Could this cash deal work?

Question

Just when you think you have handle on the various types of RE deals out there another one comes your way you don't know how to handle.

Okay so I have Ted and his mother Chelsea. They own a property together, that I want to buy. Chelsea has been in assisted living for a while. Ted's brother Greg is going to have power of attorney for his mother Chelsea soon to conduct business on her behalf.

Greg and his brother Ted want to sell me the property for 230k. However Greg wants one agreement for 150k to buy the property and a separate agreement to give Greg and Ted 80k cash. Greg says the reason for this is because if the new deed says 230k the nursing home gets all of it.

Now I have the cash 230k cash and do not mind paying that. But what ramifications would be involved for me later on after I fix and flip the house?

I am guessing, my capital gains would be higher because my cost basis would be 150k verse 230k. What else should I be on the lookout for? Is this transaction even legal?

Greg H. · Answer

So you are contemplating whether you will participate in Medicaid/Medicare fraud ?

Rich Hupper · Answer

To followup on this topic. I spoke with 2 attorneys and this is definitely illegal. I wouldn't be committing the fraud but I would be a party to it. The whole sale assignment idea you had @Ryan Detig sounded good and would be legitimate however greg will not agree to this. He literally wants the 80k outside of closing, no record of it changing hands.I checked the title at the registry of deeds and did not find a lien regarding medicaid. So their claim to the mother's assets must be in writing somewhere unrecorded. I do not know how medicaid works, but knowing the government they probably have 1st priority getting their money back, and the ability to lien anything they want.Its really a shame things are turning out like because this is a great property, and as soon as I buy it at 230k I have 40k of immediate equity. Additionally I have been mailing and communicating on and off with this family for over a year. Looks like unless I had 230k in my mattress and an attorney willing to notarize a deed this deal is dead.

Ryan Detig · Answer

@Rich Hupper So this is a very interesting situation you have come across. It seems like for sure you will be paying taxes on an extra $80k. I would negotiate a cheaper purchase price to compensate that large cost but that is just me. While I am not 100% sure on the legality of this type of situation it seems to me that as long as Greg was not the power of attorney at the time of sale, Greg could wholesale you the property for 150k with an 80K assignment fee. I would have to check with my CPA but it seems like purchasing the property this way would also increase your basis to the desired 230K as the 80k assignment fee is an acquisition fee and would count towards the basis. Disclaimer, I am not very familiar with Mass' wholesaling laws but from what I do know about wholesaling in TX, I don't see why that would not solve the problem.

Alexander Felice · Answer

For future transactions:if it looks like a drug deal, and smells like a drug deal.....Cash transactions aren't illegal, but when someone asks for "unrecorded/unreported/off-the-record" transactions your spidey sense should go into overdrive.Glad you talked to the right people and got this sorted. I'm sure the punishment for fraud and party-to fraud are the same LOLOLOL

Rich Hupper · Answer

@Steven D.No believe me I am staying far away from this. I am not getting involved with illegal activity. I am just trying to better understand the entire scenario because it is the first time I have had to dealt with it. I am also curious to the nature of conveying real estate title without a third party to facilitate it. Old common law says anyone can draft a deed ( in massachusetts it needs to be notarized to be recorded however a notary at a bank could do this ). Recording of a deed is not necessary to transfer title. Its main benefit is for the grantee ( buyer ) . The grantors would be competentThe grantee would be able to accept itAll the elements of a valid deed would be there. However if the grantee accepted a quitclaim deed in consideration for 150k cash, they would have to remedy all existing liens prior to having clean title, for the next buyer. Since the medicaid debt has not been recorded, My question would be, could the government record a lien on the property after it is conveyed?

Steven D. · Answer

I wouldn't be committing the fraud but I would be a party to it.This alone would throw up so many red flags for me. I understand that sometimes you have to come up with creative new ways to do deals to get great value but you want to distance yourself from any illegal activity, even if it is not you doing it. Additionally, handing someone 80k cash off the books may also lead to long term liability.If you feel comfortable with what your lawyers are telling you and are completely protected getting a good deal go for it. However, if you can come up with a way to do it on the up and up and still get the good deal I would pursue that first. Good luck!

Rich Hupper · Answer

Ya I am definitely not doing anything illegal for sure. An installment sale sounds interesting. Taxes are not the issue its the medicare debt that has been accumulating since the mother was put in a nursing home. The remedy to that debt is the sale of the house, which would leave the two brothers nothing because the debt is so high. I am sure they are in arrears with property taxes as well. I think the only way this guys can convey the property is without the help of an attorney or title company because they all need to follow the law, and prepare all the necessary paper work. I know deeds can be conveyed outside of escrow however the buyer would have to remedy all the outstanding liens and record the new deed themselves.

Ryan Detig · Answer

@Rich Hupper You definitely don't want to do anything illegal. I would be patient. If they really want to sell they will talk to other people and will probably get the same "well that's illegal" response. Hopefully after a couple other "no way" responses from buyers, they will look to you because the whole sale idea is the second best (and best legal) bet for them. On a side note, if they own the property outright or close to outright, would owner financing it to you help legally get around whatever medicare issue they have? I have no idea what their situation is but if they need to avoid a large lump sum at sale then owner financing it could be an option. I would definitely run everything past your attorneys on this one as it sounds like Greg is just trying to avoid paying extra taxes on the sale.