Title: “The Essential Legal Checklist for Real Estate Investors”
Episode: 236
Joining us in this episode of Profit First for REI podcast is Chris Johnsen. He is a lawyer in the real estate space and worked primarily for commercial real estate.
In this episode, Chris talks about the common pitfalls people go through in real estate and when you need a lawyer in your business.
Listen as he explains why you should hire a lawyer for your business contracts. Enjoy the show!
Key Takeaways:
[01:03] Introducing Chris Johnsen
[04:34] Getting into a specific niche as a lawyer
[09:03] Education as an investment
[14:52] The Golden Handcuffs
[17:21] Most common questions he gets as a lawyer
[23:20] Operating Agreement
[26:48] At what point should people get a lawyer?
[30:47] Connect with Chris Johnsen
Quotes:
[02:43] “I saw two things in lawyers. I saw that they provide value that is needed and are expensive.”
[09:03] “You should look at your education as an investment in yourself.”
[23:20] “Operating agreement is a contract between the company’s owners on how to run the company… there are so many pitfalls.”
Connect with Chris:
Website: https://www.johnsenlaw.com/
Tired of living deal to deal?
If you are a real estate investor or business owner who is tired of living deal to deal and want to double your profits, head over here to book your no-obligation discovery call with me. Either myself or someone from my team will hop on a short call with you to get clear on your business goals, remove any obstacles holding you back, and map out a game plan to help you finally start keeping more of the money you work so hard to make. – David
Transcript:
Speaker 1 (00:00):
So if you do it wrong and you don’t make disclosures, what it means if the deal goes south, you might have to return all the money to the investor. So if they put in a hundred thousand dollars in a deal and they lose all their money, you are going to have to come up with a hundred thousand dollars out of your pocket. So hiring a securities attorney, not just a real estate attorney, but a securities attorney that knows how to do syndications is a type of insurance policy.
Speaker 2 (00:36):
If you’re a real estate investor who’s sick and tired of living deal to deal, then welcome home. Hear from everyday real estate investors just like you, and discover how they’ve completely transformed their business by taking a profit First approach. This is the profit first for REI podcast, where we believe revenue is vanity. Profit is sanity. It’s time to start making profit a habit in your business. So here’s your host, David Richter.
Speaker 3 (01:03):
We have Warrior Chris Johnson on the podcast today. Really excited about this one because he talks through the common pitfalls, the common things that people go through. When do you need a warrior in the real estate space? If you need help here, he’s got some great practical info, puts it on the bottom shelf. He’s real estate investing specific, so understands those needs there and is just no bs. Like when should you hire a lawyer and engage one on a more permanent basis rather than just for the one-off contracts. So hopefully this is very helpful to you and very practical and thank you for being a listener of the show. Hey, welcome back to the Profit first RI podcast. Have Chris Johnson today excited to talk about this because we don’t put many warriors on the podcast and it’s not by intention or design. It is though. I’m just kidding. Chris, thanks for being on the show. Excited to have you here today.
Speaker 1 (01:54):
Thank you. And if it makes you feel any better, I’ve never put a CFO on my show either.
Speaker 3 (02:00):
That’s great. Touche, touche. I love it. Okay, so being a warrior in this space, how did you get into this? Did you say? I woke up one day, I was like, yes, want to? I want to go and do this, I want to help or how did it morph into this?
Speaker 1 (02:18):
Yeah, I get asked that question all the time. So I’m a business person first and a lawyer second. Nice. My first career was really in real estate and doing that, I started about 20 years old working for a company that did commercial real estate more in the retail sector and I interfaced with lawyers. We used lawyers and I saw two things. I saw that they provide value that they’re needed and that they are expensive. So that kind of stuck in my head. Also being a business major, I think pretty much everyone that has a business degree has taken business law. I thought it was fascinating. I loved the class. It was one of my favorite classes. So that’s kind of a number two and then number three, which is really the deciding factor is my mother and she did not tell me to go to law school.
