Can equity be transferred for cash without finalizing a sale?

Question

I have a motivated seller that would like to sell but cannot due to some restrictions in his area. If he were to sell any time in the next 15 years, the new buyer would need to meet a long list of low-income requirements. Four or five potential sales have fallen through due to these restrictions. This also significantly reduces the asking price. The low-income requirements tied to this property fall off in 15 years.

He would like to cash out his equity rights. In other words, if the place is worth $200k and his mortgage balance is $100k he is willing to give up 100% of the equity rights for $100k. The mortgage would continue under his name however the new investor (presumably me) will be responsible for it.

What are my options as the investor to get this deal done? How does the deal need to be structured in order to ensure that the investor has 100% equity share?

Some ideas that I’ve been kicking around are; loan the funds as a second mortgage, subject to, set up an option to buy. I have very little experience with any of these strategies so any help would be appreciated. Thanks.

Also, the unit is rented (Not owner occupied) and is cash-flow positive.

Karlos Rueckert · Answer

@Jason D. good point. I'll see if transferring title to an LLC is an option.

@Michael Ealy the rents are determined by the market. The low- income requirements relate to the sale of the property.

@Jaysen Medhurst - Yes, one of my concerns is tying up the funds for 15 years. I hadn't thought about the city changing the terms. I'll have to re-read the terms with that in mind.

Thanks for the input everyone!

Jaysen Medhurst · Answer

@Karlos Rueckert, this sounds like a lot of risk with way too many land mines. Aside from the complicated structure you're going to have to set up to make a deal, there's the very long timeline, with no guarantee that it will work out.

You basically have no exit plan for 15 years. Your money (cash, plus any additional equity) will be completely tied up for that time.

What if the city / state decides in 14 years that the low-income qualifications should be extended for another decade or two...or five? Their concern is providing affordable housing for the community. They don't give two hoots about the profit of one speculative RE investor.

Michael Ealy · Answer

Karlos, then what I would do is buy him with a promissory note (2nd mortgage) and pay him a small monthly amount equal to half the cashflow he is getting now and the rationale is that he is getting that new smaller cashflow with no headaches. He probably will require you to put some money down - so maybe $10K.

Having said the above, the CAVEAT is this: can you increase the rent over time despite the low-income requirements? If not, I will not do the deal. If so, then depending on the pace with which you can increase the rent and the investment you need to do to meet the low-income requirements (if any), that will determine if the deal is even worth doing or not.

Jason D. · Answer

@Karlos Rueckert could the seller transfer the property into an LLC and then sell the LLC? That way the "owner" would not change.

In a subject to, the deed changes hands so I dont know if that would be an option.

Can equity be transferred for cash without finalizing a sale?

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