Business Opportunity -- Right Place/Right Time or Too Good to be True?

[ReadySetMillionaire]

***Please do not quote original post.***

***See update in Reply #16***

TL;DR: I have been approached to be a 51% owner and lead title agent for a new title company that has immediate potential to do $1M/year in business; and I can't decide whether it's too good to be true or whether I should pull the trigger.

I'm an attorney in Ohio. I do pretty well working for city government ($66k/year with great benefits) and having my own solo practice on the side.

However, I was recently approached by my best client, who has an incredible network of contacts. Essentially, he is looking to start and fund a title company, the referrals from which will come from two of the three most prominent realtors in my area. They each sell about 250-300 homes per year, and control where title is done in about 60% of those. So you are talking 350-400 closings per year.

I have looked into the state and federal laws about this business model, and this referral arrangement is legal. It requires disclosures, but agencies referring clients to their own title company is becoming more commonplace (Howard Hanna just recently started "Barristers" under the same referral system).

My general understanding is that the title company brings in an average of $2,500 per transaction. That number times 400 closings per year means that this has strong potential to be a $1M business.

Here is the most interesting part -- the title agent (me) MUST be the 51% owner of the business. We estimate overhead to be about $300k per year. My 51% share would be a comical amount of money that I never would have dreamed of making.

So, I would be 51%, my client and each realtor would own 16.33% each. If profits are $700k/year, they make more than $100k just from referring titles here. And then the goal is to sell the business in 10 years, and it could be worth a ton.

Part of me feels that this business opportunity is the product of all of my networking in my career, and doing a great job for my best client. I've always been told the way to make money as an attorney is do good work and then leverage those relationships into business opportunities, so here it is.

Another side of me feels that this is too good to be true. We are talking about me making $200k plus right away. I'd also have to learn title work, although I have a general understanding of the work, and the plan is to bring on an independent contractor consultant for 12-18 months to get things up and running.

Perhaps my biggest concern is that my success depends on these realtors. Maybe their own parent companies start title agencies and make them go there; and if that happens, who knows what we do. The success of the business depends on them almost more than it does me.

FWIW, even if I join this business, I have been given the green light to keep my practice open. That makes somewhere around $50-60k a year. So there's always an escape hatch.

Just wondering what everyone's thoughts are. This was all presented in a three hour meeting yesterday and I feel pretty overwhelmed.

[SwordGuy]

Seems like a plausible option.   People with good business ideas look for the right kind of people to work with.

How much cash are they putting into the business to get it going?   That gives you an understanding of their level of commitment to it.

Make sure you subtract cost of office space, utilities, office staff,  etc., from those numbers!

To me, this is the big question:

1) Is this something you would WANT to do?

2) What if it failed miserably?   What if the numbers of transactions disappeared right away for the reasons you mentioned?   How bad would it be?   What could you to do to mitigate that risk?

If you would want to do this and you can walk away from a failure without screwing your future prospects, I say go for it.

[BECABECA]

To me, one of the benefits of being mustachian is having the runway to try out things like this that have the potential to be much bigger than your current career but aren’t a sure thing. I’d go for it, for a couple reasons:
1. The person you’d be starting this with is your best client. I assume he’s your best client because your history with him has been good, he’s shown himself to be reasonable, competent, dependable. For startups, the team is almost more important than the business idea.
2. Making that kind of money as an attorney is not unheard of, it just sounds crazy to you right now because you’ve been working in government for so long. But while it has the potential to make you that kind of money, assume it’ll take a couple years before it grows to that.
3. You can keep your side business going and have an alternate source of income as a hedge.
4. The realtors referring to your company are attractively incentivized to do so in your business model. That’s key... if everybody involved wins, then the business is much more likely to do well. Make sure everybody always feels they’re getting a good deal by continuing the business relationship.

Other things to consider: what are the capital costs required for starting up, and who is putting that up?

I wouldn’t worry too much about learning title work, I’m sure you’re a quick study, plus having access to a consultant for anything tricky will make the transition much easier.

Exciting!

[ReadySetMillionaire]

Seems like a plausible option.   People with good business ideas look for the right kind of people to work with.

How much cash are they putting into the business to get it going?   That gives you an understanding of their level of commitment to it.

Make sure you subtract cost of office space, utilities, office staff,  etc., from those numbers!

To me, this is the big question:

1) Is this something you would WANT to do?

2) What if it failed miserably?   What if the numbers of transactions disappeared right away for the reasons you mentioned?   How bad would it be?   What could you to do to mitigate that risk?

If you would want to do this and you can walk away from a failure without screwing your future prospects, I say go for it.