(03:15):
I’m actually the first lawyer in the family. But what she did say is an education is something that no one can take away from you. So when I was about that age graduating from undergrad, you make the decision, am I going to just go work or am I going to go keep going through school? I knew that if I didn’t keep going through school that I never would. And so I was like, okay, it’s now or never and a law degree is a worthwhile investment in myself. I never intended on actually practicing law at a law firm. I was just going to go to law school and then go back into developing real estate. I was going to go move back down to southeast Florida where I grew up and do townhomes and different developments like that. But somewhere along the way, an attorney friend of mine said, you don’t learn shit in law school. You really need to go practice for a while to learn the law. And so fortunately I did well and law school and decided to go practice at a firm for a while.
Speaker 3 (04:17):
How did you get into the niche of where you are today and go down that path?
Speaker 1 (04:23):
And so you mean practice areas?
Speaker 3 (04:25):
Yeah, your practice areas, and I know you would work with real estate people. I know that was a little bit of your background, but it’s like how did you pick going down into your specific niche?
Speaker 1 (04:34):
Yeah, so this is important for kids in law school or kids that think they might want to go to law school. So I’m not sure if it’s particularly helpful for the listeners, but definitely their kids and I think people should know this and it probably is applicable to any type of degree. So I’ll start here. You don’t always get to do what you want to do. Things just kind of pick you and that depends on the economy. So I think that is relevant a lot to real estate, just depends on how the economy’s doing at the time. So I was going to be a real estate attorney. I came from real estate, that’s what I was going to do. I went to intern at a big firm. I had an offer in their real estate department with the managing shareholder of that offer. What
Speaker 3 (05:22):
Year was that?
Speaker 1 (05:23):
That just taking
Speaker 3 (05:24):
Place?
Speaker 1 (05:24):
2007.
Speaker 3 (05:26):
Okay.
Speaker 1 (05:28):
You can see where we’re going with this. Yes. 2008 was when I was going to start and they said, well, good news is we want you still have a job. Bad news is you’re not going to be in real estate because there is no real estate work. You are going to be in litigation. I didn’t even take trial add in law school because I was like, I will never need that. I’m never going to step foot in a courtroom, never going to do anything like that. My MBA professor urged against that. He said, you know what? This is the advice I’m giving right now is you don’t know where life’s going to take you and you said, tag trial ad you should learn how to do litigation. I was like, yeah, that’s garbage. I’m only going to be a transactional attorney. So I did a stint in litigation doing a lot of real estate litigation because we had foreclosure work and things like that. So it wasn’t like I was completely removed from real estate, but I went into litigation which definitely didn’t fit in with my disposition and personality type, but I didn’t have a choice.
(06:31):
I was newly married, I had a baby on the way. I didn’t have the luxury of just saying, you know what? I don’t like this so I’m going to quit. So I was like, okay, suck it up and do it. This transitions into how I got where I’m at now. I have a litigation background, but I transitioned more into into really started with employment work and then it started with corporate work and then I went in-house, meaning I was general counsel of a company. I was their employee rather than working for a law firm. So there was zero litigation. Everything was corporate work, the nuts and bolts of corporate work. And so I went from doing that to doing more transactions and now I kind of couch myself as outside general counsel as I have my own firm and I do corporate work for number of companies, but that a lot of that includes some litigation.
(07:31):
If it gets real hot and heavy, I send it over to litigation team. You never know where life’s going to take you. My path, I wouldn’t have picked it, but I went along for the ride and didn’t fight too much about it, and what it did is it made me very much a generalist, which is good. I’ve done both litigation and transactional work. So I think it gives me a deeper understanding of when you’re doing deals where some of the pitfalls are going to be, and unlike someone that’s only a deal person, I am not scared. I’m not as scared of a fight. I know the process. I can trust the process. I know it’s ugly, I know it’s slow, and unlike someone that only does litigation, I actually understand transactional work too.
