A friend of mine is willing to sell five of his rental properties to me
at market value with the option to buy. He will buy back the property in
6 months at the same price . During the 6 months when the property is in
my name he will make all mortgage payments. In return he will pay me a
sum of money. His main objective is to pull the equity out of the
property and still keep them. When I ask him why not refinance the
property his response was, since these are my rental properties he can
only pull 80 percent of equity out of the property. He will take care
all closing cost!
My question for you guys, is this legal?
what are the tax consequences on my behalf?
Will this hurt me in any way?
Could you tell me the pros and cons of this transaction?
Please advise,your attention to this matter is greatly appreciated.
Posted by Randy (SD) on August 04, 2005 at 11:39:08:
He wants to sell you five of his rental properties at market value… Okay cool nothing wrong with that.
He wants an option to buy the properties in six months at the same price… it’s OK, still nothing wrong with that
He will make your mortgage payments… no, he can lease the properties from you after the sale and make rental payments to you, you make your own mortgage payments.
In return he will pay you a sum of money… then he’s not buying them back at the same price, increase his purchase price, collect an option consideration (nonrefundable) if he does not exercise his option he loses his option consideration.
He will take care of all closing costs… nothing wrong with that, the seller can pay the closing costs on the sale.
You ask if this is legal… the way you are proposing it as one all-inclusive agreement, no it’s not. While there does not appear to be any glaring illegalities the “intent” does present problems particularly when he goes to exercise his option, remember the previous sale and all documentation is open for the world to see.
The tax consequences to you… you will pay income taxes as ordinary income at your prevailing tax rate on any profits minus any expenses = your option consideration less depreciation, real estate taxes paid, interest paid, maintenance and upkeep etc. etc. which if you document may cancel out any potential tax liability.
Will this hurt you in any way… it could, it may deplete your ability to qualify for other financing should you find another deal. You may be forced to take legal action should your lease option tenant default on the lease. You must maintain control of the tenants currently occupying these rental properties, make sure you have valid leases, rents are paid to you or you have a blanket all-inclusive lease option contract where he collects rents from the tenants and pays a blanket lease payment to you etc. etc.
The point is you must make this separate transactions, one not contingent on the other. First he sells you the property. You can choose to lease your properties to anyone you want. If shortly after buying these properties you choose to accept a lease option contract from a “potential” buyer and give that buyer six months to exercise his option, no harm no foul.
What he is doing is trying to fool the federally insured bank to think he is doing something else, in order to make more profits. He is lying on forms that require him to swear under penalty of perjury that he is telling the truth.
It breaks several serious laws. It could get you 10 years or more in jail.
If you ary trying to rob the bank, why not just go in the front door and hold a gun to the teller?
W/out more info, it looks to me like you’d be making a very high risk loan, perhaps @ an usurious rate. Do you have exit strategies if he doesn’t (1) make the payments, & (2) buy the houses back. Anytime y ou make $$$ there are tax consequences. I’d consult both an attorney & a CPA, both well-versed in REI.
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