They are putting up quite a bit. I would say at least $50,000.

I never thought I would do title work, but I do think I would like the "checklist" nature of it and the fact that you get done with clients quickly (litigation clients eventually hate you over time). On the other hand, I'm not sure if it would get boring doing the same thing every day. I just don't know.

If it failed, I have my solo practice. It's kind of the same analysis when I took the city job in February -- it's always there to make $60kish at worst.

[Papa bear]

If you have a fall back option, doesn’t derail your savings, and this stays conservative and low overhead, take the risk.  Sounds like a great opportunity.   Depending on where in Ohio you are, I may even be able to get you some referrals.  It would be good to have someone local. PM me if you go through with this.


Sent from my iPhone using Tapatalk

[shingy]

Seems like it could be a very solid opportunity. I just have one question: are they asking you to contribute cash as well? If so, how much?

[jjones1438]

Short Answer - not a good idea in the structure you have been presented. Longer answer below.

I don't think I would have a problem with this as one of the buyers/sellers, unless the fee structure of doing the title work at your place is NOT in line with the going rate in the market as that would be a red flag to me.

OTOH, I don't know a ton about this line of work, but the general feedback I have heard is that title companies take on a LOT of risk to make their $2,500 or so per transaction as you referenced above and at the volume of 400 closings per year, you would want to learn more about what an occasional "error" could cost the business, they will no doubt happen and is part of the risk of owning these businesses.

While it sounds like you have a great feeder of opportunities through these realtors, I'm not a fan of them taking on equity in the business when something could change tomorrow and in the most extreme example, let's say they can no longer bring you business as a result of something out of their hands such as your parent company example above. You now have a silent partner adding no value that owns a portion of the business, that will not end well. Idk about the 3 realtors you mentioned, but it seems realtors move around a lot, from one place to the next, and each of these places have their own rules, regulations, reference book of vendors, etc. When you look at each of these three realtors, do you see that type of background or have them all been with the same firm the last 10-20 years?

One potential alternative arrangement would be you start the title company and each of these realtors receive some sort of commission/fee on each transaction they walk in the door. This aligns their interest as the more they bring to you, the more they make, and if something changes and they bring you nothing, you are not stuck with a silent partner. Assuming you can come up with a fair arrangement, I can't think of any reason they should not like this arrangement (unless they really are interested in owning a piece of the business).

To grow the business, you could then also network with other realtors in the area and encourage them to bring you business as well. I'd pitch the fact that you are an attorney as it could help you stand out from the other 134353 title companies out there. Most realtors are looking for solution providers, if you can continuously perform flawless work for them and their clients, they will start using you more as you earn their trust, build a reputation, etc. I'd personally rather grow the business that way than making it a financial decision for them, but that could be an option as well.

TLDR - If you want to proceed, modify the structure so the realtors are NOT equity partners and work out a different arrangement with them (non-equity), it is not a good long term solution. Survey any business in any sector and having 4 cooks in the kitchen is not a good choice, especially when everyone has different agendas/incentives, etc.

[terran]

Definitely seems like an interesting possibility. Do you know anyone who does title work (preferably who can connect you with a company owner) in another area (such that they wouldn't be a competitor)? It would be good to find out if there's anything you don't know. My biggest concern would be the kind of liability you're exposing yourself to. My understanding is that a title company is basically offering insurance that guarantees the title is marketable. What happens if that turns out not to be the case? Can you get errors and omissions insurance for such a company, or since that's basically the whole point of a title company (guaranteeing no errors or omissions in the title) are you expected to be your own insurer?

Independent of the type of company, there are, of course, all the issues of going into business with partners. Make sure you trust these people as much as you can. Try to nail down all the expectations as much as you can. Who makes decisions and how? Who pays expenses? How are profits distributed? What are the exit options if a partner wants out? I'm sure there are other questions I'm not thinking of.

Another thing that would make me a little nervous is that it kind of sounds like you'll be a 51% owner "for the paperwork," but does that mean any of the other owners expect to have greater control than their ownership stake would justify? That could get ugly if they want a certain level of control that you don't think they're entitled to, even if you're technically right because of your ownership stake.

Edit: other question - not only what happens if a partner wants out early, but also what happens if some/all partners want another partner out early? What if it's all the other partners that want you (the 51% owner) out?

[ReadySetMillionaire]

Seems like it could be a very solid opportunity. I just have one question: are they asking you to contribute cash as well? If so, how much?

I'm not putting up anything, which is obviously nice.

***

I have the same concerns about you when it comes to equity.  That's one of my biggest concerns.  Unfortunately Ohio law prohibits the commission model you suggest -- you cannot give anyone any type of payment for referring you business. Really the only way to compensate realtors is to make them part owners.

