Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
Here is the scenario. I have a home that I’ve owned for 6 years. It’s worth about $380k and I owe about $240k. I want to strip out as much equity as possible. Today a wild idea occurred to me and I want to consult the community. But first the traditional options and why I don’t like them.
1. Refinance - This would require 80% LTV and only allow me to strip about $64,000. Also requires closing costs.
2. HELOC - same as above with a higher interest rate and an additional monthly payment on the borrow. Also requires closing costs.
Now for my wild idea...
3. Sell to myself - If I buy the house from myself using an FHA loan @3.5% down I'll pay about $13k plus closing costs. I'll get the tax exemption having lived in it for 2 of the past 5 years along with a new basis of $380k. Most importantly, I'll clear about $140k on the sell side with $13k plus closing going back in for a net of $127k. I realize I'll pay PMI and my monthly cost will go up..but putting an extra $63k in my pocket in the middle of a pandemic seems like the move.
Assuming that you have the property titled in an LLC currently, I don't think this will work since you are the Member of the selling entity. If its titled in your personal name, it would just be a refinance.
I would try to find a friend or family member who has an under performing IRA or has money in a bank CD. Give them a 2nd mortgage in exchange for your equity. You get the cash, they get a safe stable investment, and it never appears on your credit.
Assuming that you have the property titled in an LLC currently, I don't think this will work since you are the Member of the selling entity. If its titled in your personal name, it would just be a refinance.
I would try to find a friend or family member who has an under performing IRA or has money in a bank CD. Give them a 2nd mortgage in exchange for your equity. You get the cash, they get a safe stable investment, and it never appears on your credit.
I'm pretty sure you can't sell to yourself. It needs to be an arm's length transaction. I believe you'll get hit with all the capital gains tax or something because its not an arm's length transaction --- double check with a professional.
@David M. I feel like as long as I get an appraisal and sell it at Fair Market Value it shouldn’t be an issue. Sales like this are done between family members all the time. Curious to see if anyone has ever seen it done in practice tho!
@David M. no problem. I AM going to sell it to myself but a sale to a family member is not arms length either so I am wondering if this falls in the same bucket as being legal...but tricky to do in practice for tax purposes.
Oh, for selling to a family member of course its legal. As you said, if you can show that it was sold at fair market value, then you should be able to defend yourself in an audit (should there be one, and probably if you are declaring a huge loss). Consult a professional.
Of course, properties get transferred all the time. But, you are trying to finagle a purchase loan of out..
Just remember that your family member will hold Title and get any/all deductions and/or tax liability. Plus, your family member will have to show somehow that they will be owner occupying since you are going after a conforming residential loan, not for investment. So, your family will have to qualify somehow still...
@Account Closed while the "selling to myself" is brilliantly creative, you're going to give your loan officer a stroke trying to navigate the plethora of issues likely to come up.
I think that if it is about getting as much cash out as possible there are some interesting ways where you can get most of your equity out but the complexity and logistics involved would be so considerable that it would create a whole new slew of issues and questionable outcomes. In other words, the medicine you take for the disease will kill you.
Perhaps you could find he trusted family member who owns their home outright and could perhaps offer you the funds they get from a heloc they get on their own house? I had a family member lend me $250,000 for real estate acquisitions that he was able to get from his $500,000 house he owned outright.
But hands down, you got a big gold star for that financial creativity :) in fact, it's possibly worth mentioning to an attorney and a loan officer and get their feedback.
@Whit B. You were going to have a big "quacks like a duck" problem with the IRS And other feds I believe, starting with violating the terms of the FHA loan.
Before even getting into this, why are you trying to get as much equity out? Do you have a property in mind that requires a higher amount down? Are you just planning to hold the cash anticipating a market decline?
Just thinking out loud, but if you want to invest in something else, just take the equity out and look for an investment opportunity in the range of your downpayment of $60k-ish.
Or keep the house and turn it into a rental and just buy another primary residence (with FHA 3.5% down). If you do a cashout as well, you could maybe buy a 3rd property.
Or, if you just want to hold on to cash and wait for the market to drop, i’d just do a cashout and capitalize on long term, low rates to grow your portfolio now...assuming you want to invest more.
@Patrick Britton I appreciate it Patrick. I’d never do something like this without legal and a CPA signing off but figured I’d bring it to BP first on the off chance someone else had executed it.
I don't have a family member that has that kind of equity. I'm the family pioneer when it comes to REI but it's got my mind spinning about private equity, maybe an decent ave.
@Matthew Olszak I understand it would be scrutinized and I’d have to have a solid appraisal...but otherwise, which part of this is illegal? To my knowledge, non-arms lengths transactions are done regularly when one family member buys from another.
"A family member purchases another family member’s home as a principal residence. If the property is sold from one family member to another and is the seller’s investment property, the maximum mortgage is the lesser of 85% of the appraised value, or the appropriate LTV factor applied to the sales price, plus or minus required adjustments. Note: The 85% limit may be waived if the family member has been a tenant in the property for at least six months immediately predating the sales contract. A lease or other written evidence must be submitted to verify occupancy"
So it'll have to become your family member's primary residence, and the max they'll lend is 85%. With PMI you might as well just go with a conventional refinance at that point. Plus if the family member won't be occupying the property, or there isn't a TRUE/BONAFIDE lease and prior 6-month occupancy to try to get the 3.5% down, it'd be fraud on their part which would trickle down to you.
Just do a normal cash out refinance I just did one on my 4 unit at 3.5% which is a great rate to lock in for 30 years. I also have a heloc on it for the 75-95% portion of equity but haven't used any of the heloc yet. You can use the same appraisal for both cash out and heloc to save money.
Whit B., my question to you is: if you're trying to maximize cash out now because you're expecting a correction in the market you'd like to be ready for - why not actually sell the property (so that you'll have 100% of your equity in your pocket)? I take it you no longer live there "having lived in it for 2 of the past 5 years"?
[I don't know the tax rules, but when do Capital Gains kick in if you leave selling for too long?] Good luck...
A local credit union that also holds my conventional mortgage. They only do it to 95% for mortgages they own. If you call around you can easily get 80% though in your state. Call the local credit unions.
@Henry Lazerow that was my next best option. I know people who have formed an LLC/S-Scorp and sold the property to the entity.
They then pay the entity rent to run their business out of their own house. This allows them to deduct their rental expense in the newly formed LLC and still depreciate the asset at the new basis. Great strategy, but they have to put 20% down which isn't the goal for me here.
@Brent Coombs thank you. The reason I don’t sell the property outright is because it’s in what I would consider an expanding area. There is a great deal of planned development surrounding the house that I don’t yet think has been priced in. I imagine we are another year or two out from people realizing the value that the city council approved and massive mixed use development nearby will have on prop values. It’s currently a dirt lot that came out of bankruptcy 3 years ago, got tied up in lawsuits, and is about to go vertical.
Suffice it to say, it’s tough to walk away from knowing what I know about the area.
Hey Whit, that is a crazy idea and I haven't heard of anyone doing anything like that. But I like it!
I would consult the bank who is giving you the loan to see how they feel about it. That is the only problem I would see. Is that the underwriter is going to see that you are selling to yourself. I'd be curious to see what happens when you speak to them. If you remember please let me know. Good luck! Hopefully it works out for you.