Posted by George Pantelakos on January 01, 2001 at 19:15:30:
Jon, Thank you again for your feed back.You have giving me alot to consider.I wish you the best.
Purchasing a Commercial Building - Posted by George Pantelakos
Posted by George Pantelakos on December 30, 2000 at 13:14:41:
I have been managing a commerial building for seven years with four store fronts on the first level and 23 weekly rooms for rent on the second and third floor.The owners are elderly and quite well off financially and would possibly consider selling the property if I approched them.They own the property out right with no mortgage.I would estimate the property to be worth $500,000.00 but it needs $100,000.00 worth of repairs.The total weekly income is $2,209.00 per week.In coversation with the owner once he mentioned someday he might give the property away for the TAX BREAK.This blew my mind.What kind of an approach and offer should I make?Whatever I do I believe they would be flexible.They,I belive would sell or give the property away if I was no longer employed buy them.Thanking you in advance for your help. George Pantelakos
Re: Purchasing a Commercial Building - Posted by Michael Morrongiello
Posted by Michael Morrongiello on December 30, 2000 at 19:08:14:
George:
IF they truly wish to sell to you, here is a way to consider going;
Have them sell you the property and also FINANCE the sale by carrying back (2) two mortgages. One wil be a Very conservative LTV exposure 1st lien mortgage that can be structured so that it can be sold to generate the “fix up” or repair money needed to renovate the building. The other mortgage will be a 2nd lien mortgage that the Sellers will retain and receive monthly interest income on. This will be considered taxable income to them on an “installment sale method” and thus will be very beneficial to them.
Point out to the sellers that the funds generated from the sale of the 1st lien mortgage will be earmarked to Improve the property thereby increasing its value and their security in the 2nd lien mortgage they will hold.
If you need some input, assistance, to make this deal fly, feel free to contact me.
To your success,
Michael Morrongiello
Purchasing a Commercial Building - Posted by Jon Richards
Posted by Jon Richards on December 30, 2000 at 19:04:24:
George
What an interesting proposition! I wonder however, about actually giving you a property. Even the tax break solution does not make sense unless you are a charity.
Possible Ideas:
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For sure you need to establish your credibility, and not look like a vulture. You could offer them $4,000 per month in the form of a life estate. They get the money until they die and then the property becomes yours.
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You could offer them monthly payments and then a balloon in 5 years that they could will to a charity or family. Presumably you could fix up the property with a loan and then refinance it within the 5 year period.
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Listen to the sellers carefully before making an offer to find out exactly what they want and why. I would not make an offer until you have talked to them several times. When I buy a property with seller financing, I have given the seller a “real estate resume” that shows who I am, my family, my real estate experience, etc. This shows them you a “real” person, not out to screw them. The more you can do to endear yourself to them; and the more you understand them the easier will be your purchase.
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If they would like cash up front (even to give away) you could create a note and sell part of that note to an institutional note buyer. To learn more about this approach visit www.create-a-mortgage.com.
Hope these things stimulate you and others to think of other ideas. Creativity is greatly rewarded in the RE financing business.
Jon Richards
Publisher, NoteWorthy Newsletter.
Re: Purchasing a Commercial Building - Posted by George Pantelakos
Posted by George Pantelakos on December 31, 2000 at 11:31:58:
Michael, Thank You very much for your response.Please forgive my limited knowledge as I need some clarification .For the 1st mortgage you mention conservative LTV exposure for the repair work.Would this be a loan from a lending institution in the sellers name.What does LTV MEAN? I understand the second morgage concept but have a few questions .What interest rate should I shoot for and for how many years?Should I try to keep my monthly payments as low as possible or pay the debt service off as soon as possible? Again THANK YOU George Pantelakos
Re: Purchasing a Commercial Building - Posted by George Pantelakos
Posted by George Pantelakos on December 31, 2000 at 12:20:33:
Jon,Thank You for your reply.I would like to ask a few follow up questions and please keep in mind I have very little knowledge in ths area.Could I qualify as a charity by giving away 10% of my profits to the red cross on an annual basis.What constitues the qualification of a charity? The owner did mention the word CHARITY during our conversation to get a 500,000.00 tax write off.Why would the owners settle for a life estate when they could just hold paper?
Re: Purchasing a Commercial Building - Posted by Michael Morrongiello
Posted by Michael Morrongiello on December 31, 2000 at 19:08:03:
George;
I will have to be breif since I will be on vacation until the week of 1-8-2001.
LTV means LOAN TO VALUE. The balance of the loan divided by the Sales price or Value of the property creates a LTV ratio eg. A $100K Property divided by a $50K loan would represent a 50% LTV ratio.
On your deal if the sellers are willing to carry the majority of their equity back in the form of a 2nd mortgage that will provide them with monthly payments then it makes sense to keep the LTV ratio of the 1st mortgage to a VERY conservative level. For instance if the property is worth $500K then a seller carry back 1st lien mortgage for $125K would represent a VERY conservative 25% LTV ratio. This mortgage then could be SOLD by the sellers to generate the CASH needed to do the repairs. They would then also carry back the rest of their equity in the form of a 2nd lien mortgage that will provide them with monthly income.
As far as the payments are concerned, you need to revisit the cash flow and expenses that this property generates. Clearly you want to be able to pay all debt service and expenses and realize a CASH FLOW. There is NO reason to manage a weekly rental type building like this (which is VERY management intensive real estate) and not have it produce income to you AFTER all expenses and debt service are paid.
To your success,
Michael Morrongiello
Re: Becoming a charity - Posted by Chuck Bailey
Posted by Chuck Bailey on March 12, 2001 at 11:43:45:
I am a CPA specializing in taxes. There is no way for an individual to become a charity no matter how muchhe gives away. To qualify as a charity, usually you have to set up a tax-exempt corporation under your state’s laws. The building would be owned by the charity and you would not be able to get any money out except ing the form of reasonable salary for managing the building and running the charity.
The major hurdles are the massive compliance and regulatory burden, the inability to “self-deal”, and proving a charitable purpose when you applied for tax-exempt status.
Tell the owner that if he wants to be charitable, he can give the proceeds from selling the building to charity. (He might be hard pressed to get a charity to accept a building that needs $100K in repairs anyway.)
Hope this helps.
Chuck
Re: Purchasing a Commercial Building - Posted by Jon Richards
Posted by Jon Richards on January 01, 2001 at 17:44:16:
I think you need to consult a good tax expert on the charitable write off for the seller.
I suggested a life estate, because you said they were willing to give the property to you. Again, you need some good tax advice, because the sellers need tax advice. If you can solve their problem you might be able to make a profit.
Jon Richards
NoteWorthy Publisher