My consolation is that I'm a 51% owner. I am sure they will want a super-majority to take certain actions but I have a lot of sway as to how this thing would operate.

I also agree about all the things you need to do to be profitable as a title company. That's a lot of checking and searching and all that.  If the business is going to be this profitable I say hire another lawyer and have literally everything be double-checked.

I think I also have a lot of leverage up front. They need me to get this going.  I think I would negotiate some guarantees the first two years.

[shingy]

The fact that you don't have to put any money up makes this pretty risk free, aside from your time and energy. Assuming you can address the issues mentioned by terran and jjones1438 in a partnership agreement, seems like a great opportunity.

[GoCubsGo]

I wouldn't worry too much about the Realtor end.  My company owns a title company but we do not have to use them (I actually think it isn't legal to force me to use them).  They can't even legally give us referral fees to use the in house company.  Also, why would a realtor work with a company that would force them to use an in house title company.  Top producing Realtors are treated like gold so if anything brokerages would bend over backwards to make them happy.  Some clients of the realtors will have their own attorneys with established title companies, but if you could get 60% that would be great.

I have a couple friends in the title industry and it's super competitive so if for some reason you lost that pipeline from the realtors you'd be in trouble quick. It doesn't look like you make a lot now considering your profession so if you were comfortable with the grind of the work, I think you would make a substantial amount more than you do now.  Get comfortable with the legal risk and the players involved and I'd say go for it.  It sounds like you'd still be marketable in your current area of practice a couple years from now.

[red_pill]

Check out Tim Ferris's Ted Talk on "Fear Setting".  It's an awesome way to take a lot of the fear out of these types of decisions, though it seems like you have already capped the downsides quite nicely.

[MrThatsDifferent]

RSM, as an aside, I’m continuously amazed at your energy. I have no idea where you’re getting this from? From what I can tell, you have two jobs, a family with 2 kids (or a second on the way), and you might go into a partnership for an 8 unit building, and now you want to start a title company. That’s a lot of spinning plates.  It feels like too much for one person to be good at all of those things, without some cost. Hopefully your young family and wife are getting enough of you. Hopefully details don’t get missed with clients. Hopefully you have time for yourself. There are lots of opportunities out there, it doesn’t mean picking every one of them up. It’s not just about making money either, it’s about doing things you care about and filling your life with what fuels you. You’re not currently hurting financially. The way your wheels spin I can’t imagine you not working at something, there is no rush. There is value, comfort and strength in identifying the most important things and giving them your full focused. Stretch yourself too thin and you or something dear to you could break.

[slappy]

RSM, as an aside, I’m continuously amazed at your energy. I have no idea where you’re getting this from? From what I can tell, you have two jobs, a family with 2 kids (or a second on the way), and you might go into a partnership for an 8 unit building, and now you want to start a title company. That’s a lot of spinning plates.  It feels like too much for one person to be good at all of those things, without some cost. Hopefully your young family and wife are getting enough of you. Hopefully details don’t get missed with clients. Hopefully you have time for yourself. There are lots of opportunities out there, it doesn’t mean picking every one of them up. It’s not just about making money either, it’s about doing things you care about and filling your life with what fuels you. You’re not currently hurting financially. The way your wheels spin I can’t imagine you not working at something, there is no rush. There is value, comfort and strength in identifying the most important things and giving them your full focused. Stretch yourself too thin and you or something dear to you could break.

I don't know about this poster, but I have a very good friend in almost this same situation. He is a landlord, owns a real estate company, two young children. He seems to be doing well, although feeling a little stretched thin lately.

OP, I don't know much about title companies, except that I just shopped around for a cheaper one than my mortgage company was offering. I guess that makes me a 51% expert. ;) Couple of quick questions-the title company is different than title insurance right? A couple of posters have mentioned the risk you take on, but isn't some of that risk transferred to the title insurance company? Also, you don't get to keep the full amount of the closing costs, right? In my refi, the closing fee was only a few hundred dollars of the whole closing cost amount. Just curious if your potential income numbers are accurate.

[Fuzz]

1) Call a company that sells insurance to title companies--can you get insurance to do title work? At what cost?
2) Call a broker that sells title companies in another part of the Ohio; ask the broker to introduce you to someone who recently sold a title company. Send him/her a box of pears since you can't buy coffee. Ask questions.

This is way more interesting IMO than working for the town. YOLO. That said, it does not seem to be an innate interest of yours either.

3) Think really, really hard about that operating agreement. If I were the realtors, I would want more than 16%. If I were you, I'd want non-competes/guarantees.

