All Forum Posts by: Account Closed

While wholesaling can be used as a strategic approach for real estate investors, it’s a process that must be carried out very carefully. The legality of wholesaling in real estate is not nearly cut-and-dried.

Before digging into the legalities of wholesaling real estate, it is important to understand what wholesaling actually entails. A real estate wholesale generally occurs when a wholesaler enters into a contract with a property seller, who more often than not is looking to sell a property in a short period of time. Wholesalers commonly enter into a purchase contract with the intention of reselling the property. In fact, sometimes the wholesaler re-sells his or her contractual interest in the property to another party for a profit before the deed is ever transferred.

When done correctly, wholesaling real estate can be a strategic move for real estate investors looking to buy or sell off a number of properties. But when real estate wholesaling is conducted without care, it can result in legal missteps that could result in the imposition of substantial penalties and fees.

Just to add a little more, to meet the requirements of the like-kind exchange, the seller must inform the intermediary within 45 days (so there is a bit of a time crunch and you'll want it set up and ready to go) which property is being exchanged and acquired. Under Section 1031, once the sale of a property occurs a qualified intermediary must receive the cash from the sale, similar to an escrow arrangement. A qualified intermediary is a third party entity or person that facilitates a Section 1031 exchange, often a trusted real estate attorney. The property sale for both properties must also close within 180 days of each other in order to qualify for valuable tax benefits.

Lease payments can be among the most significant expenses for business owners. But the fact of the matter is that there are many non-rent fees and use restrictions that can have a significant economic impact on a commercial tenant. For example, if the commercial lease stipulates the tenant is responsible for utilities, consider taking on that expense. Likewise, if the company is responsible for paying maintenance fees, as the building owner, maybe waive common maintenance costs instead of reducing rent.

Typically, a commercial real estate transaction begins with a buyer offering a letter of intent or otherwise formally expressing interest in the property. A letter of intent is a preliminary agreement that roughly outlines the fundamental terms and elements for the final agreement, but it's not a legally-binding contract to purchase the property. Rather, it's a statement of an offer. After the offer has been accepted, an attorney will typically draw up a Commercial Real Estate (CRE) sale and purchase agreement.

Another option could be a small business loan - if this applies to your business. The lending programs of the SBA give small businesses a chance to grow and thrive. Securing an SBA-backed loans can give your business the opportunity to do things. Every SBA lending program is different. However, if you intend to apply for an SBA-backed loan, there are certain pieces of information that are mostly standard.

It is important to consider that a foreclosure is a legal process through which a lender invokes a number of rights against an underlying property after a borrower has allowed a mortgage loan to go into default. Obtaining knowledge of foreclosure laws in your state will be helpful as they regulate the rights of both borrowers and lenders in the event a borrower fails to uphold his or her end of a mortgage agreement. You will want to be aware of the process and the players involved in foreclosure.

You may also want to also be aware of short sales. 

The biggest difference between a short sale and a foreclosure is that under a short sale the lender agrees to accept compensation that is lower than what is still owed on the borrower’s mortgage. In these cases, when the borrower defaults on the mortgages and is compelled to sell the property for less than what is owed on the loan, the lender will accept the sales price as full repayment for the defaulted loan, no matter the amount.

Unlike a foreclosure, a short sale often does not impose any additional financial or legal liability on a borrower in default once the sale has closed. However, some states require borrowers to be held responsible for the difference between what the property sold for and what was originally owed, even in a short sale.

It is important to consider that a foreclosure is a legal process through which a lender invokes a number of rights against an underlying property after a borrower has allowed a mortgage loan to go into default. Obtaining knowledge of foreclosure laws will be helpful as they regulate the rights of both borrowers and lenders in the event a borrower fails to uphold his or her end of a mortgage agreement. You will want to be aware of the process and the players involved in foreclosure.

The timeline is going to be the key determining factor -- did the bankruptcy happen before or after the sale. 

In a Chapter 7 bankruptcy (liquidation), the court was asked to have the property taken in exchange for forgiving the debts owed. Under Chapter 13 bankruptcy (reorganization), a repayment plan as filed to pay off a portion, sometimes all, of the debt owed over a period of time. Chapter 13 allows the property owner to keep their property, depriving you of the ownership opportunity.

I support @Dave Foster's advice. 

And to add a little more as you move forward in the process, for tax purposes, these transactions are not recognized as a sale of property, but rather as a trade of one investment in real property for another. Real estate investors often use like-kind exchanges as part of their tax liability management strategy, but these transactions are complex and potentially full of pitfalls. Like-kind exchanges only apply to investment and business property and trades are fairly relaxed. Residential properties, inventory, securities, trust certificates, corporate stock, or partnership interests cannot be exchanged under Section 1031. Rather, by definition a like-kind real property exchange involves a trade of real properties within the United States that are the same in nature or character, even if they have different qualities. So, for example, two lots of the same approximate size, value, and location could be exchanged under Section 2031 even if one was improved and the other unimproved.

Short sales can get you a home at a surprisingly low price. In fact, the low cost of short sale houses is often one of the biggest and only draws. Otherwise, short sales are notoriously complicated and frustrating to deal with and can take a great deal of time. The process of working towards a mutually acceptable purchase price for short sale property may take months and months. This is especially true when there are a number of players involved. 

All that said, short sales can be very worth it, financially speaking. A bargain on a home purchase can be a rare event and one worthy of jumping through some hoops.