Why Every Real Estate Professional Should Be a Corporation

As an Agent working for a brokerage you are considered an independent contractor.  You are missing out on tax savings and protection for your personal assets.  Since brokerages give you a 1099 form instead of a W-2 you are considered an independent contractor, this means that as far as the government is concerned you are the sole owner of your real estate business.  So, what does that mean?

Risks of Sole Proprietorship

Personal Possessions.  As a sole proprietor business type all of your personal possessions are at risk if there are any legal actions taken against you or your employees.  This includes your home, personal income, retirement accounts and more.  By forming your business into an LLC you gain protection for your assets, but not in all the ways you might hope.  Unfortunately, since you still operate through the BRE as an individual your assets are not safe if you are the one making the mistake.  However, you gain protection if your employees are the subject of a lawsuit.

For example, if you have an assistant showing an open house that is negligent of proper care which results in damages to the property.  Without incorporation you could be held liable for any damages that are not covered or partially covered by your brokers insurance, if you are a corporation in this situation your personal assets are no longer at risk.

Benefits of LLC / S-Corp

Tax Savings.  One of the largest advantages of being an LLC and paying taxes as an s-corp is the tax savings.  Essentially, as an s-corp you end up paying taxes on less of your income.  Instead of paying a self-employment tax on all of your profits, you pay tax on your salary with the rest of the income being distributed as dividends to yourself.

IRS Audit Risk.  Sole Proprietors are the MOST AUDITED BUSINESS TYPE.  No matter how in-order your taxes and business filings are, an audit is always a pain.  According to an article from 2011, the Wall Street Journal found that s-corps are ten times less likely to be audited by the IRS compared to sole proprietors.

Flood Damage: What You Need to Know

Floods are the most common and costly natural hazard in the nation.  They are an even greater risk if there have been recent wildfires in the area.  With the recent fires in California we are at heavy risk,  normally vegetation will absorb rainfall and reduce the amount of rain that makes it directly to water flow channels.  After a wildfire the land is barren, and unable to absorb water. This creates conditions where the soil is not anchored, meaning that there is a high risk of mud-flows and flash floods.

Just a few inches of water can cause massive amounts of damage.  According to FEMA, the average flood claim in 2010 was approximately $28,000.  Homeowners quickly found out that their standard homeowner’s policy did NOT cover flood damage.  Without flood insurance these residents were forced to pay out of pocket to repair their possessions, or to give up on them entirely.

It is extremely important to assess your risk when evaluating what kinds of insurance you should have.  Homeowners living in high fire risk areas are also very vulnerable to flooding.  Brick and mortar houses will likely suffer less overall damage in the case of a flood to their exterior, but are still likely to have large costs associated to the interior of their homes.  Additionally, floods often leave behind more than just water.  It is common for floods to bring in dirt, microorganisms, silt, and sediment that can do more than hurt the visual appeal of your home.  

After a flood you must assess the damages to your home.  Since floods are not only water, there comes additional dangers when your house is affected.  Silt and sediment can create problems in your appliances, electrical system, and lighting fixtures that will make them not only impossible, but dangerous to use.

Myths about Umbrella Coverage for 1099-Employees: Real Estate Professionals Beware

What does umbrella coverage actually cover?

Personal umbrella coverage is designed to keep you safe when you damage property, cause an injury, or have a lawsuit filed against you.  However, this coverage starts and ends on you.  When you begin to act as an agent for a business, even your own, this coverage becomes unreliable.  In many cases insurance agencies will cite the ‘course and scope’ section stating that you were in the process of real estate activities during the time of the incident.

 

What does that mean for Real Estate Professionals?

Real estate professionals receiving a 1099 form may not be covered under their personal general liability ‘Umbrella’ coverage.  Since you receive the 1099 and are considered a business you have the same legal obligations and liability as larger firms.  In addition, you don’t have any of the protections of a larger firm!  Real estate professionals need to be extra vigilant in this area.  If you are classified as a Sole Proprietorship type business you could end up with huge legal fees and an insurance plan that won’t cover it!



What about my E&O coverage? 

Unfortunately, E&O isn’t a silver bullet catch all to protect yourself.  With only an E&O policy that brokerages generally require you may have many gaps in your policy.  These gaps include general liability, employee injury, and property damage.  For example, a client could injure themselves during the showing of an open house, general liability insurance could have protected you!

 

How to get coverage applicable to your real estate activities:

Small Business Owners Plans, or BOPs, are specialized plans the have the most important types of coverage bundled as a package to save you money.  A specialized Real Estate Professionals BOP is available here. To learn more about how a BOP can protect you and your assets from costly legal fees please contact us.

Homebuyers: Beware of Mortgage Closing Cost Phishing Scam

If you’re getting ready to buy a house, the Federal Trade Commission (FTC) and the National Association of Realtors (NAR) are urging you to be vigilant about who you trust. Unfortunately, scammers have had success stealing the closing costs of homebuyers by posing as representatives of title insurance companies, realtors or real estate agents. The more you know about this scam, the easier it will be for you to spot it and steer clear of it.