Lots of people start small businesses and that gross 1m/year. Why not you?

[Malum Prohibitum]

I just refinanced.  I paid about four hundred bucks for title.  I shopped around, and it was about the same everywhere.  Are folks in Ohio really paying $2500 on average?  If so, why has somebody not undercut that number?

Do you know what it is your business actually does?

As an attorney, are you familiar with what happens later when there is a title issue, that is, who pays?

Is your company just doing title searches?  You have to pay somebody to drive around to various counties and search title. 

Is there an indemnity provision with the title insurance company if you make a mistake and the title insurance must pay?

Title mistakes and later payments are more common than you might think.

[ReadySetMillionaire]

First, answering the questions, and second, an update.

Answers to Above Questions

@Malum Prohibitum -- I've done a lot of research on this, and I have found that the average for each title issued on a new purchase is about $2,000 - $2,200.  The key here is that this potential title company does the title exam (i.e., pulling the deeds), the title report, and the deed prep, which increases revenues (most title companies outsource the exam and deed prep).  Title exams on refinances are always significantly lower.

Regarding insurance stuff, honestly, I have not come across that yet. My understanding is that you have insurance just like you have malpractice insurance, and you do a damn good job to make sure no issues ever arise.

***

@Fuzz -- Thanks for the advice. I tried calling a few places and title company stuff is just a black box. And I agree about the operating agreement. That is the big catch here.

***

@MrThatsDifferent -- Thanks for the advice. One of my general life philosophies is to make myself an entity of its own, and create multiple income streams. Right now I have my solo practice and my city job. Both are pretty easy. I also have a blog, which I started and then stopped. I plan to do a four-day retreat and write the whole thing, then let it sit and see if it makes money. Then maybe incorporate it into a book. And yes, I also have the rentals, which I am starting next spring.

It's a lot but, the way I see it, each one of these things gives me a little bit of temporary FI -- I can pull back from any of them if they annoy me. For instance, the blog became a time suck, so I stopped. I'll start it up again. My solo practice also ebbs and flows.

************

Update

So, I've found out what the catch is. Because I would legally have to be the 51% owner of the title company, the investor and other realtors want to start a rental property company (separate from the one I just mentioned above). The idea is that the income from the title company goes up to a holding company, and said holding company also owns the rental company. And at this holding company, we could equal everything out.

They want me to invest $75,000 for 20% equity in the rental company. Each of them would invest a proportionate amount for the remaining 80% equity.

I have pushed back on this because, to me, "equaling" everything in some separate business is a complete fiction. They are all completely passive in the title company and, if revenue projections are accurate, they will get $50,000 per year for doing basically nothing. Why do we need to do a rental company?

To me, there are other corporate levers to pull. We can put them on a small salary as "business consultants" to increase their cut. We can require super-majority voting. We can give the investor a note with a nice interest rate. Why are we trying to start a $2M rental business to "even" things out?

***

What is keeping me interested is that, basically, the title company would be set up so that I have to work about 15 hours per week. There is another title agent who is lower 60s and just wants to be an employee who will do most of the work. We plan to hire three staff. The thought is this is a machine that runs on its own, and all I have to do is review things at the end. Literally everything else is prepared for me or outsourced.

If the numbers are right, my share of profits is at least $120k and closer to $160k. I could reduce my city job down to 30 hours (still keep the amazing benefits at 30 hours) and use that extra time for the title company. Then my practice would greatly diminish, but would be there only for 2-3 clients and possibly other big cases.

We are having another meeting tonight and I'm really torn. Paging the above posters, and @Laura33 , @FIREby35 , and @Finances_With_Purpose for input.

[Laura33]

Hey, thanks for the page.  Alas, I can be of little to no help here.  Title work is one of those areas that scares the hell out of me, because it requires a meticulous attention to detail, with huge consequences if you get it wrong.  But for someone with a different skill set and higher risk tolerance, it may be a good opportunity.  I can't advise on the corporate issues, either, but I think that comes down to just negotiating something that feels fair to you.

Honestly, I think you might as well go for it.  You seem to like change and the excitement of new opportunities, from going out on your own, to the partnership, to breaking up the partnership, to the city opportunity, to now this.  You seem to have a lot of hustle in you and to thrive on those kinds of challenges.  So why not take a chance and see if this can provide a good income stream for you with minimal additional effort on your part?  It may work, it may not, but either way you'll learn something from the experience that you can take to your next opportunity. 

[robartsd]

To me this comes down to how much liability you are taking on and how you feel about the risk/reward. You should be compensated for your time at least as well as you can earn in your private practice in addition to your compensation for taking on the liability. Of course your partners would also have their share of the liability, trusting your diligence to mitigate that risk.