Speaker 3 (08:21):
Yeah. Now you’re in an interesting position, I think because business owner also got an education. I feel like the rallying cry or battle cry of entrepreneurs, don’t go to college, just go out there and make the money, be an entrepreneur. Where do you sit on that side of the fence? You got the education your mom heavily fluency of. That’s something that no one can ever take away. I really like that perspective because I feel like in the entrepreneur world it’s the opposite. Don’t go to school, don’t do all that. So where do you sit on that fence there? I know for your own life which route you took, but looking back,
Speaker 1 (08:57):
So where I sit, and I think it’s a really common sense, reasonable approach is you should look at your education as an investment in yourself. So I make investments and every investment I make, whether it’s a stock or a bond or real estate, I’m going to look at the return, I’m going to look at the risk and I’m going to look at the opportunity costs. Those are really the three factors that you’re going to look at in any investment. So when I’m choosing to do my education, I want to look at what kind of return am I going to get, and a lot of that’s tied to the type of degree that you’re going to get. The risk I think would be,
(09:46):
I don’t know where I’m going with that, but the return, I’m definitely on that piece with your education, just look at it, return on investment, and then the opportunity cost is I guess the amount of time that you’re going to spend not doing what you’re doing. So let’s kind of boil that down into education. And I don’t mean to demean any profession because I’m truly not doing that. This is the same advice that I would tell my kids. First of all, I would discourage my children from doing any degree where the only jobs are teaching more kids how to get that degree. To me, that’s a fundamentally broken system because it’s just like feedback loop. Whatcha going to do go to college so you can work at a college to teach more kids to work at a college? That doesn’t make any sense to me.
(10:38):
And I also think that there are trade schools out there that are fantastic for what someone might want to do. So like a welder, you could go to trade school for welding and work in oil and gas and easily make six figures easily and do very well for yourself. So why would you go to a four-year degree just so you can go out of school and be a welder? That actually doesn’t make sense. You’re spending money, it’s not giving you return on investment and then the opportunity cost, you’re losing out on career path trajectory than if you just went in first. However, I do think college degrees and other things, open doors, being a lawyer certainly opens doors to me being on deals.
(11:34):
So if I was a doctor, I wouldn’t be networking with business people and they’d be like, oh, you’re a doctor really? I need to get you in on this deal. I could get a board seat of a medical tech company or something like that if it’s transferable. So again, I got to look at the transferability of my degree and what I’m intending to do with my degree. It certainly can help. So I think being a lawyer has helped open tons of doors and I think it was the wise move for me. Another thing that I’ll point out is cash. So I don’t think you should forget the value of cash. I see a lot of investors that want to get involved in the hustle that real estate and other things like that. It’s funny when you talk to people that their sole job is syndicating deals or finding investors who do they go to? A lot of dentists, doctors, lawyers. So those professions might be demeaned by other people as oh yeah, you’re going to be miserable and you’re never going to make seven, 10 figures on an exit. So you’re giving up and those professions are very cash oriented. You can make a very good living every year, but you’re giving up equity growth. You’re certainly not the tech company start off. So again, that’s like an investment. You have different kinds of investments, you have dividend stocks and you have growth stocks.
(13:16):
So back to that example, I think a lot of entrepreneurs tend to focus on the growth, which is fine. I think there’s nothing wrong with that, but don’t discount the value of cash, the ability to make half a million dollars a year and just shove money in deals and real estate and investments in a way it makes it easier for people to get off the train than if you had to start scrapping it together. So I know I threw a lot on the board, but I don’t think education should be totally demeaned. Of course I love education, but what I don’t like is people just going to school just to go to school. They don’t know what they want to do. There’s no path and their parents pay for it. That’s flushing a hundred thousand dollars down a toilet
Speaker 3 (14:03):
And that was a mature perspective. It’s like you have to figure in your whole plan of what you’re also thinking of doing. And like you said, you can’t dig it the four year degree if you’re going to do welding or something, that’s totally not going to be beneficial to it and that’s going to be your long-term play if you know that and if you don’t know it, it’s be cautious and maybe invest some of that time upfront. Then on the back end, I like what you said most people do demean it from the aspect of some of those high paying jobs. It’s like, yeah, but it’s just a high paying job that you’re chained to. Well, it’s also a path to becoming that and Robert Kiyosaki’s four quadrants an investor making that cash work for itself. So it’s another way to access it just if that’s the way that you’re going. So I really like that
Speaker 1 (14:47):
If you’re disciplined, David, if you’re disciplined. So what happens is a lot of these high paid professionals just end up raising their spending and so they’re constantly stuck in that Go Rob Kentucky, the rat race and I call it the golden handcuffs. But yeah, making a shit ton of cash very quickly in life can be the way to an out.
Speaker 3 (15:15):
Yeah, no, I agree. That’s so good. I like what you said, discipline. This is a profit first I podcast. So we’re trying to teach discipline on the cash side to a lot of the investors and it’s like that’s just as important no matter where you’re stationed in life is to have that discipline, especially when, and I love that you brought up the value of cash. You can’t overlook that in whatever career or path or entrepreneurship direction you’re going.
