If I can close this deal....

[Dominic Lucarelli]

I'm trying to push this deal through. The potential upside is enormous. The short term is challenging. What are your thoughts?

Asking price: $127,000

Triplex, fully rented, owner occupied

Main floor (and full basement): 2 bed, 2 bath. Owner occupied (estimating future rent at $600)

2nd Floor apt: 2 bed, 1 bath, separate entrance. Rented at $550

3rd Floor apt: 2 bed, 1 bath, separate entrance. Rented at $450

**Main floor can support an addition of a small studio apartment. Plumbing in place for a toilet. Need to add dedicated bathroom/shower & kitchen space. Estimated cost to add: $5000 Estimated added rent: $400

**The Main Floor apartment can be separated from the basement area, creating another unit. Basement area could be 1 bed, 1 bath apartment. A dedicated kitchen area would need to be added. This would adjust the rent of the Main Floor apartment to $500. Estimated basement rent: $400.

Now, the catch... the owner is selling the building but still wants to live there. She's lived there for 54 years. I'm trying to get creative with the financing on this one. In the short term, this will be a break-even deal. But once she passes on (morbid, I know...) this will be a smoking hot deal. I'll explain...

My Offer: $60k and allow the owner to live rent-free

This will allow me to buy the building much cheaper than I could otherwise afford. Once she moves on, I can gain an additional $600 in income per MONTH, allowing me to exit as Property Manager if I choose. On top of that, at any point I can add in an additional unit (or two!) for additional income.

Current building income: $1000 + owner + $25 garage rental fee

Expected fixed monthly expenses: $520

Insurance: $115

Property Taxes: $175

Water: $40

Sewer + trash: $130

Lawn Care: $60

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Total: $511.48

7% Vacancy: $71.75

10% Repairs: $102.50

10% CapEx: $102.50

Property Management: Currently $0

Mortgage: $234.73

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What are your thoughts? Am I crazy? Am I risking too much up front? I'm submitting this as an offer by the end of the week.

[Brian Gibbons]

Use a TIC Agreement

From Bill Gulley...

Let’s Play “TIC, TAC, TOE”!

December 1, 2015|Posted in: Bill's Blog9 Comments

Tenants In Common (TIC) is common in apartment ownership instead of C0-Opts or Condos, but is an available title ownership in any type of property regardless of size, type, zoning or use. These ownerships interests are also referred to as fractional ownership interests.

Why not form an LLC or partnership? These business entities are fine when the property is held strictly for business purposes, but in dealing with a homeowner who may live in a property they are not the best arrangement. Held in a business, the owner loses the ability to deduct interest on a home mortgage as well as the exemption of capital gains from their residence.

Another aspect is the availability of fractional financing under conventional loan guidelines, a TIC owner may sell and finance their interests as a conventional residence, like a condo loan, staying out of commercial lending requirements.

Unlike other joint tenancy forms of ownership, a TIC owner may leave their estate to chosen beneficiaries instead of other owners. They may sell or lease their interest without consent of other joint owners. They may also finance or refinance their interests held as just mentioned. That means that other strategies such a subject-to transactions, installment sales, leases and lease option to buy arrangements can be devised with TIC.

Holding legal and equitable title interests also means avoiding many of the pitfalls in other investor strategies. With a TIC agreement you're not on the outside as you are with a master lease or a sandwich lease. Your sale under an option is no longer contingent on having your seller sell, you can pass title as an owner and execute the sales contract through escrow with your TIC partner or have the power to sell.

Wholesalers are no longer subject to license requirements facilitating a sale when they are holding legal and equitable title. Agents are much less exposed to claims of net listings or agency relationships being in title.

Need to get in and make improvements to a property but don't have a contractor's license? The TIC may be the answer, the owner is doing the work and contracting as required. Not only can you perform work on your property you can obtain permits required and hire contractors and sub-contractors.

Want to be a landlord? With TIC and your TIC Agreement, you become an owner and you can manage your property without a real estate license. You have an agreed buy out with your co-owner under your TIC Agreement, you take a management fee and split profits up to current rents, then retain the forced appreciation you create. Many ways to split a deal!

Why would an owner enter into a TIC Agreement selling just part of their property? Answer, it works for distressed properties, distressed owners, when an owner needs some money or steady income and would rather wash their hands of dealing with the property, like tired landlords. Another reason is taxes, the seller can string out the sale of interests in the property, still retaining tax benefits. They can also defer income gained over time. A seller can go from an active income to a passive income.

How safe is a TIC arrangement? Well, it can be safer than owning 100%! Creditors, even through bankruptcy have a much harder time seeking judgments against a fractional interest than a whole interest. That's because the ownership rights of others cannot be impaired. You can be safer owning 10 properties with a 10% interest than one with 100% interest.

Can't a majority owner just vote to change the TIC Agreement? No! The agreement can be made requiring all owners to consent to any change.

Can you buy an interest with seller financing? Absolutely, that’s how I do them! If you are buying from an occupant owner and you’re an investor, Dodd-Frank will not apply, same as if buying as an investor from another investor. The only way Dodd-Frank would apply is if you intend to move in to the property, even then you may have an exempt transaction buying from an owner occupant. The collateral pledge is simply your percentage of ownership.

How complicated is a TIC Agreement? Truth is, it can be very simple much like a purchase contract or a lease-option to purchase contract or it can be complex, it depends on your investment strategy and what you want to agree to. There are standard TIC Agreements available.

Can you use a Trust or a business entity to hold a fractional interest? Absolutely! Just understand with a business entity you may lose the benefits of property owned individually, like building permits or representing yourself in court. That’s a business decision.

What about the value of a fractional interest, will the price be the percentage of ownership taken with respect to the market value? You can agree to that, but the Tax Courts as well as Federal Courts have ruled that a fractional interest is less because it requires a law suit to force sale and administer a fractional interest. That is to value found through tax matters and law suits, actually an advantage to that owner. But, since the TIC Agreement can include power of sale provisions and agreements, the matter of forcing sale can be avoided. As to your net worth, after you acquire a fractional interest at cost, a year later you can show the fair market value as adjusted under the rules, always see your accountant.

What does TIC, TAC, TOE stand for? TIC, is tenants in common, "TAC" is taking administrative control under the TIC Agreement, "TOE" is taking equity under the TIC Agreement by your entrepreneurship. And, no, this is not guru stuff!

@Bill Gulley