This plan also relies on a key employee who is nearing retirement. How would you handle suddenly losing this employee? Sounds like your partners have already identified him and either they are not comfortable offering him the deal they are offering you or he was approached and is not interested in taking the deal. I'd want to understand why.

You mentioned that your overall plan has been to do good work and build relationships but that litigation work often ends up with clients not liking you by the end of it. I imagine that title work has so little interaction with the clients that you don't really build a relationship with most of them. You will have your relationship with your partners and staff; your partners will be the ones with a relationship with the clients that they refer. Title work itself sounds like a grind to me, but your role will be more in managing the work.

[FIREby35]

I personally don't know much about titles. But, an older attorney's I know owns a title company, right next to his law firm on "Main Street" in a small town. As far as I can tell, he does well and he has for many, many years.

Also, to me detailed paperwork is easy to train employees to do. Make check lists and systems and train them up. You won't be the first title company, so copying the smartest ideas already out there should be easy enough. If you get lucky, you can have someone work for you for 20 years that knows more about titles than you by the end.

Also, I've always felt that if you are going to be in business, it's best to make sure you are in control of the business. Business partners with an ownership interest, have never been an amplifier for me. In fact, quite the opposite. So, whenever I engage in business agreements I structure them as joint-venture or co-counsel agreements that are made one at a time and for a limited purpose. Those have been successful. As of today, I do not foresee sharing equity of any business with anyone - even less a passive partner.

When non-lawyers ask to get in business with legal stuff, I just tell them, "The bar says I can't split fees with non-lawyers." That is basically true, but really I just don't want a business partner!

Anyway, its been a while since I even checked these forums. I'm glad to see everyone is still kicking!

[ReadySetMillionaire]

Another meeting down.  I finally got the investor to back down on the real estate company and focus on making a deal within the title company.

He basically wants to make everything 1/3, 1/3, and 1/3.  Crunching numbers this puts me at making about $125k/year for 1,000 hours of work.

That obviously sounds great, but I am a bit annoyed that two passive persons will be making the same as I would.  The investor would be investing $100k and, if projections are right, will make an immediate 25% return; and then will make that in spades indefinitely.  The real estate agent does not need to do any additional work; he just needs to send the title work to the title company, pass go, and collect his money.

I tried negotiating $100 to my private practice for each deed prep, but that got shot down.  I am going to keep bringing that up because I think it is fair.

I am really torn about this.  As @Laura33 correctly points out, I love new ventures and starting a business. And as @FIREby35 correctly states, the thought of implementing a checklist/system machine intrigues me.

BUT, my life is really easy and pleasant right now. The city job has its frustrations but is mostly a laughable cake walk that pays $66k/year with $16k pitched in for retirement and the best healthcare available ($500 total out of pocket!). Then my solo practice is basically on auto-pilot making $4-5k/month.  I go there on Wednesdays and Sundays and it works.

So, this is not like most of my past situations where I am unhappy and looking for a change. I'm generally content right now. But, the thought of adding another revenue stream, starting a new business, etc. excites me.

Really, really torn. They are looking for a decision by next week.

[Laura33]

That obviously sounds great, but I am a bit annoyed that two passive persons will be making the same as I would.  The investor would be investing $100k and, if projections are right, will make an immediate 25% return; and then will make that in spades indefinitely.  The real estate agent does not need to do any additional work; he just needs to send the title work to the title company, pass go, and collect his money.

Welcome to capitalism.  ;-)  The investor is being rewarded for the risk he is taking with that $100K of his capital, not for any actual work he is doing personally.  The RE agent, meanwhile, is being rewarded for his role as rainmaker and has brilliantly managed to find a way to significantly increase his revenue from the work he is already doing without actually increasing his workload at all.  The worker bee is at the bottom of the pyramid; he's the only one who gets rewarded solely for his labor. 

The answer, of course, is to figure out how to be one of the other two guys.  ;-)

[robartsd]

Another meeting down.  I finally got the investor to back down on the real estate company and focus on making a deal within the title company.

He basically wants to make everything 1/3, 1/3, and 1/3.  Crunching numbers this puts me at making about $125k/year for 1,000 hours of work.

Is this with them providing all the startup capital? How would you manage liability? If you have an equal share of the liability and investment costs, you deserve equal share of the profits AFTER compensating you for your time. A $50k salary in addition to your share of the profits would be a bargain for them.

I thought there were to be 5 partners total: you, your best client, and three real estate agents.

[ReadySetMillionaire]

Another meeting down.  I finally got the investor to back down on the real estate company and focus on making a deal within the title company.