 

How the Scam Works 

The process a hacker goes through to steal your closing costs typically goes something like this:

 

  1. The hacker finds a way to access your email account and learns about mortgage or real estate transactions you have coming up.
  2. The hacker sends you an email and tells you to wire the closing costs to a different account than you were originally given. In order to convince you, he or she poses as the title company or the real estate agents you have been in contact with throughout the home-buying process.
  3. If you are convinced of the hacker’s authenticity and wire the money to the scammer’s account, your money will disappear (most likely forever).

 

Scams like this are not new, but that does not minimize the devastation they can cause if you fall for them.

 

What You Can Do

Thankfully, there are a few things you can do to avoid becoming a scam victim. If you receive unexpected attachments in an email, don’t open them, even if they appear to be from a trusted source. You can find out if an email is legitimate by contacting the company through a known phone number (not a phone number provided in the questionable email).

 

Avoiding phishing scams can be tricky, but protecting your new home doesn’t have to be. If you live in close proximity to brush fire zones or have trouble securing insurance for any other reason, Free Fire Zone Inspections can help. Contact us to schedule your free inspection.

Earthquake preparation, is your go-bag ready?

With the abundance of disaster in recent months it is more important than ever to make sure you are ready.  This means making sure you have all the necessities packed and ready to go on the move with you.

Ready.gov  has a basic emergency supply kit breakdown:

  • Water – One gallon per person per day, minimum three day supply
  • Food – Three day supply of non-perishable food
  • Battery-powered radio, NOAA Weather Radio
  • Flashlight
  • Basic First aid kit
  • Batteries
  • Moist towelettes, garbage bags, plastic ties – personal sanitation
  • Dust mask
  • Basic tools
  • Manual can opener
  • Cell phone battery packs / cables
  • Pet supplies

In addition, you may want to beef up your kit with some non-essential items that can either improve your downtime or give you the ability to help others. These items range from having non-prescription medication, sleeping bags, blankets, eating utensils and extra clothing.  You may not feel the need to have an emergency kit right now,  but when disaster strikes it becomes too late!  It is better to be prepared and not require your supplies than to need them and not have it.

Depending on where you spend your time it may also be smart to have more than one kit ready to go.  Home, work, and vehicle kits should all be handily available.

 

Real Estate Agents: Liability During an Open House

Can a Real Estate Agent be Liable for Injuries at an Open House?

 

 

 

 

Personal Injury Attorney Barry P. Goldberg weighs in on liability questions for real estate agents.

 

During an open house the agent “takes control” of the premises and is required to use reasonable care for the safety of potential buyers. In the event that a potential buyer is injured, you could be held liable!

According to personal injury attorney Barry P. Goldberg, “It is a relatively common occurrence for potential buyers to be wondering a property for sale and slipping or tripping on a stair or slippery floor. It is easy to understand why— potential buyers are looking around— not down. They are by definition unfamiliar with the property and are more likely to miss a step or small defect.”

Are you in good hands?

 

 

 

 

 

 

Time to Prepare for Wildfires

Wildfire season is here again.  Home Owners are encouraged to learn about this danger and participate in brush clearance and safety preparedness activities in their communities.

A Few Things to Keep in Mind

Fire prevention is the first defense against disaster. You cannot afford to ignore proper maintenance of your property.

Here are just a few of the things that can put you at increased risk:

  • Insufficient horizontal spacing in your landscaping plan
  • Insufficient vertical spacing between ground level plants and taller trees.
  • Leaves and pine needles clogging the gutters of your roof
  • Storage of combustible material near your structures
  • Not enough distance between your home and undeveloped areas.

Wildfires spread faster when the wind is blowing. Hot embers can land on dry material near your home and spark fire on your property.

How to Get Ready for Fire Season

Dry grasses and open spaces put rural residents at greater risk. Dead and dry plants are always ready to light up. They are the perfect tinder for an uncontrolled burn. This makes fire prevention everyone’s job.

  • Participate in community safety preparedness meetings.
  • Organize brush clearance for the surrounding region.
  • Contact a fire safety professional for a free fire zone inspection.
  • Work with other members of the community to elevate the neighborhood’s readiness.

Free Fire Zone Inspections provides evaluations and consultations to residents living in high risk areas. Ask for your free consultation today.

Local Entrepreneur Recognized by Allstate for Serving Other Businesses

Allstate Insurance Company recently awarded Robert Feldman (Allstate exclusive agency owner) for his leading performing in customer service and business insurance sales. The Top Agency in Allstate Business Insurance sales award recognizes Feldman’s exceptionally high standards in ensuring that his fellow business owners are properly protected with quality insurance policies.

 

Feldman has been with Allstate for 14+ years and is a graduate of California State University, Northridge. His main office is located in Los Angeles and his second office is in Verdugo City. In response to the recent award he received, Feldman replied that he understands how hard it can be to build a successful business, since he is a small business owner himself. He also stated “I also know how important it is to protect what you’ve built and earned.” Feldman proudly accepted the award from Allstate and expressed his desire to continue serving other entrepreneurs in the community by helping them secure the right insurance coverage.

