How to Protect Your Real Estate Deals From Hidden Legal Traps | Kevin Pritchett

Kevin Pritchett (00:00)

If you are an investor, it’s critical that if some promoter is saying this is the best deal since sliced bread, not only that you get disclosures, but you get a personal guarantee from that. I have three lawsuits now and one pending where my client gave a million dollars of his money.

His brother gave $250,000. So about $1.2 million total. They got no personal guarantees from the promoter. And of course it went belly up.

Scott Bursey (01:05)

Welcome back to the Real Estate Pros Podcast powered by Investor Fuel. I’m your host, Scott Bursey. Glad you’re with us. And today we’re delighted to be joined by Kevin Pritchett, an attorney who has spent thirty five years investing in real estate himself. He runs the law office of Kevin Pritchett and also runs Thor Capital Holdings. So he has sat on both sides of the table, the legal side and the owner’s side.

Listeners, you can expect a straight look at the paper behind the deals, how a deal gets set up, where the legal traps hide, and what to ask before money changes hands. Get ready to deep dive into the side of this business most investors only learn the hard way. Kevin, welcome to the show.

Kevin Pritchett (01:50)

Scott, thank you so much. I’m thrilled to be here.

Scott Bursey (01:53)

Counselor to help our listeners get up to speed. Please give us the ninety second highlight reel of how your career ignited and where you’re pouring your fuel now.

Kevin Pritchett (02:03)

A

lot of your members will probably appreciate this. About 35 years ago, one Friday night, I came home from my law office. I was beat tired. And I saw a television commercial. You probably know where I’m going here. Carleton Sheets had a television commercial, and he goes, More people make more money from their real estate by accident than anything they ever do on purpose. That just struck a chord. So I got his materials.

bought books and started investing. I bought one, two flat, rehabbed it, sold it, made about 30 grand, thought I was freaking rich, and I was off to the races. In about 18 months, I had about 30, 40 buildings done. I was just a maniac. So that’s how I got started in investing.

Scott Bursey (02:54)

Thank you for the detail on that. And what really caught my attention about you, Kevin, was the question you put to owners who have been at this a long time. Would you buy your own rentals again today? That one question says a lot about you and how you think. The deal on paper on one side and the life that deal builds on the other. And we want to get into how that way of thinking works.

Kevin Pritchett (03:20)

Background on how that question came up, Scott, both personally and with representing dozens and probably hundreds of clients. So I had these 40 buildings, and this is when I first started. And I was worth a million dollars net worth, hovering right at a million dollars, feeling pretty good about myself, but I would wake up in a cold sweat, realizing, my net worth is a million, but I got a million dollars worth of debt.

And I don’t have a lot of cushion here either. And if something goes down, I could really be sweating hard. I’m a really good deal maker then and I still am analyzing deals, but I am not a handyman. So I undervalued how important the management aspect was. So I was always

Dodging bullets and dancing around trying to fix things. I would bring managers in, but they weren’t the right one. So that question of would I buy those rent deals today came because I got to the point where I was successful cash-flowing net worth, but I didn’t like the life that I had. So I had to just re-look at everything I was doing. And it recast me on a whole new pathway on how to look at being an investor.

I saw the same thing with my clients. So over the years I’ve developed checklists and things in order to help people just wrap their heads around that question. Sometimes you keep them, sometimes you don’t, you keep some of them, but it’s a real issue. the longer you’re an investor, the more prevalent this question becomes.

Would you buy this stuff over again and do you like the life that you’ve created for yourself?

Scott Bursey (05:01)

Kevin, you’ve invested in real estate for thirty-five years. What do you see in a deal that the rest of us may just miss?

Kevin Pritchett (05:10)

I don’t know that I see anything that other people don’t, Scott, but I am a systems person. I’m relentless, I’m disciplined. So it’s not like I see things that you or your members don’t see, but it’s just that every day my machine is sending me leads. Every day I’m analyzing them. I’m responding right away. I don’t miss any lead. I respond immediately to every single lead, or reasonably.

So my superpower is my discipline and my ability to have a process to analyze things.

Scott Bursey (05:43)

Thank you for sharing that with us. And counselor, this has been on my mind. Why do so many talks with a seller die before they turn into a closed deal?