He basically wants to make everything 1/3, 1/3, and 1/3.  Crunching numbers this puts me at making about $125k/year for 1,000 hours of work.

Is this with them providing all the startup capital? How would you manage liability? If you have an equal share of the liability and investment costs, you deserve equal share of the profits AFTER compensating you for your time. A $50k salary in addition to your share of the profits would be a bargain for them.

I thought there were to be 5 partners total: you, your best client, and three real estate agents.

This is *the* issue for me @robartsd .  It's an even third, third, third.  My "salary" would be included in my "third." Basically, at the end of the day, everyone gets the same amount of Cheerios in their bowl.

I totally get @Laura33 's sentiment regarding capitalism, but this is not a fair deal when they are effectively completely passive.

[FIREby35]

Another meeting down.  I finally got the investor to back down on the real estate company and focus on making a deal within the title company.

He basically wants to make everything 1/3, 1/3, and 1/3.  Crunching numbers this puts me at making about $125k/year for 1,000 hours of work.

Is this with them providing all the startup capital? How would you manage liability? If you have an equal share of the liability and investment costs, you deserve equal share of the profits AFTER compensating you for your time. A $50k salary in addition to your share of the profits would be a bargain for them.

I thought there were to be 5 partners total: you, your best client, and three real estate agents.

This is *the* issue for me @robartsd .  It's an even third, third, third.  My "salary" would be included in my "third." Basically, at the end of the day, everyone gets the same amount of Cheerios in their bowl.

I totally get @Laura33 's sentiment regarding capitalism, but this is not a fair deal when they are effectively completely passive.

Echoing Laura, and you, "fair don't mean nothin'!"

Only time I can get someone to listen to what's fair is when I'm arguing before a jury. Otherwise, it appears to be a dog-eat-dog world.

[ReadySetMillionaire]

So here’s an interesting development. I was doing my due diligence and was looking at RESPA — what it allows, what it prohibits, etc.

Here’s a basic article about it — https://www.nar.realtor/ae/manage-your-association/association-policy/following-respa-rules

Speaking extremely generally, RESPA prohibits a realtor from getting “anything of value” for referring to the title company. The realtor cannot force the purchaser to use said title company, and the title company cannot pay “anything of value” for the referral.

In my case, I own 51%, the realtors own 16.33%, and the investor owns 16.33%.

BUT, as I stated, the goal is to “even up” and make everyone a 1/3 owner (one realtor is not an owner of this holding Corp; just one of the realtors). The theory being exactly what @Laura33 stated — the realtors are sending the leads.

However, and I have not researched this, but giving him well above his actual ownership interest certainly seems to be a thing of value. It is not like a straight commission, but it would be an accounting cartwheel to give him 33.33% of profits when he is actually a 16.33% owner; and what is illegal generally cannot be made legal.

I’m not sure if it would ever get caught but the consequences would be absolutely dire.

Am I being overly skeptical or am I into a huge issue here? Paging my fellow lawyers @Laura33 , @FIREby35 , @TVRodriguez , etc.

[FIFoFum]

I usually lurk on these things, and you've gotten good advice so far.

But chiming in: I am SUPER skeptical about all of this.

I'm skeptical about the proposed third-third-third and no salary arrangement. This has tax consequences for the entity and for you. More importantly, it has order of distribution and creditor rights issues related to when you actually get paid for labor performed.

I'm skeptical about you taking on all the risk of liability (the heart of why there is ANY money being paid for this work being done) with this group of investors, given everything else you've said about them.

I'm skeptical about it being above board for the realtor.

I'm skeptical about governance in small businesses with this split of money and labor and the # of people (either it will be prone to deadlock or someone is likely to get very screwed when any number of normal events happen).

I'm skeptical of how you will do legal work and fee share for it (although jurisdictions differ).

I'm not in your jurisdiction, YMMV, but nothing you've shared here suggests this is a good opportunity for you. You're a hustler and you work in details. It sounds like these people maybe...don't? And want a quick buck and are trying to draw you in with the promise of that. 

[iluvzbeach]

Yes, this!! ^^^

[Bloop Bloop]

Excuse the crudeness, but let me put my views to you straight. I'm a self-employed lawyer and I eat what I kill. That's the principal reason I'm self-employed. If I wanted to be someone else's lackey making someone else rich then I'd still be an employee and at least I'd have the benefits of being an employee (like sick leave).

Never accept an arrangement where someone takes a share of your profit for doing nothing.

[ReadySetMillionaire]

@fefifofum and @Bloop Bloop — you have both explained my concerns, although much more eloquently than I could.

