Possible OF deal in Charlotte, NC

5 Replies

Hey BP members, I could use some advice on how to approach a potential opportunity that recently presented itself to me. My brother-in-law’s girlfriend’s father owns 5 rental properties in my area (greater Charlotte, NC). I ran into him the other day and asked his thoughts on it and how long he had done it. He said he had had them for 12 years and had done some flips with his brother who has 44 units but no longer flips due to being disabled. He then proceeded to tell me about how awful being a landlord was. He complained about repairs, depreciation recapture, and capital gains taxes. This tells me that he is ready to sell but is afraid of the tax hit if he does. At this moment I have no more deal specifics as that was the extent of the conversation. I need advice in a few areas. 1) Could this be considered not to be an arm’s length deal? If so, any precautions I need to take to ensure I don’t have any blowback if he has a change of heart after the deal is done? 2) I’m assuming this has to be an owner finance deal and would be easier for me if it was. Any suggestions on how to structure it to mitigate and/or spread out his tax liability to make it more appealing to him to sell. Depreciation recapture seemed to be the one thing he was most concerned with. 3) What are your thoughts on coming in at a lower price with a higher interest rate component? Should I offer some sort of prepayment penalty if I refinance or sell before a certain amount of time but don’t have another property available to reassign the remaining portion of the loan to? 4) What is a good set of terms to start at? I was thinking about a 15-20 year amortization with no balloon if possible and interest between 5-8% depending on the price and length of terms. Thanks in advance. Any recommendations for relevant experts in my area would also be appreciated. RE attorney, CPA specializing in RE, experienced investors or groups in my area, etc. FYI, I do have a potential partner who has indicated he would be interested if the deal is right.

Find out if he wants 100% out of real estate or just this deal. See if he's willing to go into something like a NNN lease. If so, you can put him in a 1031 exchange to help him with his taxes. A 1031 exchange means you and he trade like-kind properties. Since you have no property and no money; you could find a JV partner with money to buy the NNN lease. Then make the trade. Then buy out your partner. You need a CPA, a lawyer and a JV partner. It sounds like you have time on your side to put the deal together too.

Sounds like a deal worth evaluating and presenting to him. He may be interested in trying something on one property versus his entire portfolio just to “dip his toe in the water” of owner financing. Surely, he is aware of it but may have never been the bank so to speak.

I would not initially offer a pre-payment penalty. Present a deal that works for both while leaving any penalties out of the deal for advancement for yourself should you find a better financing deal.

Hey @Jeshua Patrick ,

Listen to Joe Fairless' podcast JF1176.  Bruce Jones talks to Joe Fairless about an alternative to the 1031 exchange that helps sellers mitigate tax impacts from selling their properties.  Maybe its something your seller would be interested in doing with you.

http://joefairless.com/podcast/jf1176-tax-planning...

To your proposed terms (4) maybe stay away from talking terms until you really can find out what he wants out of the deal. What you want is the houses to add to your portfolio, what you want to help him with is getting rid of his 'headaches' and what you want give him is whatever he needs to do this deal with you (in a way that also works from there.

If you can figure out the results or outcome that he would need to do the deal then you can backwards engineer your way to figuring out how to get there with him in a way that works win-win-win.


Good luck!

Originally posted by @Ian McKeown :

Find out if he wants 100% out of real estate or just this deal. See if he's willing to go into something like a NNN lease. If so, you can put him in a 1031 exchange to help him with his taxes. A 1031 exchange means you and he trade like-kind properties. Since you have no property and no money; you could find a JV partner with money to buy the NNN lease. Then make the trade. Then buy out your partner. You need a CPA, a lawyer and a JV partner. It sounds like you have time on your side to put the deal together too.

This seems a little complicated and confusing. What I don't really understand is how the lease transfers ownership or even his tax liability. Can you expound on how this would deal with his tax situation? I understand what a direct 1031 exchange would do for him but do not understand how your suggested approach shifts his taxes/ownership from him to me/my JV partner and then into a different property? As an example, assume that I wanted to buy/lease his portfolio, rehab it, and 1031 it into a small MFU.

@Brian Corbett I definitely will consider taking just one to start if he is uncomfortable OF the whole deal at first. 

@Josh Stack Thanks for the podcast link. I will have to listen to it on the way to work but the first few minutes definitely sounded like what I’m probably working towards. Definitely trying to get to that win-win-win, especially since I will likely see him on a semi-regular basis and don’t need any hard feelings between us. 

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