Kevin Pritchett (05:53)

Because the principals in the deal have not looked at their documents carefully or had their professionals look at their documents to find the holes in them. Your members are great operators at the real estate side, but understandably they don’t know the legal loopholes. And let me tell you one of the biggest wants: not coordinating the business accession language.

not having any succession language at all. And then secondarily not linking their business succession and their documents with their personal estate plan. The biggest problem I have with the documents. Another thing is how do you resolve disputes between partners? One partner wants to sell, the other one doesn’t. Are you at a standstill? Do you have to go to court? Another big problem. Things like that, Scott.

Scott Bursey (06:44)

What other paths can an investor offer that seller instead, Kevin?

Kevin Pritchett (06:50)

instead of just a plain buy, just a straight up buy. and I’m sure you teach your members this as well. You have to learn how to be what one of my early mentors call being a deal engineer. You have to be able to see, okay, are you gonna buy this and fix it and flip it? Are you gonna wholesale it, just take the contract, flip it to a back end? Can you take the debt that’s already on it?

And say, okay, Mr. Seller, I will give you a couple grand to be on your way. It’s not in bad shape. I’ll put a renter in it, cover the mortgage that’s being generated, keep it in this position, maybe do a rent option in that person that comes in, sell it, in a few years, the renter gets to own the property. I get the delta. Between those two things, the seller got a couple money.

To go on his way for something that had no equity in it, you have to be able to see all those steps as a wholesaler. Do you just do a traditional wholesale? Do you do a novation? Do you rehab it and then put it on the market? Lock up your gap, which is your fee, lock in the seller’s fee, and then have there be some extra delta that either you get, the seller gets, somebody else gets.

A lot of different ways to skin the gap. Each of them has an upside and a downside. Each of them is either quick or time. I tell sellers, you typically can get only two out of three things. You can get as is and you can get fast. You can get as is and closer to your price, but you can’t get fast. You cannot get as is your price and fast.

You can’t get all three of those things. Pick which two of those three you want, and then I’ll tell you how I can solve your problem.

Scott Bursey (09:15)

The Delta. I love that framing. Kevin wondering, what gets missed most in succession plans and entity papers?

Kevin Pritchett (09:23)

Succession language at all. Just not having it in the documents at all. Let me give you an example. your properties, they’re in an entity. Let’s say, for this example, they’re only in one entity. You don’t necessarily want 20, 30 properties in one entity, but let’s say, in this example, to keep it simple, they’re all in one entity. It’s owned by ABC LLC and Scott Bercy.

is the member, is the operator of that LLC, the manager of that LLC. Scott dies, right? You die. There’s no provision in that document for who gets the assets to that LLC. Now let’s say your estate plan is suited and booted, everything’s good, but you’ve got 30 properties in this LLC.

With no owner. Your spouse or your heirs will have to go to probate court. Now, fairly straightforward process, but it’s not a cheap process. in probate, you’ve got to open up, it’s like a law case. You have to file a notice in public papers. Anybody who thinks that you owe them money can file a petition against that estate. Lord help you.

If they do, because then that becomes a lawsuit. They file a motion for money. You’ve got to respond to that motion, discovery, all that horseshit. And the only people who make money or the lawyers involved. I’ve had cases where my clients didn’t take care of that. I had to go to probate, and the fees and the people challenging were so strong that the heirs ended up selling.

this happened three times over my 30 years. Portfolios were rent asunder because those succession plans were not simple. The alternative, if you just say, in the event of Scott’s death, all Scott’s interest in ABCLLC will go to Amy Burcy. Dunn, right? Or will go to the Scott Burcy.

Living trust done. You avoid probate. You avoid noticing up anybody who could file a claim against it. Super simple, but it could be a twenty thousand dollar mistake if it’s not there.

Scott Bursey (12:12)

Appreciate that breakdown. Kevin, curious to hear, what should an investor ask before they take money from other investors?

Kevin Pritchett (12:20)

Really big issue too that I see a lot, Scott. When you’re taking money from an investor, you have to be aware that this is a securities transaction. When you are taking money, that’s an investment. You may not think of it as a security, but it absolutely is. Usually when you’re taking money, publicly traded offering, you have to file a very expensive offering statements, and it’s a very expensive proposition.