The 1/3 stuff makes theoretical sense — one is the investor, one brings in the deals, and I do the work. But as I have stated to them multiple times, they are completely passive when it comes to the actual business.

I might be able to push back on this with the RESPA issue I raised above, although that might be a poison pill to the entire deal.

Lunch today to talk things over with the investor and former title agent.

[Omy]

I usually lurk on these things, and you've gotten good advice so far.

But chiming in: I am SUPER skeptical about all of this.

I'm skeptical about the proposed third-third-third and no salary arrangement. This has tax consequences for the entity and for you. More importantly, it has order of distribution and creditor rights issues related to when you actually get paid for labor performed.

I'm skeptical about you taking on all the risk of liability (the heart of why there is ANY money being paid for this work being done) with this group of investors, given everything else you've said about them.

I'm skeptical about it being above board for the realtor.

I'm skeptical about governance in small businesses with this split of money and labor and the # of people (either it will be prone to deadlock or someone is likely to get very screwed when any number of normal events happen).

I'm skeptical of how you will do legal work and fee share for it (although jurisdictions differ).

I'm not in your jurisdiction, YMMV, but nothing you've shared here suggests this is a good opportunity for you. You're a hustler and you work in details. It sounds like these people maybe...don't? And want a quick buck and are trying to draw you in with the promise of that.

100% this^.

I recommend talking to a few title attorneys to see what they say about risk and reward (and how much hassle this job entails) since this isn't your area of expertise. As a former realtor who worked closely with title attorneys for 15 years, I don't see any scenario where you will be making tons of money for only 15 hours of work per week.

[terran]

So here’s an interesting development. I was doing my due diligence and was looking at RESPA — what it allows, what it prohibits, etc.

Here’s a basic article about it — https://www.nar.realtor/ae/manage-your-association/association-policy/following-respa-rules

...

I’m not sure if it would ever get caught but the consequences would be absolutely dire.
...

I could be wrong, but isn't this just a policy of the National Association of Realtors? Not all real estate agents are realtors, and even if the one you're working with is I'm not sure "the consequences would be absolutely dire" if they got kicked out. It might mess with their marketing a little, but really it would just boil down to not being able to call themself a realtor and getting kicked out a professional organization. It's not like they'd lose their license or anything (unless I'm misunderstanding and this is a law, not a professional organization policy).

[ReadySetMillionaire]

So here’s an interesting development. I was doing my due diligence and was looking at RESPA — what it allows, what it prohibits, etc.

Here’s a basic article about it — https://www.nar.realtor/ae/manage-your-association/association-policy/following-respa-rules

...

I’m not sure if it would ever get caught but the consequences would be absolutely dire.
...

I could be wrong, but isn't this just a policy of the National Association of Realtors? Not all real estate agents are realtors, and even if the one you're working with is I'm not sure "the consequences would be absolutely dire" if they got kicked out. It might mess with their marketing a little, but really it would just boil down to not being able to call themself a realtor and getting kicked out a professional organization. It's not like they'd lose their license or anything (unless I'm misunderstanding and this is a law, not a professional organization policy).

RESPA is federal law. Violations include fines up to $10,000 and up to one year in prison. All involved are jointly and severally liable. And, while I do not practice white collar criminal defense, the kicking up to a holding corporation, dividing assets from there, etc. probably implicates the wire fraud statutes.

[yachi]

So here’s an interesting development. I was doing my due diligence and was looking at RESPA — what it allows, what it prohibits, etc.

Here’s a basic article about it — https://www.nar.realtor/ae/manage-your-association/association-policy/following-respa-rules

...

I’m not sure if it would ever get caught but the consequences would be absolutely dire.
...

I could be wrong, but isn't this just a policy of the National Association of Realtors? Not all real estate agents are realtors, and even if the one you're working with is I'm not sure "the consequences would be absolutely dire" if they got kicked out. It might mess with their marketing a little, but really it would just boil down to not being able to call themself a realtor and getting kicked out a professional organization. It's not like they'd lose their license or anything (unless I'm misunderstanding and this is a law, not a professional organization policy).

RESPA is federal law. Violations include fines up to $10,000 and up to one year in prison. All involved are jointly and severally liable. And, while I do not practice white collar criminal defense, the kicking up to a holding corporation, dividing assets from there, etc. probably implicates the wire fraud statutes.

Would Disbarment follow as well?  I wouldn't want to risk your other income sources for this one.

[ReadySetMillionaire]

Would Disbarment follow as well?  I wouldn't want to risk your other income sources for this one.

I cannot tell whether violation of RESPA is a felony; but generally, entering a plea to a felony causes an almost automatic indefinite forfeiture of your law license.

