Is this creative or illegal?? - Posted by Jeff

Real Estate Investing Real Estate Law
1

Posted by Jeff on May 09, 2004 at 18:32:45:

Thanks for the response traveler…

As for the motivation for doing the deal in this structure, if you were borrowing 80% LTV, you’d have to put up 20% down. If you could structure the deal such that you could get the cash back immediately, you would now own real estate at “no money down”.
That’s the goal.

Of course you can always (1) refinance later, or (2) get your money back when you sell, but if you refinance, there is a cost to get any new loan (and a process that may take time). Selling is not usually an immediate goal, especially if you’re concerned about taxes, so getting money on a sale is a temporary fix.

The goal of this would be a “no money down” purchase method, where you can keep cash in your pocket to acquire even more deals. Or, even better, add to that cash in your pocket to buy more.

That’s my understanding.

Discussion / comments welcome.

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Is this creative or illegal?? - Posted by Jeff

Posted by Jeff on May 07, 2004 at 24:12:26:

I posted this on the lender forum, but then I thought that I’d “run it by the legal department” here…

OK.

I’ve heard of this technique, and I’m wondering if it is (1) legit, (2) legal, and (3) workable.

Three parties are involved - Seller, Buyer, and “Party 3”.

The Seller has a home he is willing to sell for $100K. The property will appraise for $200K.
The Seller sells an option to “Party 3” to sell the home for $100K in the next 90 days.
The Buyer agrees to buy the property from the Seller for $200K.

So, under that scenario, the Buyer has to come up with $200K, which is $100K each for the Seller and “Party 3”.

Now, here is the question - can “Party 3” and the Buyer be related in any way, shape or form? Can “Party 3” be the Buyer’s LLC? Distant cousin? Does any of this reek of self-dealing?

I hope I laid out this clearly enough - two separate deals (Buyer / Seller, Seller / Party 3).

I have never done this personally, but I have heard of it being done and I want to know what shaky ground (if any) this is founded upon.

Thanks in advance for your thoughts.

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Re: Is this creative or illegal?? - Posted by Keith

Posted by Keith on May 08, 2004 at 13:27:40:

I’m not an attorney but I don’t know how it is possible to have a sales contract with 2 different parties for the same house. Party 3 has an option to purchase the property. How can you then sell the property to another party (Buyer) without defaulting on Party 3’s option to purchase it from you.

Maybe I’m confused.

Waht exactly are you trying to accomplish ?

Keith

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Re: Is this creative or illegal?? - Posted by Jeff

Posted by Jeff on May 08, 2004 at 19:06:35:

Nor am I an attorney, but this is how this was posed to me…

“Party 3” places an option on HOUSE with Seller.

Buyer places contract to buy HOUSE from Seller, but at a larger dollar amount than the option price.

At closing, money goes from Buyer to “Party 3” to pay off both the option and also as “option consideration” (difference between option price and sales contract).

The example I’ve heard (but not done, since I’m not sure it’s all ok) is that your C-Corp or LLC is “Party 3”, and YOU are the Buyer. So you get a loan for, say, 80% LTV, and the C-Corp holds an option of say 50% LTV. The 30% goes “in your pocket”, so to speak, in that you get 80% of the HOUSE value (80% LTV), but only really pay 50%.

Some things do have to happen, like you do have to bring 20% to the closing table (since you have a loan of 80%), but you get it right back in the form of the 30% to your company.

I hope this helps to explain what this is trying to do - max out the LTV, and put cash in your pocket at close.

So again, legal or not?

I’m not an attorney but I don’t know how it is possible to have a sales
contract with 2 different parties for the same house. Party 3 has an
option to purchase the property. How can you then sell the property to
another party (Buyer) without defaulting on Party 3’s option to
purchase it from you.

Maybe I’m confused.

Waht exactly are you trying to accomplish ?

Keith

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Re: Is this creative or illegal?? - Posted by Tom-FL

Posted by Tom-FL on May 08, 2004 at 20:56:40:

I’m not a lawyer, but that sure doesn’t seem to pass the sniff test.

It sounds like you are buying a house for 100K and defrauding the bank into thinking you are paying 200K and putting the difference in your pocket.

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Re: Is this creative or illegal?? - Posted by Jeff

Posted by Jeff on May 09, 2004 at 24:26:16:

Maybe I should ask an attorney about this, because it is a technique that seems to be pushing the envelope…

Technically, you’re dealing with an option and a contract with what is supposed to be a neutral third party. But if that party isn’t really neutral, then I guess it becomes an issue… Could it be legal? Could it not? That’s why I asked. And as for standing on technicalities, many court cases are won and lost on just that - technicalities (I believe I heard Bill Bronchick say just that).

If anyone knows definitively, I’d sure like to hear more.

Again, if this is legal, it would be a nice card to add to the deck of possibilities of dealing in real estate. If it isn’t, I leave the marked cards at home.

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Re: Is this creative or illegal?? - Posted by Traveler newbie

Posted by Traveler newbie on May 09, 2004 at 03:33:20:

I still new to this but I don’t understand why you would go to this trouble. If your planing on keeping it why not just buy it for 100K and refin later for 160k(80%ltv) and put 60k in your pocket instead of 30k, or if you plan on selling sell for 160-180k and put more in your pocket and then you don’t have to worry if it legal because the above is definently legal but like I said I am new so maybe i’m missing the point.