It’s a small deal, you can fit under certain investor exemptions, Reg D. Every state has them. Then there’s Federal Reg D. But you have to do it the right way, file the right paperwork. And you also have to give the person you’re getting money from proper disclosures of all the risks that might reasonably occur. That’s the biggest problem that I see. Clients come to me, I’ve gotten this money.

What disclosures did you give? I didn’t give any disclosures. That could be fraud in and of itself on the merits if you don’t give disclosures of reasonable risk. You don’t lose in a situation where an investor gives you money and a deal falls apart. That’s not what will get you in trouble. Risk, that’s part of the deal. But if you don’t give that investor disclosures of what might happen

reasonable risk, that’s when the securities commissions will say you committed fraud. And so the way to get around that is to have disclosure documents that you give and have an evidence of them being signed. You have to have that document saying we recommend you go to your financial advisor, legal advisors to review these before you give us money. Keep all those signed documents in your file so that you cover yourself in the event the deal

blows up for whatever reason. If you are an investor, it’s critical that if some promoter is saying this is the best deal since sliced bread, not only that you get disclosures, but you get a personal guarantee from that. I have three lawsuits now and one pending where my client gave a million dollars of his money.

His brother gave $250,000. So about $1.2 million total. They got no personal guarantees from the promoter. And of course it went belly up. So now I’m chasing an entity that has no money. And we’re trying to chase the real estate in foreclosure. Get personal guarantees. At least you’ll have personal guarantee against the promoter.

Let me share one thing on this. I know I’m going a little long, but it’s important. In one of the deals where my clients gave money, I got a judgment right away because the investor didn’t show up to court. So we got a default judgment. But it was a judgment against him individually. He then came around he got an attorney. So we had a settlement agreement. In that settlement agreement, I placed language that says that if he defaulted.

in that agreement, then the judgments would be personally held against him. So initially the judgment I got was not personal, it was just against the entity. We got the settlement agreement. I put that personal language in there. Of course he did default. So now I have a judgment against him personally and I can go after everything he owns. Just examples of things that you really have to be aware of, whether you’re the investor

or the promoter when you’re soliciting or giving money.

Scott Bursey (15:46)

Fine examples, counselor. And on the flip side, what should they ask before they hand their own money to someone else?

Kevin Pritchett (15:54)

we talked a little bit about that. You need to get personal guarantees from the promoter. The promoter will say, this will work. this is good. Everything is everything. Give me a personal guarantee. You also want the promoter to give you a list of their past deals, their track record. You want to do your own due diligence to make sure have they been in any lawsuits?

do they have any bankruptcies? my clients gave money to this guy. He had previous bankruptcies. He had other lawsuits. Right now, he has over 66 zero lawsuits against him. Do your due diligence to make sure that you know what this person who’s asking you for money, what their background is, lawsuits, judgments, and bankruptcies, anything in their past.

Scott Bursey (16:41)

Thank you for walking us through that. And Kevin, I know our listeners are going to want to hear this from you. What does it mean to escape the landlord life and how can an owner tell when it is time for a change?

Kevin Pritchett (16:54)

It is an existential question. Escaping the landlord life is what I was talking before, Scott. I built this portfolio, done everything right, had this very successful for portfolio, but realized it wasn’t passive. First of all, real estate is not a passive investment. I didn’t like the life that I had built that was required in order to support that. So that’s what escaping the landlord life means.

Not everybody, I have a client now that owns 17 buildings that are worth about 20 million dollars. He’s at the point of wondering, okay, do I want out from this? Every situation is different. But to get the answer to the question of whether you can or should escape the landlord life, you have to get real hard, honest answers.

To a number of questions. One of them, what’s your real cash flow? What are your real expenses? What could you walk away with if you sold everything after all costs? my client, his buildings are worth $20 million, but that’s not what he would walk away with. you’ve got to factor all of that in. Most people, when they wanna escape the landlord life.

They say, I don’t want the responsibility, but I sure love the cash flow. So can I get rid of the responsibility and keep the cash flow? There’s a number of different ways to do that. Better management is one, or you could sell some, keep some, take the money, and then with whatever the net proceeds are, you need to do an analysis of what could that generate for you after tax.

in order to really see where you are. And I have checklists and protocols that have been distilled over forty years of practice to help investors answer all those questions.

Scott Bursey (18:42)

Kevin, over your career, what has been your philosophy on being in the right rooms with the right people?

