Posted by Kristine-CA on September 26, 2002 at 16:10:54:
Shawn has a good point here. Ask the seller what he needs. Sounds like he is already fully depreciated on this property and doesn’t want to pay out any cash when he sells. If his goal is to not pay capital gains out of pocket find out what he needs to come out even.
PLEASE SOMEONE I NEED ADVICE FAST! - Posted by Tim Peris
Posted by Tim Peris on September 26, 2002 at 14:09:37:
I have found a house where the seller owns outright, and has done some work to the house , but house still requires probably 7-8000 in repairs/updating. The seller asking price is 63k house is worth 80-85 fixed up. Seller wants 15-20k down and wants to do a land contract for the rest. Have not discussed terms yet. I do not have the money for the downpayment he wants, I wish he wanted all cash because I have a 100k line of credit available to me. How can I structure this deal. How much should I offer, and can I utilize my line of credit to do the repairs. My line of credit has a 1 year term on it, meaning I must pay it off in 1 year. That was a deal I struck with a local bank for buying fixing and selling homes all cash. Which I did 1 already this year. How can I give the seller what he wants, and get title so that maybe I can refinance to payoff my line, and he still gets payments , he doesn’t want to pay capital gains. I would appreciate any help.
>Date: Thu, 26 Sep 2002 19:54:57 EDT
>Rent for this house will be around 750-800/month. I was planning on getting
>a better estimate on repairs this weekend, and then make him an offer, 63k is
>his asking price, so I’m definitely not going to offer him what he wants
>right out. So then if I get a first mortgage, I take out enough to give him
>say 15,000 down ( that’s what he said first and then changed his mind to 20k
>down.) , and use the difference for repairs right? Then he would take back a
>second for x dollars and % in second position right? What kind of terms
>should I be looking at being fair. What about balloon? I guess this depends
>on when he wants all of it. Would I be required to come up with a
>downpayment on the first mortgage?
>Thanks again for your help,
Tim keep this on the creonline board. It is an excellent teaching board even if the advise is wrong you’ll likely get all the perspectives here
We still need to know what the seller is thinking. However, I would definitely work this thing to the bitter end. You are doing him a huge favor by not paying cash. 1.He will only pay capital gains on what he receives. 2. He will have no management headaches.
3. He will receive good cashflow
What would happen if he WERE wanting all cash? Let’s say you would offer him the full 63k
After paying the full $22,050 in capital gains that would leave him with $40950.00 in cash to get 3% in a CD or approx 1228.00 per year or $100.00 per month.
Don’t make the mistake of offering normal bank lending rates. Offer 3- 3 1/2% and work him from there. In the negotiation, if he wants more interest drop the price. This is where you’ll make your money.
In answer to your other question the seller will be taking back the second in lieu of downpayment. A balloon is between you too. He still can’t stop you from refinancing at a later date, but if you negotiate favorable terms, who cares?
Structure it win win and this deal will happen. Your biggest hurdle will be convicing him to take a secondary position. This can be overcome by offering security as in bonds, etc… or by your professionalism. Let me know how it turns out.
Going to keep as rental. I guess I have to find out how long he wants to avoid capital gains. I don’t know my exit strategy that’s what am asking you guys for. How do I exit. Let’s say he is willing to wait 1 -2 years for payoff then can I do something. I don’t know if you have enough info here to help me, but I appreciate it.
If you are going to keep it as a rental this could work out to be a great deal. First, you need to figure the cash flow (I’ll assume you know how to do this) Next, instead of drawing on your LOC take a 1st mortgage on the house for $35,000.00 give the seller the 20,000 and take a 2nd for $43,000.00= 63,000. You now have a rental the seller has his cash down and a solid cash flow without the big bite of capital gains.
The sellers only caveat is that he takes a 2nd position. This might be an opportunity to secure the note with zero coupon bonds.
But again, you need to compare all this for your cashflow. If it is not a good quality positive cashflow you should walk.
How about getting the seller to sell for cash and exchange into some other property, to avoid the capital gains tax. He might trade up and get some new depreciation going for himself.
Now, I don’t understanding your asking our advice for what to offer him. My usual starting point is $200. If the property is worth more that $20K, I offer $ 2K, because I am a nice guy.
But Joe Kaiser says says don’t make an offer–sit down and work out a number between the two of you.
This deal seems not to have much profit in it at the asking price. Expect the fix-up work to be $7-8K, huh? So, I’m guessing it will be closer to $12K. Market value is $80-85K? I’ll bet I can find a similar house nearby for $75K. I’d suggest that you pare down the price to something that gives you at least $10K or $15K more profit potential. Why work so hard for virtually no equity?
At least til we analyze this a little. What is your exit strategy? The seller doesn’t want to pay capital gains (by use of installment method of reporting). Are you saying that he won’t accept $63,000.00 cash? Even if you had 15k down what about the 8k in repair cost? how are you going to refi. when the seller wants the monthly income? How will the seller stop you from refinancing once you have control of the property? Please give us a complete picture.
No he won’t take 63k I wish he would. Then I would offer him all cash and refi later after repairs completed. My problem is how to get my 23k investment out to payoff my LOC. You see he wants to delay capital gains.
I know I can use the LOC, doesn’t take a genius to figure that out, thanks for your wisdom. But if I take the 15k down and the 8k repairs out of the LOC, and seller still wants to do land contract , how do I get my 23k out to payoff my LOC which is due in 1 years time? What if the seller took a second mortgage, and I used my loc for a downpayment could I get a first mortgage no money down. any other way to do it so that I am able to payoff my LOC (refi?)
You still haven’t filled us in on your and apparently the sellers exit strategy. Is he looking for a long time renter so he never pays the capital gains? and still expect you to put 23k k in the deal? Good for him!
Before we can give you accurate advise we need to know the sellers motivation for selling. I for one have never heard of a seller asking for $63,000.00 with one stipulation… you can’t pay cash. (this part is a Joke) Would he take $85,050.00 in cash? That’s 63k plus the 35% in capital gains tax. When does he want to pay the gain and you’ll have your answer.
By the way, are you going to live in this property or sell it or what?