Finding L/O possibilities - Posted by Steve (OH)

Posted by G on March 17, 2001 at 03:04:15:

What is a (1031)? I heard one of you guys refer to it as a rehab. I was just wondering if you give me a few more details as to what exactly a (1031) is. What type of rehab, etc.?

Finding L/O possibilities - Posted by Steve (OH)

Posted by Steve (OH) on March 14, 2001 at 10:27:21:

I recently attended Bronchick’s lease/option workshop (highly recommend) and am trying to find motivated sellers to apply the principles. My problem, however, is that I work a FT job and as far as I can tell marketing, etc. (doing things to find motivated sellers) takes time and should not be taken lightly…it is hard for me to put forth this time b/c of my job (that is until I get the moxy to walk away! I know this sounds like a cop-out 1/2 a$$ effort, etc.). I have some cash I can get my hands on if need be and therefore my proposal involves this process:

  1. Finding potential “rehabs” (not major…just 5k or so needed in cosmetics) from agts that I already have relationships with.
  2. Paying “all cash” (home equity, etc.) to get a discounted price.
  3. Perform the needed updates.
  4. Get a new appraisal and 1st mortgage on property with 80% LTV.
  5. Pay off home equity, etc.
  6. Find tenant buyer to lease/option property.

Does anyone see any positives/negatives to this plan? As an example: if I find a property listed at 30k with comps of 60k (after fix-up). I buy for “all cash” for 25k and put 5k into it. Get an appraisal for 55k conservatively and take out a loan for 44K (80% LTV). Pocket 14k (tax free) after paying off 30k “cash” debt. Payments would be at/around 354 (PI based on 30yr/9%). Lease option at 2,500 down and 600/month.

Any input?


Re: Finding L/O possibilities - Posted by Judith

Posted by Judith on March 22, 2001 at 01:51:33:

Just a few comments:

  1. the $14k is not really tax free since you will not be living there. You are merely taking some of your capital gains now and deferring your taxes for later, when you sell the property. Your basis cost will be purchase price paid, plus closing costs + fix up costs. Anything above is taxable gain. What’s more, when you lease it out and claim depreciation on Sch E, the depreciation will be recaptured when you sell to increase your capital gain. Still, cash now, tax later is not so bad.
  2. I would keep the lease option period short,say 12 months, which should be plenty of time for tenant/buyers to make a decision and come up with the finance. Taking an option premium, last month’s rent and deposit up front would ease your cashflow.
  3. If you kept the lease option period short, it might not be worth your while getting a mortgage on the property since it can easily cost you $2,000 to do so, so I wouldn’t do that if I were you. However, if you see another RE opportunity and need cash, then you can borrow using the property in question as collateral.

Re: Finding L/O possibilities - Posted by Paul Maguire

Posted by Paul Maguire on March 15, 2001 at 02:24:05:

You have a few problems there chief. First of all, you will have closing costs on the way in equal to at least 1500-2000. Second, you will have closing costs again with a new loan, also about 2000-2500. Third, you will have no seasoning on the property, so you will have to look hard to find someone to give you cash out before the first year. Fourth, 5000 in fix up may be realistic, or it may be a fantasy. Flooring alone(new carpets and lino) will run you about a 1000-1500 on most 800-1000 square foot houses. Check your prices. YOu would be better off to sell this place after rehab, or exchange it, and look for another deal. Figuring fair condition, you will usually make between 8k-12 K with these numbers after your costs.
Be sure to get a BINDER with your title insurance, which will give you a refund if you sell it or refi it within a given time period(2-5 years) with the same title company.

YOu got the right idea, but remember the golden rule…If you are going to put cash into a deal, know how you are going to get it out before you do. Have an exit strategy. The best on this is to take the cahs and pay taxes or exchange, not necessarily hold a single family. This sounds like a non owner occupied deal, so getting the cash out on a refi may prove to be harder than it sounds. Good luck. Paul

Re: Finding L/O possibilities - Posted by Tim (CT)

Posted by Tim (CT) on March 14, 2001 at 10:58:15:

Wouldn’t the 14k (in pocket) be taxable? This is consider capital gains isn’t it? (Unless you dumped it into the 1031 exchange).

Re: Finding L/O possibilities - Posted by Steve (OH)

Posted by Steve (OH) on March 15, 2001 at 07:09:39:

Thanks for the input, Paul. I have done 2 of these already EXCEPT I have kept them as rentals instead of l/o them. On both deals on the way in, I paid 254 in closing fees plus taxes (approx 700)…then “slapped” a 1st mortgage on them within 60-120 days of taking title. I haven’t run into seasoning problems. Jim Piper posted the same concern on the other board and I guess I should be lucky that I haven’t run into these problems. Both loans were “portfolio” loans that the banks kept and did not sell (I have good credit, etc.) so this may be the reason that I was able to bypass the seasoning requirement. Also, if I pay 1000 going in and 2000 on the re-fi, is this better than getting hit with taxes right away? I haven’t run any figures to compare these two scenarios, but am just thinking out loud…or as I write.

Re: your questioning of 5k in fix-up…that is definitely a “random” number and I know flooring, etc. can get expensive. That is where a solid estimate prior to releasing the inspection contingency would come in. Good point, though.

Also, can you exchange (1031) a rehab? I was under the impression that you could not. I have no experience at this so am just going on what I have read elsewhere.

BINDER is a great idea…I would not have thought of that.

Thanks for the input…anything else on the items I have brought up above is appreciated.


Re: Finding L/O possibilities - Posted by Steve (OH)

Posted by Steve (OH) on March 14, 2001 at 12:02:40:

It would be taxable at the time of sale (3 yrs…if a 3 yr option period)…but not until then.