Can I Sell A Property To Myself? - Posted by Carmen

Real Estate Investing
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Posted by Carmen on May 18, 1999 at 22:57:13:

You’re right, it would be simpler. My main objectives with this complicated plan are to:

  1. Close on property quickly (quicker closes means I can get lower offers accepted)
  2. Get repair money

I have a bank that will do as you suggest, but they take weeks to close - making mine a “non-cash” deal as it were. With hard money, it would still be considered a “cash deal” as far as the seller is concerned.

I’m going to rethink this after getting some of the feedback - it may still be one way to do it (though admittedly not the preferred way)

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Can I Sell A Property To Myself? - Posted by Carmen

Posted by Carmen on May 18, 1999 at 14:58:52:

This may seem like a strange question, and since I’ve never done it, I wonder if anyone has experience in it. I am interested in creative, but not “overly” creative venues, in which to take cash out for fixup and this came to mind - what would be the repercussions, if any?

Sorry if this gets convoluted - it made sense when I read it.

I have 2 funding sources - 1) hard money (65% LTV max, loan on contract amount, no rehab $, close in 1 week) and 2) Semi-investor loan (80% of value of property; 5% of loan value as down payment; first cut is paid to seller at closing for contract amount + costs; difference held in escrow and paid directly to contractors as repairs are done, and the difference given to me after repairs, once appraisal comes in for FMV)

The easiest/fastest way to get a loan is hard money; however, it does not give me any rehab money. Sometimes the other loans take much longer, and since one strategy which seems to work well is to use a quick close to induce a low price, it may be worth it to go hard money, if I can then get the money out to rehab with.

QUESTION: Other than the double closing costs, would there be any issues if I purchased a home with hard money in my name, or the name of one of my corporations, then immediately sold it to another of my corporations or my husband’s corporation at a higher price using another funding source - which may take up to 30-45 days to close? Is this just an “internal flip”?

*** I understand that of course, it would be simpler to just purchase with the investor loan to begin with, but I’ve had a few deals fall through when the financing we originally tried to get didn’t come through, or it just took too long to get all the paperwork done, so I’m looking for options. ***

Maybe an example is in order:

Purchase Price $45K
FMV $80K
Repairs $ 8K

Use hard money to purchase at $45K.
Sell it to corp. with 80% FMV semi-investor loan (64K total loan, with $3,200 down). Do not pay off hard money yet.
Have investor loan pay for the repairs (8K)
Collect remainder of investor loan in 3-4 weeks (after repairs)
Pay off hard money loan
Sell house, collect rest of cash.

This gives, at the time investor loan cashes me out:

$60,800 + closing costs - Investor Loan (64K-3,200)
$50,200* Minus Sale Price to self
8,000 Minus Repairs

2,600 TOTAL NET AT “PURCHASE”
17,200 TOTAL NET AT “SALE” (80K - 60,800 - 2K closing costs)

19,800 TOTAL NET PROFIT(not including holding costs)

  • Sales price to self used to pay off 45K hard money loan + 2K closing costs, and recoup 3,200 down payment)

Does this sound right? Other than finding a great lender who will close in 2 days at 100% FMV, what other options would I have to do rehabs quick-n-easy? And don’t forget the original question - can I sell this property to myself in this way?

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Re: Can I Sell A Property To Myself? - Posted by JHyre in Ohio

Posted by JHyre in Ohio on May 20, 1999 at 07:16:34:

Hi Carmen,

Jim Piper’s point on IRS & related sales is on the money. While no fraud is involved, IRS would take a “heads we win, tails you lose” approach. That is, if gain on the sale, you are taxed. If loss on the sale, no loss/deduction allowed. How to get around related party status: Not easy- you need to find a trusted non-family member AND still would need a CPA/attorney to structure things. Probably not worth the hassle.

John Hyre

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Re: Can I Sell A Property To Myself? - Posted by JPiper

Posted by JPiper on May 18, 1999 at 22:31:04:

I can’t answer whether this would work, but if it does, it’s not something I would do.

