You must be logged in to reply to this topic.
-
Hi, thanks to Covid I have some time on my hands and I have begun reading Jack Miller’s books offered by Cash Flow Depot. First, I want to say, holy crap! What great books, full of head scratching great ideas. Second, can someone explain to me why on page 37, title Discount Buy Back Options Jack required that the sellers form a new corporation as a condition of the purchase: See below.
“Real Estate Partners (REPS) were about to lose their leveraged offices and with them, their professional reputations as real pros in their markets. Their $500,000 building had $250,000 in debt against it which carried 18% interest. Oscar had funds coming out of a StarkerExchange and was looking for a bargain. He offered $250,000 for their building if they could pay off the loan and deliver it to him free and clear of debt.
He agreed to lease the property back to them for 10% yield on his invested cash net of all operating costs, insurance, and property taxes, BUT ONLY IF THEY’D FORM A NEW CORPORATION. To sweeten the deal, he agreed to give them an Option to buy it back in 5 years for $350,000 cash. Everyone benefited from this deal: ”Again, what is the significance of the Sellers forming a new corporation? Did buyer purchase the entity with the property in it to avoid transfer tax or uncapping of the assessed value?
Thanks
Kenneth,
In many states, including Florida, where Jack lived, buying a property and giving the (former) seller an option to buy it back may be considered a loan.
This does NOT normally apply to commercial property, but for residential – especially owner-occupied, it can turn a good deal into a total loss and penalties for USURY.
Forming a new corporation prevented this from being seen as a loan, since the old corporation no longer existed and could not exercise the option.
Jack gave us this scenario to protect us when we buy and give an option to buy back.
I ran into this myself and refused to give the sellers an option to buy back the same property. Instead, I let them buy another property from me at a discount, thus preserving my capital.
-Michael
You must be logged in to reply to this topic.