Kevin Pritchett (18:48)

I shared this a little with you before we started. I was a straight A nerd in school. would go to my room, do my homework. I had every hour of every day schedule on new. a school is a meritocracy, one of the last pure meritocracy. When I started becoming an investor, I was a lone wolf. I was disciplined, my superpowers being disciplined, having a machine.

But I realized I needed to know people that I didn’t know. I needed resources that I didn’t have. I needed knowledge that I didn’t have and I didn’t know where to get it. So I learned too late, unfortunately, or not too late, but later than I would have liked to. The importance of being in the right rooms with the right like-minded people.

I don’t want to be the smartest person in the room anymore. I want to be in a room with people who are more knowledgeable, not necessarily more successful, but certainly more knowledgeable than I am. So that I can grow. I’ve learned the value of that and I can’t put a value on how important it is.

Scott Bursey (19:52)

powerful perspective. Kevin, curious to know, how should an investor weigh building wealth against the life they actually want to live?

Kevin Pritchett (20:01)

That is a seven-figure question. Every person I invite, because you don’t have to do anything. My grandmother used to say, you’re free black and 21. You can do what you want to. But if I were you, I invite everyone to think very honestly about what kind of life do you want? I think all of us got into real estate.

Because we wanted to be independent. We didn’t want to be structured to a nine to five job. we wanted to live a life on our terms. a lot of us were focused on building these portfolios, and we didn’t really think about what the life was because we knew we had to sacrifice, we knew we had to have discipline. I invite everyone to look, take a good hard look at.

Is your life right now the way you want it to be? I did that for myself when I had those buildings and realized I had a net worth of seven figures, good cash flow, but I had debt. I had about a million dollars worth of debt too. I would wake up in a cold sweat at night with realizing the responsibilities, and if anything went wrong.

How bad things could really be. We are risk takers, investors. We are real estate investors. We’re risk takers. We’re risk managers. We get paid for managing risk appropriately. As part of that equation, it is incumbent upon us to look at am I living the life I want? And if not, then take the steps to transmute, transform.

your assets to create the life that you want. And as I said, I’ve created checklists and protocols in order to help answer those questions from dealing with investors and myself who’ve had to answer these very questions.

Scott Bursey (21:48)

Appreciate you being open about that. Counselor, you have given us excellent advice here today. But is there any additional words of wisdom, a golden nugget or two that you could leave with our listeners?

Kevin Pritchett (22:01)

I’ll just share my experience. My experience is All things in the world of form have a lifespan. Everything has its own lifespan and everything works a little and nothing works forever. So if you get to the point where something needs to be adjusted, have the courage, the self-confidence.

To look at it and say, what do I want? Don’t limit yourself. Say, what do I want? I created this. If this isn’t what I want now, I can create what I want. So that’s what I would leave your listeners and your members.

Scott Bursey (22:35)

Counselor, thank you for those words. And for those of our listeners that would like to keep this conversation moving, stay in your lane, collaborate with you on future deals, perhaps. What’s the best way for them to plug into your pipeline and reach you directly?

Kevin Pritchett (22:48)

couple things. go to my website because I have lots of wonderful content that you can get on the website and just opting in. So that website is K-O-P Protect My Business dot com. The letters K O P and then another P protectMybusiness dot com. Put in your name and email there and you’ll get my checklist. You’ll get content that I put out all the time.

You’ll get my email to reach out to me. I talk to people regularly, especially people that I’ve met through podcasts. as I said, I have become very aware of the importance of networking. Happy to help and support in any way that I can to somebody reaches out to me. But get on that newsletter list, get my free content, and that’s the best way for us to be in communication.

Scott Bursey (23:37)

Kevin, thank you for joining us on the Real Estate Pros podcast today.

Kevin Pritchett (23:41)

It has been my pleasure, Scott. My sincere pleasure to be with you. I hope it’s been valuable for your members.

Scott Bursey (23:46)

Extremely valuable. This has been an absolute masterclass. And to our listeners, we appreciate you. If you received value from today’s episode, please subscribe. We’ll be filling your tanks with the lineup of elite guest, just like Kevin Pritchett, who are accelerating and setting the pace for the rest of the industry. Until next time, keep your standards high and your vision clear.

We’ll see you in the next episode, everyone.