Seller Financing Multi-Family - Owner User & Cap Gains Concerns
I don't need advice on general numbers - I need input on structuring seller financed / creative financed deals. Below is a scenario. Please provide input and help me figure out how to structure a deal.
My Current Situation: I'm not desperate for a deal. I'm in Southern California and prefer to own here (I've done well over the last ten years and know the market). I own several multi-families already and have strong income. I am coming out of a 1031 with about $500K gain. I have plenty of time to identify my upleg - timing is not an issue.
Seller Profile: I'm working with a multi-family owner in Southern California. The owner is retired, not working, and living in her multi-family. She is retired and looking to down-size and use some of her equity to live. She is savvy (former RE agent) and understands capital gain tax implications. She tells me she does not know where she will go if she were to vacate her apartment. I think she also might be interested in a "rent back" - ie. continuing to live at the property while she figures out her next move. She is struggling financially as she does not have enough cash flow. She has tried to pull some money out of the property, but I understand that she has not been able to qualify for any cash-out programs (probably compounded due to Dodd Frank restrictions - she has very little income). Seller has children out of state that are not wealthy, and have basically been useless is helping her try to find a short-term solution.
Property Profile: Multi-family property with value >$1.4M. Seller will take ~$1.2M. She owes ~$350K on a 6%, long-term note (her payment is $2500/month; she's about half-way through the payback period). Property is a triplex (in triplex zoning) that has a non-conforming 4th unit. It seems to me this non-conforming unit might be used to my advantage (ie. she may be hesitant to go to the MLS because the non-conforming unit will potentially cause problems for non-cash buyers).
I'm thinking of transferring my $500K 1031 gain to her as a down payment (and to pay off this note). I can fairly easily obtain financing (30-year fixed is generally what I go for) on the remaining $700K.
- Is there a smart way for me to give her payments (e.g. $100K for 7 years) that will allow her to minimize her cap gains taxes, while ensuring that I can leverage "attractive" financing as I am not in need of seller financing and would generally prefer to lock in 4-5% interest for 30 years (rather than be subject to higher "hard money" interest rates and shorter payback period).
- Under this scenario, I understand that I would not need an appraisal, and could waive other inspections. This would resolve the concern regarding the non-conforming unit.
- Any seller financing would be secured by the subject property (not my other assets).
- I'm not sure how the "rent back" clause gets documented, but I would like the contract to formalize that the owner can rent back her unit for as long as she like for $2000/month. No additional tenants would be permitted to reside for more than 30 days in the unit. The rent back period would be indefinite if legal (since I need to rent it anyway), and I would include a nominal annual increase 2-3%.
- What kind of "lease option" deals can you think of that might work here? A lease-option might make her feel secure as it would provide her income but not require her to vacate (if I understand these structures properly).
- Is it permitted to record a seller-financed note with 0% interest in the State of California? For example, if I offer to give her $500K plus $100K each year for the next 7 years is this legally permitted? For some reason I thought zero-interest carry back financing was not permitted in California, but I have not been able to find any useful information online regarding this restriction (maybe because I am imagining it!).
Who's got some solid thinking for me on this situation? I would like to try to make something work. Thanks