Deal Structuring and Taxes?

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  • Situation:
    House value: 210k
    Debt owed: 185k
    Seller understands hiring broker will eat up all equity and possibly have to come out of pocket. I made a separate proposal recommending she sells with owner financing. This is too skinny a deal for me so I proposed the following: I find buyer and handle note management, and she would carry burden of paying underlying PITI in the case the buyer defaults. For payment, I would get 50% of down payment, 75% of net monthly cash flow, and 50% of equity above current 25k (I e. At time of refi/new sale, 50% of anything above 1st mortgage payoff + 25k).

    I’m trying to figure out how to paper this up. Initially I thought about having seller deed into land trust and then have us both listed as beneficiaries with payment schedule detailed in trust agreement, but wasn’t sure if that would trigger a taxable event (or how to do it really).

    Any advice?

    Hi Francis

    I’m sorry for the delay in responding, I’m doing a Panama Relocation tour until Thursday afternoon.

    Has the seller agreed to these terms?

    Sounds like there is a better way to do this to protect your interest.

    Why not get an option to buy subject-to at the mortgage balance of $185,000 with an agreement that the seller will get 50% of the down payment. Do a Highest Bidder Sale for the highest down payment so you can get the max!. Sales price is $210k or even $215k

    You buy the house, subject to the mortgage. Then wrap the note to sell with seller financing to your buyers.

    Let’s assume that you get at least $30,000 for the down payment. You get $15k. The seller gets 15K

    There is NO upside left. So you can leave that 50% of upside part out.

    Explain to the seller that you are taking all the risks so you should get ALL the cash flow. You did not say what the underlying loan payments are or if they include taxes and insurance. Is the note a FIXED interest rate? These are very important things to find out before you do the deal.

    My 2 cents.


    Plan B

    Instead of buying the house subject to the mortgage or getting any of the cash flow, you could just do a Highest Bidder Sale for the Highest Down payment for a flat fee of $10,000 or $15,000 marketing fee or 50% of the down payment. Get in. Get out. Be done with this deal and move on. Let the seller keep the cash flow – which will probably not be much since there is so little equity. Let the seller keep the upside if there is any.

    Skinny deals usually take up more time than they are worth

    Hi Jackie- I don’t want to take title on this property for the aforementioned skinny profits in the deal. Don’t want to have to cover costs during vacancy or foreclosure with such little equity. However, the seller has a 3.6 fixed mortgage in place that will result in some decent cash flow. The upside wouldn’t be in appreciation but rather strong monthly cash flow and the paydown differences in the note. Not sure I want to give that up since the owner has agreed to the terms in principal.

    Also forgot to mention that I wonder f I have an interest/agreement with seller and they do the owner financing rather than taking tile and doing an owner carry myself, I wouldn’t be subject to the transaction limits set in Dodd Frank.

    Welcome to hear thoughts.

    My thoughts is have the seller sell subject to but you orchestrate for your profit. Part of the down stroke, part of the monthly cash flow, and money at payoff. You accomplish the latter two but let’s say a 1/10 undecided interest in the debt instrument. I just through that number out hell 50 percent if you can get it. I would service the note also

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