I think we're about to be offered what I believe is a deed in lieu of sale contract (if that's the correct term) for our rental. I've read about them but I've never actually seen one, and I have no idea how to handle the accounting or taxes. Any recommended references?
Last month when we posted our rental home for sale or for rent on a military housing website, we also listed it FSBO on Craigslist. (We're not desperate enough to try Craigslist renters yet.) We got a call a couple weeks ago from a "We buy houses for cash!" entrepreneur, who says his business model is buying houses for less than 75 cents on the dollar.
I'll say that from the start he's raised my spouse's hackles. He wanted to meet for an hour (or more) to go over how he approaches a deal, and she tends to feel slighted by implications that the property could be discounted from its sweat equity. Plus there's an element of vulture capitalism that could make the sellers feel as if they're being pressured. But she agrees the problem is hers, not him.
To my nuclear way of thinking, I can empathize with a guy trying to make a fast buck from desperate sellers. His typical client is an idiot, or drowning in debt, or overwhelmed by a family crisis, or frantically trying to raise money ASAP for [whatever]. This buyer swoops in with cash, closes in 48 hours, and totally eliminates the hassle. Born & raised local, professional appearance, one-man entrepreneurial shop, grateful heartfelt testimonials, the whole package. Smooth but not slimy.
I think he's a great practice negotiation for an eventual sale, so I engaged him. He asks a lot of financial questions that could be interpreted as personal (more spouse hackles). "How much is your mortgage? What's your monthly rent? What do you spend on maintenance & repairs? What do you pay for property taxes/excise tax/association fees? What's your tax bracket for cap gains?" and so on. "Gosh your expenses sound too low, the national averages are much higher than yours. Where are you getting the numbers from?" His questions seem intended to determine if he's dealing with the blissfully ignorant or with idiots. Once he learns what's important to the seller, he pitches the appropriate offer. He doesn't come right out and say "I'll give you 75 cents for your $1 house to close in 49 hours." Instead it's couched as a sales tactic-- "What would you expect to get for your place? Would you sell if your monthly cash flow stayed the same? Do you prefer lump-sum cash or a monthly check?" And so on. Questions designed to elicit more info without necessarily revealing his intentions. Perhaps some attempt at building reciprocity or commitment. I've just finished reading a book on the psychology of sales influence, so I'm hanging tough.
I used an old "selling the rental" thread to refine a spreadsheet of how much we'd bank for various sale prices and how much we'd get each month by investing our after-tax profit in CDs. I think it covers all the details-- deferred cap gains from a 1989 sale, depreciation recapture, fed/state cap gains, AMT. What it boils down to is that he agrees a conservative estimate of our sweat-equity landlording is now giving us $xx/month. However to achieve that monthly yield in a 4-5% CD would require a sale price of about 95 cents on our dollar. No way could he do it for 75 cents, even if we took back some paper in excess of 6%. We have no compelling reason to sell, we expect to rent the place in the next couple months, and we can play defense for a long time. We've told him that we don't think we're his type of customers and that while we don't enjoy landlording emotionally, it makes compelling financial sense. Thanks, we'll reconsider in a few years if the tenants move out.
So we spent 45 minutes on the phone tonight going over the income & expense numbers, which we both agree on, and on a sale's rough before-tax/after-tax amounts. No controversy there. But instead of working on a sale price or a sale with taking back paper, he asked how we'd feel about turning the property over to him in exchange for a monthly check. We'd get enough in that check to pay all our current expenses (including the mortgage) and have our $xx/month left over, while he'd essentially sublease the place. Maybe subleasing isn't the right term-- perhaps it's an installment sale or some sort of rent-to-own contract.
Our motivation would be getting our current income without landlord hassles. His motivation is that he'd get a rental property for nothing down, taking all the risk to keep whatever's left after paying us. We'd continue to pay our 5.5% mortgage, which financing he can't get on his own. If our arrangement lasted for 5-10 years then eventually he'd raise the rent (perhaps pocketing the difference) and maybe buy us out at some pre-agreed value which he'd then flip for its appreciation. I don't have any objections to that idea. But it sounds too good to be true.
What I'm not sure about is the legality of the contract. The rental's mortgage has a "due on sale" clause which we'd clearly be subverting by the intent (if not the language) of his proposal. Our homeowner's insurance policy might not cover us for this type of contract rental. As a landlord I can deduct Schedule E expenses (including mortgage interest & depreciation) but surely I'd give some of that up by contracting with this guy. He'd want to take his own deductions from the arrangement, and if I lose them then I'm getting the same amount of before-tax money but paying higher taxes on it.
He said he'd crunch his numbers and get back to us in a day or two. Meanwhile the military rental list is chugging along, most of the available properties have dropped off the site after a couple weeks, and our posting is probably close to getting a phone call. If we get a nice military tenant then we'd shelve any idea of selling for at least a couple years.
