Examples of Creative Transactioneering

[Jackie Lange]

Today I posted anarticle by Jack Miller on my blog that I thought many at BP would benefit from.  You'll learn some ways to take creative real estate to the next level.  

Remember, every deal needs to have a purpose.   You're in the business of solving real estate problems... not just doing deals.  Learn how to think (and do deals) way outside the box. 

How does one come up with a creative financing idea? A long time ago someone said that necessity is the mother of invention. Nothing could be more true than having to earn a living, or come up with something to repay a loan. The key to creative financing is to understand how a conventional deal works, then to modify the various component parts in unconventional ways to achieve the desired results. Oftentimes, conventional methods just will not work to solve real estate problems.

1. Using Remainders to Remedy Upside Down, Unsustainable Financing, Personal Debt Liability:

The elderly widow is unable to sustain the payments on an indexed loan. She has no income with which to repay a loan, and insufficient value in her small house to make a Reverse Annuity Mortgage feasible. The entrepreneur buys a Remainder Estate in her home for either with a Note that matches her payments, or by using IRA cash to completely pay off her mortgage, leaving her a Life Estate.

Benefits for her: No mortgage payments, no risk of losing her home in foreclosure, and sufficient income to support her lifestyle needs.

Benefits for him: Management/maintenance free property bought at approximately 50% of value. Profit will be realized upon her demise. No reassessment of taxes, and retention of homestead exemption by her, which holds down property taxes and insurance costs while protecting the property from liens (which would be extinguished upon her death).

Documents needed: Purchase Contract, Deed, Title Insurance

2. Using Master Leasing and Shared Appreciation to remedy Out-of-Control Rental Property, Tenants, Collections, Maintenance, Liability:

Distraught landlord who lives 100 miles from commercial rental property has lost control of management. Although it is leased to a good tenant, repairs are either not done, or are costing far more than they are worth. Cash from rents is not accounted for, or transmitted promptly. He is leery of hiring another manager, and is unable to sell the property.

Entrepreneur who is an experienced commercial property manager Master Leases the property at 90% of the existing lease payment with an Option to share all future gain on sale on a 50/50 basis.

Benefits: Landlord increases cash flow and gains peace of mind. Entrepreneur earns an income and can increase its share of profits by increasing the net income of the commercial building through more efficient management.

Documents Needed: Long-term Lease with the right to sub-lease.

3. Using "Ender" IRA capital to definance bank debt and "turn and burn" to make possible an entire chain of fund "Financiers" "Wholesalers", "Fixers" "Retail Buyers" by sharing future profits; tax free.

Entrepreneur who lends money short term to rehabbers and wholesalers is being denied credit by his local bank. It doesn't like lending money to what is essentially a competitor and is refusing to renew his line of credit. He contacts the owner of a well heeled Roth IRA who pays off his institutional line of credit.

Next, the IRA Custodian and the entrepreneur combine forces. In return for providing a "Private Line of Credit" to a Trust they form for this purpose, the entrepreneure is able to fund short term loans. The Trust isolates the parties from liability. The IRA gets half of the net profit; which amounts to a yield of over 15% per year.

Benefits: The entrepreneur, and his customers, are shored up by a much more reliable source of funds at a cost that is easily affordable to them. The Roth IRA has a high yielding portfolio of small, short term loans that enables it to multiply its tax free earnings over what it could earn in deposits or in the stock market with virtually no effort and limited risk.

Documents Needed: Contract, Declaration of Trust, Appraisal, Title Insurance Policy, Shared Appreciation Note, Deed of Trust (Mortgage)

4. Using Lease Sandwiching to create income with which to fund Options bought on Installment Notes.

The enterprising Broker has no capital with which to buy real estate, and no financial reserves to support it while awaiting for a sale in the current slow market. His brokerage income is drying up and he needs cash flow.

Instead of buying houses and renting them out, he solicits all of the other brokers with an offer to sandwich lease their unsold vacant single family house and condo listings at market rents for 90% of fair market rents, with an Option to buy them at 90% of appraised value anytime he can find a buyer.

In return, he offers to give any broker who brings him a house that the can lease/Option 30% of his share of all rents he collects until the property is sold. At that time, he will not participate in any of their commissions.

Benefits: The listing Brokers are thus able to keep in the good graces of their owners by offering a solution to empty house cash flow problems while creating some income from rentals and the potential for future commissions when the Options are exercised.

The managing Broker creates income from sandwich leasing in addition to earning a future profit that is far more than any of the listing brokers will receive when the houses are sold and he exercises his purchase Option.

Documents Needed: Division of Income and Gain Contract with Broker, Lease from Owner with right to sub-Lease, Purchase Option that includes a provision for the Owner to pay a commission when the Option is exercised.

5. Using Options and Corporate Pension Plans to Convert Equity to Income with Minimum Taxes.

Unlike IRAs, into which only $5000 per year can be contributed, it is currently possible to put as much as $160,000 per year per participant into a Qualified Corporate Pension Plan. The problem is that few real estate entrepreneurs earn enough to be able to spare this amount of contribution.

The solution is for the entrepreneur to contribute houses, or Options on houses with high taxable equities to their corporation. This is tax free to the extent that any mortgage debt does not exceed the tax basis. Next, the corporation sells the house and realizes a net profit over the loan payoff that it contributes to its corporate pension plan. The corporation deducts 100% of its contribution from its taxable net earnings and thus reduces tax on the sales.

Benefits: The Pension Plan contribution can continue to compound tax free until it is withdrawn after retirement. This gives the entrepreneur a way to essentially fund his own retirement out of negotiated bargains and foreclosure sales tax free. It also helps his corporation conserve its cash by funding his retirement plan with contributed real estate that it sells.

Documents Needed: Corporate Charter, Qualified Pension Plan, Purchase Contract or Deed, Option, Assignment