via requisite monthly principal and interest payments, or risk foreclosure by the lender. There are many accounts of property owners stripping their properties for capital and investing in the stock market or the crypto market, and they lose all their money, and then they can’t keep up the payments, and they lose their property. Again, extremely risky. Now, the last but not least is the friendly loan strategy.

To reduce the risk of foreclosure, some owners obtain a friendly loan from a business or a trust controlled by someone they know personally. Because of the personal relationship, owners assume that the lender will not foreclose in case of a period of slow or non-existent loan payments. Many of these friendly loans are eventually dismissed as fraudulent because they do not appear to be genuine. They didn’t do the due diligence. They weren’t recorded properly. You get my drift. Although every jurisdiction has its own specific regulations to pass muster, the loan must be made for a specific economic purpose, must be properly documented, and the mortgage lien filled.

More importantly, the principal, so you need a paper trail, really what it comes down to. The principal and interest payments must be made on time and in accordance with the loan documents. Many loans placed for the protection of property are dismissed by the courts because the borrower never made or documented the making of mortgage payments. So again, really all of these different ways of doing it bring me back to my favorite way, and that is using a HELOC unfunded so that you aren’t having to pay monthly payments, but on first glance, especially if you get one that’s free, right? No cost to you because based off your good credit history, your score and all of that, the deal makes sense.

I would max that out, not use it. And then on first glance, a legal professional is going to look or a creditor is going to look at your asset and go, there’s nothing there. It ain’t worth it. This is an excellent use of your time, honestly, and it can save you from really devastating effects when it comes to people trying to attack you legally. I’m also going to go in on this even deeper because we can do this exact scenario in the mortgage 2.0 or the investment series to help protect your assets inside of your LLCs or even if you don’t hold rentals inside of an LLC, which I always preach you should do.

I’m going to teach you how to do that in your personal life as well because there’s so much more when you’re dealing with rentals, more legal ramifications of people being injured or hurt by you or your property. Again, equity stripping works in your personal life, your personal home, and it also works in your investment properties. All right. I hope you got something out of that. That’s going to save you a lot of money on legal fees. Talk to your attorney as always, but this is a great solution to protect yourself. Hope you got something out of this.

Let’s move on to the next lesson. [tr:trw].

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