What would you call this kind of deal? - Posted by Chris (San Diego)

Posted by Scott SC on June 07, 2000 at 14:15:21:

The manner in which this landlord is presenting this deal saying he would like to make this house appear to be a 2nd home for him is immoral and illegal.
This guys obviously trying to pull one over on Uncle Sam. It would be a great L/O deal but the way the landlord is handling it the deal could turn out messier than a diaper on a baby!

What would you call this kind of deal? - Posted by Chris (San Diego)

Posted by Chris (San Diego) on June 07, 2000 at 11:59:53:

I have lived in a rental in San Diego for the last 2 years and my lease is up for renewal. I asked my landlord if he would be interested in selling me the house. To my surprise, he said that he would be willing to do it if I am willing to do a creative financing deal. He gave me a brief explanation of how it works but I’m having a little trouble following the concept. Here is the basic idea.

He told me that after we agree on a selling price, I would give him a down payment (this locks in the selling price). For the next 2 years I would continue to rent the property. I would put the utilities in his name but I would continue to pay them. Then at the end of 2 years we would put the property through escrow and transfer the title over to me. He would then carry the note at an interest rate of 7.5% monthly. He wants to do it this way because he says for the 2 years I continue to pay rent, this property will be considered a second home for him. That way when the title is transfered, he won’t have to pay capital gains on the sale.

Has anybody ever heard of or used this kind of deal either as a buyer or a seller? What are the benifits and pitfalls of doing it this way? Is this a good deal for me the buyer? What else should I know and what should I look out for when setting up the deal? How do I make sure I don’t get ripped off?

I appreciate any advice you could give me. Thanks!!

Re: What would you call this kind of deal? - Posted by Phil

Posted by Phil on June 08, 2000 at 08:43:53:

Chris:
I am just a newbie, but after having read Ernest Tew’s book ( How to Get Rich Helping Others ), I think the best thing would be to convince your seller to go with a net lease and purchase the option to buy in a Roth IRA. That way your seller would get the Capital Gains Tax relief he desires and you would get to lease the house during the term desired. Ernest talks all about this in his book and even gives you a soft copy of the forms you would need.

Hope this helps,
Phil

Its called CONSPIRACY TO COMMIT FRAUD - Posted by Soraya(SanDiego)

Posted by Soraya(SanDiego) on June 07, 2000 at 23:54:45:

If you can not talk the Seller into doing a legitimate lease option you should pass on the deal.

If there is an IRS audit, you could very well be criminally liable. Its called CONSPIRACY TO COMMIT FRAUD

I don’t think there is enough money in the deal for you to take a chance of spending 5 years “on the inside looking out”.

Soraya

Close…but no cigar. - Posted by soapymac

Posted by soapymac on June 07, 2000 at 14:08:15:

Chris:

  1. 7.5% MONTHLY??? I hope you meant annually.

  2. “He wants to do it this way because he says for the 2 years I continue to pay rent, this property will be considered a second home for him. That way when the title is transfered, he won’t have to pay capital gains on the sale.”

The gentlemen does not understand the law here. In order for him to not pay captial gains on the transaction, he would have had to have PERSONALLY occupied the home for two of the last five years. So he gets the utilities transferred to his name, but you continue to pay them. Whose credit does that help? And isn’t he a trusting soul?

You’ve been there two years…now he wants to “live” there on paper for two years to avoid the capital gains tax. Where is he living now? Isn’t he claiming an interest deduction on the place where he’s living? And does he expect to “skate” through the IRS computers when they catch him with TWO PRIMARY RESIDENCES? As David Krulac asks below, “Can you say fraud and tax evasion?” I would ask another question:

Do you want to sully your character and reputation by being an accessory to this scheme? I thought not.

That being said, let me point you to an avenue where you can still L/O the house, keep the utilities in YOUR name, and bypass the capital gains problem.

It’s called a 1031 exchange. I do not know exactly how this works (haven’t had to do one yet,) but I understand the principle as it is used with life insurance contracts (where it is called a 1035 exchange.)

You may want to ask for assistance from a RE attorney on how to structure this. There are also RE Brokers who specialized in this type of transaction.

Cordially,

Roy MacLean
"soapymac"

It’s called a ‘Lease Option’ or ‘Lease with option to buy’. - Posted by GL

Posted by GL on June 07, 2000 at 13:03:48:

Look around this site, there is lots of information about lease options. Some investors specialise in them. They are completely legal,moral etc. So don’t be afraid to do it if it suits your needs, but make sure you have the deal checked by a real estate lawyer before you sign anything.

Can you say fraud and tax evasion? (NT) - Posted by David Krulac

Posted by David Krulac on June 07, 2000 at 12:32:33:

.