***

Again, my issue is whether I'm taking crazy pills about this RESPA issue.  For the lawyers in here, check out 12 USC 2607(c) and 24 CFR 3500.15.

[robartsd]

Unless they are willing to do this legit by all the rules, it would be a hard no for me. I could see offering labor in lieu of capitol to purchase your share of the business and foregoing salary, but I'd rather the capital and ownership aligned and labor was compensated as an employee at a reasonable rate.

[yachi]

So here’s an interesting development. I was doing my due diligence and was looking at RESPA — what it allows, what it prohibits, etc.

Here’s a basic article about it — https://www.nar.realtor/ae/manage-your-association/association-policy/following-respa-rules

Speaking extremely generally, RESPA prohibits a realtor from getting “anything of value” for referring to the title company. The realtor cannot force the purchaser to use said title company, and the title company cannot pay “anything of value” for the referral.

In my case, I own 51%, the realtors own 16.33%, and the investor owns 16.33%.

BUT, as I stated, the goal is to “even up” and make everyone a 1/3 owner (one realtor is not an owner of this holding Corp; just one of the realtors). The theory being exactly what @Laura33 stated — the realtors are sending the leads.

However, and I have not researched this, but giving him well above his actual ownership interest certainly seems to be a thing of value. It is not like a straight commission, but it would be an accounting cartwheel to give him 33.33% of profits when he is actually a 16.33% owner; and what is illegal generally cannot be made legal.

I’m not sure if it would ever get caught but the consequences would be absolutely dire.

Am I being overly skeptical or am I into a huge issue here? Paging my fellow lawyers @Laura33 , @FIREby35 , @TVRodriguez , etc.

The good news is that a real estate broker can be the owner of a title company, and refer clients to it, as described lower in your link.  I agree that the 33.33% vs 16.33% can't easily be explained when you are required to be 51% owner. 

Affiliated Business Arrangements
    Real estate brokers and agents are permitted to own an interest in a settlement service company, such as a mortgage brokerage or title company, so long as the real estate broker/agent:
    Discloses its relationship with the joint venture company when it refers a customer to the mortgage broker or title company;
    Does not require the customer to use the joint venture mortgage broker or title company as a condition for the sale or purchase of a home; and
    Does not receive any payments from the joint venture company other than a return on its ownership interest in the company. These payments cannot vary based on the volume of referrals to the joint venture company.
    The joint venture mortgage broker or title company must be a bona fide, stand-alone business with sufficient capital, employees, and separate office space, and must perform core services associated with that industry.

[Fuzz]

You might cut the other investor out. $100K is not that much money/start up capital. Not worth the headache, unless the partner brings something else to the table. You could get a loan for that much. You probably also don't need that much either (IIRC you run your lawfirm on a shoestring of google products).

That said, I would have zero problem paying the realtors a generous percentage of sales they refer (up to 1/3). I disagree with the idea they're not doing the work--they are actually doing the important work--getting the sales.

[ReadySetMillionaire]

You might cut the other investor out. $100K is not that much money/start up capital. Not worth the headache, unless the partner brings something else to the table. You could get a loan for that much. You probably also don't need that much either (IIRC you run your lawfirm on a shoestring of google products).

That said, I would have zero problem paying the realtors a generous percentage of sales they refer (up to 1/3). I disagree with the idea they're not doing the work--they are actually doing the important work--getting the sales.

I totally agree about cutting the investor out. But, he is my best client, and he is the one connecting me with the realtors, so I can’t quite pull that trigger.

The issue with your second paragraph is that per Ohio law, the title agent must own a “controlling interest” (51%) in the title company. That leaves 49% of equity left over.

[LWYRUP]

I am a commercial real estate lawyer.  My two cents, I wouldn't bother.

Thanks but no thanks.  Wait a few years.  If you still have an itch to do title work, just start your own title company.  100% you.  You're smart.  You'll find referrals. 

Big NOPE to two other people trying to take 67% of my business when I'm doing the work.   

[ReadySetMillionaire]

I've ultimately decided to pass up on this and advised the investor/realtors yesterday.

We had a meeting Friday and I advised of the RESPA concerns I had.  Their response was to concoct some sort of "management company" that would, of course, bill the title company work and thus dilute its value.

I was growing tired of the entire thing.  The initial idea was great -- one realtor, one lawyer, two staff, small little title company that we could do on the side.  That morphed into three realtors, significant staff, and all the other stuff I've brought up.

Guess I'll just wait for the next opportunity to come around.

[terran]

I'm with @LWYRUP, if this seems like an interesting direction for you, why not start your own title company? Or were the "guaranteed" referrals what really made it interesting to you?