 

Allstate Takes Pride in the Success of Agents

 

Michael Barton, president of Allstate Business Insurance, says that every small business should be given a chance to thrive. He praised Barton for taking “…pride in helping business owners get off on the right foot and protect what matters to them.”

 

The Allstate Corporation serves approximately 16 million households through its various brand names, which include Allstate, Answer Financial, Esurance and Encompass. The corporation is the nation’s largest personal lines insurer that is publicly held. In addition to providing a variety of coverage options through their insurance policy program, the corporation also offers attractive benefits to their agents through their benefits program.

 

Learn More About Your Insurance Options

 

There are a variety of home insurance options available to you, and it can be hard to choose the right one for your needs. If you live in a high fire risk area and have trouble getting insurance, please contact us! Free Fire Zone Inspections can provide you with a free inspection and match you up with a great insurance policy.

Do You Know What Insurance Gaps You’re Facing if a Brush Fire Hits Your Home?

 

La Tuna Fire – September 2017

Brush fires can hit without warning and cause remarkable devastation in a short period of time. Unfortunately, too many homeowners find out after their homes and properties have been destroyed that their insurance coverage does not sufficiently protect them from fire damage. If you are a homeowner who lives in a high fire zone area, do you know what insurance gaps you’re facing if a brush fire hits your home?

 

Why the California Fair Plan May Not Be Right for You 

The California Fair Plan is intended to be used only as a last resort for homeowners who are unsuccessful at obtaining coverage in the voluntary market.  Homeowners who unnecessarily rely on the California Fair Plan may have huge gaps in their insurance coverage that they are not fully aware of.  If you are close to a brush fire zone and you have coverage through the California Fair Plan, it is time to carefully study your policy and reevaluate your coverage options.

 

We Offer a Solution

Many insurance brokers do not understand that some insurance companies are willing to insure homes that are close to brush/fire zones, without forcing homeowners into the California Fair Plan.  If you would like to learn more about policies that offer more comprehensive coverage without major fire gaps, we invite you to contact Free Fire Zone Inspections and request an inspector to evaluate your home today.

 

Should You Incorporate Your Real Estate Business?

If you are a realtor and operating as an independent contractor for a broker, there are two good reasons to form a corporation for your realty business:

1) Tax Savings
2) Personal Asset Protection

Tax Savings
If a real estate agent works for a broker as an independent contractor, and receives a Form 1099 from the broker for reporting of wages, then that agent is responsible for paying 15.3% self-employment tax on those wages to the IRS, along with regular income tax.
By forming an S Corporation, you can avoid paying much of those self-employment taxes.
An S Corporation is known as a “pass through” entity, which means that the profits and losses pass through the corporation and flow to the tax returns of the individual shareholders. Shareholders who actively run an S Corp must pay themselves a “reasonable” salary, which is subject to employment taxes. For example, a realtor who makes a profit of $200,000 a year and works 40 hours a week running the business to generate those profits, might pay herself a “reasonable” salary of $75,000. After that, all other income can be paid out as dividends, and is subject only to income tax.
S Corporations also pay an annual state franchise tax of 1.5% of net income in California, subject to a minimum of $800 per year.
S Corporations are also attractive because they have a very low audit risk.
It is always a good idea to discuss these issues with your CPA.

Personal Asset Protection
Unfortunately, the California Bureau of Real Estate still only recognizes broker’s corporations for the purpose of licensure. If you form a corporation, you will still need to operate through the BRE as an individual. Therefore, forming a corporation will not protect your personal assets from your own mistakes or accidents. However, if you have employees (salespeople, administrative staff, etc.), then your corporation can protect your assets from their actions.
Example A – A real estate agent operates as a sole proprietorship carrying $100,000 in liability insurance. She hires an assistant to sit at an open house. While showing the house, the assistant accidentally leaves a large window open and a subsequent torrential rain ruined the homeowner’s carpet and pricey paintings. The homeowner’s insurance company sued the broker for repayment of $200,000. The broker paid $50,000 through its insurance company but demanded the agent pay the remaining $150,000. Since the agent’s company only has $100,000 in liability insurance, the agent is personally responsible for the remaining $50,000.
Example B – A real estate agent sends his assistant to the bank to make a deposit. The assistant has a car accident while driving to the bank. People in the other car are seriously injured and they sue the realtor for $1,000,000. The limits on his auto policy are only $300,000. The agent is personally responsible for any award of damages over $300,000.
By forming a corporation, and properly maintaining it, you can protect your personal assets from all business related liabilities of your staff, and thereby prevent creditors and claimants from going after your personal assets to satisfy business debts or judgments. (Note: there are a few exceptions to this general rule which include personal guarantees, payroll taxes and fraud.)

For more information about formation, maintenance, and taxation, please call or email Joslyn Stuart, Esq. at The Small Business Law Firm, P.C. (805) 778-0206 jstuart@smallbusinesslaw.org