Speaker 1 (15:39):
Hence, I haven’t quit doing what I’m doing, Dave. Right,
Speaker 3 (15:41):
Right. I was just going to go into that.
Speaker 1 (15:43):
Yeah, I mean if you want hear, a lot of people want to do passive investing, which is fine, but man, I can’t support it in my lifestyle and I’ve built up some investments, but first of all, I want to reinvest my dividends. I want to reinvest my income because that compounds growth. Second, I love what I do and third man cash has its place that earning income that I can just spend on the crap and then have some leftover to invest has its place. You got to have a lot of real estate to have a lavish life on real estate, and I do. I come from a family of real estate people and they just naturally knew the live below your means mentality. They don’t drive flashy cars or any of that. They have no desire for that. So you wouldn’t know that they have millions of dollars in real estate, but you have to have tons to actually make that cash work for you and with a fancy lifestyle that the average person wants with vacations and sports cars, boats and all that crap,
Speaker 3 (16:50):
Right? Yeah. It’s one thing to get out of the rat race where you stand today. It’s another thing to have the discipline to keep building to where most of people don’t live or don’t live. So no, that’s a really good perspective. Okay. Shifting to your actual profession, what are some of the, I don’t know, the most commonly asked questions you get or the most common cases that come across your desk? How can people help themselves with some of the stuff that you might get on a daily, weekly, or monthly basis that keeps recurring popping up?
Speaker 1 (17:21):
Okay, that’s a good question. So one thing the listeners can do is go to the Johnson Law YouTube channel, that’s J-O-H-N-S-E-N. It’s with an E, not an O, so Johnson Law. And then they can also go to the Fidelity Lake Houston YouTube page. So Fidelity, Houston’s my title company I underwrite through Fidelity National Title. Johnson Law is the business law firm. I also have estate planning firm, but I’m not going to go into that for your listeners, but for the real estate stuff, I tend to, it’s either on one or two of those channels. Fidelity tends to be a little more realtor focused. Those are a lot of the clients. Johnson law tends to be a little bit more like investor focused, but when I see a reoccurring issue, something that pops up a lot, I will spend the time to make a video and put it on there.
(18:14):
It’s hard. So what we do is really is so broad that there’s so many things. Let me say that as a firm, that is hard for me to really drill down on some things and go into detail, but I think what I might just do if this is more real estate focused is go over some of those issues that I see commonly come up. Okay, so when you’re a real estate investor, I think definitely just basic corporate formation work. You hear a lot of asset protection attorneys talk about it like it’s asset protection. It is, but it’s really, it’s so basic. I just view it as corporate work and that’s just creating buckets, different buckets for different things. So you’re isolating your exposure to that bucket for risk purposes. Then you can get real complicated with asset protection and there’s difference between different types of trusts and family limited partnership.
(19:24):
I’m not going to go into that stuff, but that is a topic that’s of interest to investors, something that we handle. Series LC is commonly used in real estate, so that’s a common topic. That’s something that I have on the YouTube channel as well as some tax deferment strategies like 10 31 and some other tax things you’ll find there for real estate. Other things of interest? Well, if you have a real estate business, one thing of interest right now, and I’m going to present it at family David, I decided this is going to be the topic of the masterclass. I think I have in a month or something. I’m not sure. The FTCs ruling on non-competes is very interesting and that’s very timely.
(20:15):
I think a lot of people, I’m going to wait until the C said what they’re going to do. They haven’t done it yet, and you got to wait for the rule to actually come out. And then there’s going to be a lot of nuances on non-competes. So the umbrella that non-compete falls under is restrictive covenant and there’s different kinds. There’s a confidentiality agreement as a type of restrictive covenant, a non-solicit as to customers as a non-solicit as to employees as a type. None of those that I just listed were a non-compete, and I don’t think that was intended by the FTC to ban those types of restrictive covenants. So there’s a lot of other tools in the toolbox. Then you have your non-compete and those are, they’ve been pretty much wiped out and that’s okay. There will be some exceptions to that. Look, lawyers aren’t subject to non-competes and they’ve been going out without ’em for a while. And let me say too, that everyone’s already gearing up to fight this ruling is unconstitutional because it came from an agency and it didn’t come from a legislature and there’s going to be other issues. I think that’s going to be really big over the next couple years for business people.