Anyone heard of this type of deal before? Any IRS pubs, websites, books, or articles I can read up on it? Any pitfalls? If it's legit, what protections do I need to make sure of?
Last month when we posted our rental home for sale or for rent on a military housing website, we also listed it FSBO on Craigslist. (We're not desperate enough to try Craigslist renters yet.) We got a call a couple weeks ago from a "We buy houses for cash!" entrepreneur, who says his business model is buying houses for less than 75 cents on the dollar.
I'll say that from the start he's raised my spouse's hackles. He wanted to meet for an hour (or more) to go over how he approaches a deal, and she tends to feel slighted by implications that the property could be discounted from its sweat equity. Plus there's an element of vulture capitalism that could make the sellers feel as if they're being pressured. But she agrees the problem is hers, not him.
To my nuclear way of thinking, I can empathize with a guy trying to make a fast buck from desperate sellers. His typical client is an idiot, or drowning in debt, or overwhelmed by a family crisis, or frantically trying to raise money ASAP for [whatever]. This buyer swoops in with cash, closes in 48 hours, and totally eliminates the hassle. Born & raised local, professional appearance, one-man entrepreneurial shop, grateful heartfelt testimonials, the whole package. Smooth but not slimy.
I think he's a great practice negotiation for an eventual sale, so I engaged him. He asks a lot of financial questions that could be interpreted as personal (more spouse hackles). "How much is your mortgage? What's your monthly rent? What do you spend on maintenance & repairs? What do you pay for property taxes/excise tax/association fees? What's your tax bracket for cap gains?" and so on. "Gosh your expenses sound too low, the national averages are much higher than yours. Where are you getting the numbers from?" His questions seem intended to determine if he's dealing with the blissfully ignorant or with idiots. Once he learns what's important to the seller, he pitches the appropriate offer. He doesn't come right out and say "I'll give you 75 cents for your $1 house to close in 49 hours." Instead it's couched as a sales tactic-- "What would you expect to get for your place? Would you sell if your monthly cash flow stayed the same? Do you prefer lump-sum cash or a monthly check?" And so on. Questions designed to elicit more info without necessarily revealing his intentions. Perhaps some attempt at building reciprocity or commitment. I've just finished reading a book on the psychology of sales influence, so I'm hanging tough.
I used an old "selling the rental" thread to refine a spreadsheet of how much we'd bank for various sale prices and how much we'd get each month by investing our after-tax profit in CDs. I think it covers all the details-- deferred cap gains from a 1989 sale, depreciation recapture, fed/state cap gains, AMT. What it boils down to is that he agrees a conservative estimate of our sweat-equity landlording is now giving us $xx/month. However to achieve that monthly yield in a 4-5% CD would require a sale price of about 95 cents on our dollar. No way could he do it for 75 cents, even if we took back some paper in excess of 6%. We have no compelling reason to sell, we expect to rent the place in the next couple months, and we can play defense for a long time. We've told him that we don't think we're his type of customers and that while we don't enjoy landlording emotionally, it makes compelling financial sense. Thanks, we'll reconsider in a few years if the tenants move out.
So we spent 45 minutes on the phone tonight going over the income & expense numbers, which we both agree on, and on a sale's rough before-tax/after-tax amounts. No controversy there. But instead of working on a sale price or a sale with taking back paper, he asked how we'd feel about turning the property over to him in exchange for a monthly check. We'd get enough in that check to pay all our current expenses (including the mortgage) and have our $xx/month left over, while he'd essentially sublease the place. Maybe subleasing isn't the right term-- perhaps it's an installment sale or some sort of rent-to-own contract.
Our motivation would be getting our current income without landlord hassles. His motivation is that he'd get a rental property for nothing down, taking all the risk to keep whatever's left after paying us. We'd continue to pay our 5.5% mortgage, which financing he can't get on his own. If our arrangement lasted for 5-10 years then eventually he'd raise the rent (perhaps pocketing the difference) and maybe buy us out at some pre-agreed value which he'd then flip for its appreciation. I don't have any objections to that idea. But it sounds too good to be true.
What I'm not sure about is the legality of the contract. The rental's mortgage has a "due on sale" clause which we'd clearly be subverting by the intent (if not the language) of his proposal. Our homeowner's insurance policy might not cover us for this type of contract rental. As a landlord I can deduct Schedule E expenses (including mortgage interest & depreciation) but surely I'd give some of that up by contracting with this guy. He'd want to take his own deductions from the arrangement, and if I lose them then I'm getting the same amount of before-tax money but paying higher taxes on it.
He said he'd crunch his numbers and get back to us in a day or two. Meanwhile the military rental list is chugging along, most of the available properties have dropped off the site after a couple weeks, and our posting is probably close to getting a phone call. If we get a nice military tenant then we'd shelve any idea of selling for at least a couple years.
Anyone heard of this type of deal before? Any IRS pubs, websites, books, or articles I can read up on it? Any pitfalls? If it's legit, what protections do I need to make sure of?