It seems to me you’re doing a whole lot of finagling to obtain repair money?.unless I misunderstood the motive. The first thing is that you brush by the multiple closing costs?..something I wouldn’t do. The total of these closing costs represents a large cost when compared to this hypothetical repair bill of $8K. If I had the choice of going through all this for $8K in repairs, I would simply use my credit card. Even at high interest this cost would be significantly less than multiple closing costs.

Next, this doesn’t appear to be an arms length transaction. Whether the lender is OK with that, I don’t know. But certainly MANY lenders would NOT be OK with it?.in fact, with some types of loans this would be called fraud if you chose to hide it and didn’t disclose this arrangement to the lender. You’d be in a better position to evaluate this issue in terms of this lender than I would.

Next, I was puzzled by the following statement: “Sell it to corp. with 80% FMV semi-investor loan (64K total loan, with $3,200 down). Do not pay off hard money yet.” This seems to imply that you believe the lender is going to loan you money and take a second position prior to paying off the hard money loan. Again, you’d be in a better position to evaluate this than I, but my initial impression without knowing who the lender is would lead me to think it “ain’t going to happen”. I’m not even sure why this is even one of your steps, but again, if it involves receiving money prior to a hard money payoff, this would indicate taking a second position, which I would be dubious of.

Finally, there are IRS considerations regarding transactions between related parties?transactions that are not arms length. It’s a complicated area, but I would be sure to review all this with your CPA.

Bottom line is that it seems much easier and cheaper to use a credit card for this amount of money. Or perhaps you have an acquaintance who’d be willing to make a loan for the repair money and receive high interest. Six month interest on $8K at 20% is only $800.

JPiper

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Re: Can I Sell A Property To Myself? - Posted by PBoone

Posted by PBoone on May 18, 1999 at 18:49:43:

The process probably could be done but why not keep looking for a hard money lender that will lend purchase and rehab money. These lenders are out there as long as you stay below 65%FMV after rehab.
Pat

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Good Points - Posted by Carmen

Posted by Carmen on May 18, 1999 at 23:10:54:

Good points all. The objectives here would be to (1) close quickly-within days or max 2 weeks- and (2) get rehab money. Although I’m sure they’re out there, I’ve had a hard time finding a lender that can do both.

The closing costs in both closings would be “rolled into” the loan, so I would not have any out-of-pocket costs (where have I heard that it’s not the COST of money, but its AVAILABILITY that’s important?)

I don’t have access to 8K at the moment, although I’m looking into a home equity line (crossing my fingers). I do also have one investment property I am selling after June 1 (tenant 'til then), which will give me the cash. Until then, I was trying to think of “no-down” methods of buying and fixing these homes.

Your point on non-arms-length transactions is well taken, though. Especially as a realtor, I wonder how that would be looked at. I certainly want nothing to do with fraud - hence the question here. Is it fraud to sell something to yourself? Even if “you” are different entities? As long as you are not inflating any numbers?

And you’re right - the hard money loan would have to be paid off at the second closing.

Thanks, that’s the kind of input I was looking for, to see if this made sense - it may still, if all disclosures are made, but it may not be worth the hassle. Maybe I’ll keep searching for new lenders or new sources of funds …

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Re: Can I Sell A Property To Myself? - Posted by Dave T

Posted by Dave T on May 18, 1999 at 21:55:57:

Have you looked at traditional bank financing for home improvement loans? What is the tax bite to your corporation when you “sell” the property to another corporation at a “profit”?

There are a couple of banks in my area that will give me a non-owner occupied home improvement mortgage for 75% of after repair appraised value. With this funding I purchase the property, and the bank keeps the difference between the purchase price and the full mortgage amount in a repair escrow account. As repairs are made, I submit invoices to the bank and draw against the escrow account to pay rehab costs.

When the work is finished, I can either receive the balance of the escrow account in cash, or apply the difference to the loan principal balance.

If you buy the property with a hard money loan, why not just consider refinancing with a non-owner occupied home improvement loan? Seems a lot simpler than the corporate sales you refer to, and no taxable corporate profits either since a sale has not taken place.