(21:41):
Another topic that comes up a lot for real estate people, just the basic contracts. I find that real estate investors tend to, they’re very DIY type of people. That’s just kind of the mentality that they are and there’s nothing wrong with that. But no, they’re cheap. Maybe they’re falling profit first too. Well, I don’t know. So the investment in the contract, I find that oftentimes real estate investors will do their own and they’re just really bad. I see ’em all the time, and if you get sued over one, it’s going to be like 10 or 20 times at least than what you would’ve just paid to actually have an attorney do it. Chad GBT might do a pretty good job. I don’t know. I’m sure with certain provisions and if you actually know what you’re looking at, you could use generative AI to create some decent contracts for your deals that work for you and you have some outs.
(22:49):
So back to corporate governance, anytime there’s more than one member of a deal, there should be a good operating agreement. That’s another one. I see tons of people screw up on that. Tons of litigation pop out of that because people pull a document off legal zoom and then they are like, I think there’s a common understanding amongst people like, oh, well an operating agreement’s just an operating agreement. It’s a template, which kind is true with bylaws. So I can see where that assumption’s made an operating agreement’s a contract between the owners of the company on how to run the company, and there can be so many nuances in it and there’s so many pitfalls and I’ve just seen it time and time again. And if you go to a lawyer after you signed it and there’s a problem, it is too late. I’m sorry, the answer is going to be, I’m going to need a $20,000 retainer to get where you could have done in the beginning for much less.
(23:48):
And it is just unfortunate. If whatever attorney tells you that is not taking advantage of you, it just is what it is. It’s just going to be expensive to fight it. I’ll end with this so I don’t ramble on too long, but syndicating deals, syndicating the real estate deal does not simply mean that you create an entity and have multiple owners. Anytime you are bringing in money for a deal, you are selling securities. In exchange, there is some, the securities laws are being implicated, which means that there are certain disclosure requirements that need to be made, and the extent of those disclosure requirements are very dependent on kind of more detail. So I’m just going to be real general about it, but real estate investors need to know that now. So who cares? Who cares if I do it wrong? So if you do it wrong and you don’t make disclosures, what it means if the deal goes south, you might have to return all the money to the investor. So if they put in a hundred thousand dollars in a deal and they lose all their money, you are going to have to come up with a hundred thousand dollars out of your pocket. So hiring a securities attorney, not just a real estate attorney, but a securities attorney that knows how to do syndications is a type of insurance policy.
Speaker 3 (25:22):
No, that’s really good. Now I like this. This is good because what I heard, a lot of the most common things, the corporate formation in that structure, the asset protection, the series LLC, the non-competes is a big one right now. Contracts. Oh, man, you touched on something there. I mean, if you’re listening to this and you don’t have good contracts in place, I think the person that I used to work with just he had spent thousands of dollars on his contracts for real estate. He was doing a bunch of different types of exit strategies, so it wasn’t just one templated contract. So I was like, he took that super serious, and I’m like, I just wish everyone would be as serious as that, the operating agreement. That was really good. I like how you said that. It’s literally that agreement between the owners of the company.
(26:08):
If you’ve got multiple people on that, that is your binding agreement there. And it’s not just a legal zoom thing where you’re just like, all right, yeah, let’s just spit that out. That was really good. And then the syndicating deal is like you could get real into trouble real quick, real fast for a lot if you don’t have the right people there. No, that was good stuff. I did want to ask at one point, should people get a lawyer or you guys or, because I know there’s probably different tiers of lawyers too because like you said, illegal zoom, which is like anyone can go out there and try and play a lawyer themself, which is also bad, but where do you see people on that scale, especially I would say in the real estate world since it’s that our show is around that
Speaker 1 (26:48):
I hate to be overly cautious and I’m really not. Maybe I’m under cautious. I think my answer is going to be pretty common sense and no one should rely on this. This is literally my opinion. I think for the average person, just forming an entity is pretty simple. I think they can figure it out. If it’s only one member, one owner, if it’s multiple owners, I think you should use an attorney for the operating agreement. I’ve really never, I’d just say I, I’ve never seen a non-attorney do operating agreements. Well, I I’ve seen them doing pretty good, actually. There’s one old guy I’m thinking of that’s pretty darn good, but he still makes mistakes that could be costly. So once you do those things for the majority of people, the next question is, and so you need an attorney to answer your question in the beginning a little bit.
