A few weeks back I posted a blog about troubleshooting last minute deal-killers. I am proud to report that the deal finally closed. The problem I had was that although the "Fair Market" set the price,the deal hinged on the buyer getting financing from a bank. The Banks are running scared and so are their appraisers.
I could've risked re-marketing but I was now 6 months in,and buyers were drying up. Here's what I did;
I was willing to take the reduced $225,000 price only if I could get something I valued at $25,000 in exchange
I was not willing to take compensation in the form of a 2nd mortgage note, You may be wondering why?
a. Although borrowers were qualified for a higher mortgage amount, the lenders these days rarely allow secondary financing.I was not about to do a "silent second" without disclosing to the lender and if I disclosed,the deal would more than likely die.
b.Even if I decided to take it,I would create a tax liability of around $10,000 due by April 2011 !!! It's one thing to collect $25K and owe $10K in taxes but entirely unacceptable to collect $750 in payments this year and owe $10K because of it (sidebar- as an investor, do not forget your silent partner ...the IRS)
The solution for me was to purchase from the buyer an Option to re-purchase the property anytime until September 2022 for $225,100. There is no tax liability for the Option until exercised or abondoned
The buyers are a really nice,hard working family.They really love the home and it is affordable.I have no plans right now or the near future to purchase back the property. However in time, when this chaos is behind us,values will correct. Someday the buyers will come back to me.
by the way,even without the Option we still realized a pre-tax profit of over 25% in 7 months, close but not quite 50% annualized, but good enough
PETER FORTUNATO will be here in New Jersey October 23rd he is the Master of these types of techniques
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