Tuesday, November 29, 2011
In good economies and bad, real estate exchanging is where it’s at. A real estate exchange or trade expands your opportunities and has everyone thinking outside the box. As a seller, you could take a smaller property in exchange as partial payment for your larger property (unless the smaller property has little or no mortgage and your larger property is heavily leveraged you could still exchange but balancing the equities will be a requirement). Just think of it, if the buyer has the cash or gets a new mortgage on your property as part of the closing, you will most likely get most of your sales price in cash and there are many more buyers for the buyer’s smaller property than for your larger property, making it easier to cash out. You will have substantially increased the depth of the market for your property because now, instead of just looking for buyers with cash, you are also including a much larger audience of “buyers” who have cash and/or equity in a smaller property. If you are a seller with 20 acres to sell and no one is biting, maybe you are not a seller at all. Maybe, you are a buyer…especially if you have a little cash (or a cabin cruiser, a stamp collection or auto, race horse, diamonds, i.e. “boot”) to throw into a deal. Why not trade your “equity” in your 20 acres plus some cash and boot for that half empty shopping center that you know you can “do something with”? But the owner of the center is thinking… “I don’t want 20 acres, five houses and a stamp collection”. Well, if he gets the majority of his purchase price in cash, he can cash out the equity and boot at a discount and still have accomplished all of their goals. (Often, the party trading up will through in paper (an I.O.U.) to balance the equities.) How about an example… Terry Trader owns a 20 unit apartment property that is worth about $1,500,000 and he has paid his mortgage down to $300,000 over the years. Terry also has a $600,000 six unit apartment property that he owns free and clear. His liquidity includes $400,000 in cash. Terry’s broker has buyers lined up for the two apartment properties and also has found a $5,000,000 Walgreens store property under a 20 year triple net lease into which Terry can trade. Terry has $1,800,000 in equity plus the proceeds from a new $2,900,000 first mortgage that he will get on the Walgreens property at closing. That adds up to $4,700,000 to which he adds $300,000 of his cash to balance the equities. I’ve seen transactions where there have been four or even five parties trading up in the same transaction with one of the brokers accepting the equity in the smallest property as their commission! Also, let’s not ignore the tax benefits to the party(ies) trading up (“buying”). If the transaction is structured properly under the requirements of IRC (Internal Revenue Code) Section 1031 – caution, consult your professional tax advisors – there will not be taxes due on the parties’ transaction. The taxes that would have been levied had they sold outright and then repurchased are deferred, possibly forever. This tax savings can also benefit the seller because a “buyer” trading up will be able to pay more for the trade-up property due to their tax savings! Think outside the box. It is amazing the types of transactions you can actually pull off with some creative thinking.
Friday, November 25, 2011
Finding it hard to sell your real estate at a "reasonable price" (whatever that means)? Consider carrying back so-called Seller Financing. The benefits can be stellar. You will defer the payment of the majority of your capital gains tax. The cash downpayment that you receive is comprised of return of a portion of your cost basis and the rest will be capital gain. The same goes for the principle portion of the mortgage payments that you receive from your purchaser. (This is simplistic, but you get the idea...consult your tax expert.) The interest portion of those payments will be treated as ordinary passive income, but you have some control there as well by charging the lowest possible interest rate that you can (don't go below the IRS's imputed rate though) in exchange for a higher selling price (which will be taxed at capital gain tax rates ONLY WHEN YOU RECEIVE IT)! This type of sale also gives you the benefit of having a safe place to invest the sale proceeds at a rate of return that is set by you. There are several ways to make sure that your loan doesn't go bad and wind up becoming a liability. A few of those ways include making the buyer maintain a real estate tax escrow with you, providing you with certificates of insurance and actually inspecting your collateral once or twice a year to make sure that it is being maintained (and making it an event of buyer default if it is not). If your property is free and clear, then seller financing is a no-brainer. If your balance is a small one, then just require a downpayment from your buyer that covers your loan balance payoff and other costs of sale. If your loan balance is not small and the loan has due on sale provisions (alienation acceleration) then go in a talk to the lender about your plans. You may be surprised at their relief in hearing that they are not about to get back yet another property!