(27:51):
Okay, just a little bit. There’s really not much money to spend, so what’s the next thing you could do? You could do, well, are you going to have employees or subcontractors? That’s kind of my question. If you are, you might need an employment agreement, subcontract agreement, and you might have a lease issue, some lease negotiation. Other than that, I can’t see you spending that much on a lawyer in the beginning of a company. And real estate is a funny business. I would say most real estate is not a business. I actually won’t be in real estate unless it’s not a business. I don’t want any more businesses. I have a title company that’s in real estate industry. I don’t need my real estate property to be a business for me. So I like ’em to be really passive. You’re not going to use any lawyer stuff for that.
(28:43):
If the more active you are in real estate, the active the business is, the more you’ll have. I think the general threshold for me is when a business reaches a million, now they need legal services on a pretty consistent basis, and this is the part that you got to just take with a grain of salt. I would not fault anyone for pretty much doing things themselves except for the operating agreement. I think they should invest in that, but for the majority, just kind of scrapping it together up until you get to that million mark. And then what a lot of companies do is they’re like, look, we scrapped this together. We’ve been in business for five years. We’re now hit a million because a million, you have some extra money to spend. You’re feeling good. You’ve got your stride. So now they can come in and just take a deep breath and they can say, look, can you just audit everything we have? And they’re going to spend some money to do that. They’re willing to. They don’t care at that point. They have the money. But I think it would be unrealistic for me to go out there, started businesses before. I know I’m not just some voyeur that doesn’t understand these things, but if you’re going to start a business, I mean, why are you going to spend five grand a month on legal or make a $30,000 investment when let’s be real. A lot of businesses fail. You may even pivot in six months to do something else.
Speaker 3 (30:17):
That’s a good perspective. I like how you said the million mark. You’re kind of getting hit in your stride there and the end, you’re more set like you said, because if you’re before that, you could be going the different ways now. I like that a lot and I’m sure that’s where you probably help people there a lot. Is that million or over as well too. Just the last question here. It sounds like people can go to your YouTube channel to find more out about you, but how do you want people to connect with you? Is it just YouTube or do you want to go to a website or is there somewhere else?
Speaker 1 (30:47):
We can go to the website as well. Johnson law.com and it’s SEN. There’s a scheduling link on there, like a widget, and it goes to my calendar and you can schedule a 15 minute call. Talk to me about anything that’s free, 15 minute consultation, happy to talk to anyone. I do what I do and love what I do because I just like businesses. I like business myself and doing what I do. I get to live vicariously through a lot of people. It would be impossible for me to understand this many types of businesses, but for being an attorney or maybe an accountant, accountants and CFOs do as well, and consultants. I find that we have very holistic understandings of different industries because we work with so many different industries.
Speaker 3 (31:37):
Yeah, no, that’s really good. So you can find him at, that was Johnson Law, so with an SEN at the end of Johnson, and then johnson law.com. He’s got the YouTube channel as well. And then Fidelity Lake Houston was another YouTube channel you gave during the episode as well too. So it’s how you can connect with Chris. Chris, this was awesome. Thanks for imparting wisdom here and giving very practical stuff of what people are usually searching for. What are the first things or when should you engage with a lawyer as well? I thought that was good and not telling them, oh yeah, you need it from day one all the time. Give us good stuff. So make sure to go to his site and remember if you need help on the financial end, if you’re on your way to that million and wanting to keep more of what you’re making, go to simple cfo.com. We can help you from the CFO and the financial department perspective. We want to help you get to where you want to be. Chris, thanks again for being a great guest.
Speaker 1 (32:30):
Thanks for having me on. I appreciate you for
Speaker 3 (32:32):
Sure. And remember, if you’re listening, make Profit a Habit in your business. Thank you very much.
Speaker 2 (32:39):
This episode of the Profit First for REI podcast is over, but there are plenty more where that came from. Are you ready to learn how David and his team can help implement the Profit First system in your business? Schedule a discovery call@simplecfo.com right now. We’ll see you next time on the Profit First for REI podcast with David Richter.