All Forum Posts by: Ron Thomas

@Chrystal England Thanks for the reply and insight.  In the couple of weeks that have past since I posted this, we've decided to essentially put the deal on hold.  According to the broker, the seller wants to roll his funds into a larger deal with some very prominent Detroit investors and doesn't want to do any carry backs.  We let the broker know that in the event the seller becomes receptive to a carry back, then we'd give the deal another look but without it the deal is currently a non-starter for us. 

Thanks again for the advice.

Hi Bill,

Thank you very much for the great advice.  I had to read it all a couple of times to really digest everything you said in your article.  Splitting the proceeds from a 1031 seems complex to say the least.  I think what I am going to do here is suggest to my partner that we walk away from the deal for now, but tell the broker something to the extent of 'Although we see potential, we want to make absolutely sure that we are adequately funded.  With a 10% seller carry back being off the table, were going to hold off on a letter of intent for now to give ourselves some time to look at raising more capital.  If the seller is willing to split their 1031 to accommodate a carry back (we realize this may complicate things and is unlikely) or be a private money lender for about the equivalent amount then we may have basis for negotiation.  Otherwise, were going to hold off for the time being.'

I cant thank you enough Bill.  Have a great New Year!

Hello all,

So here's a quick run down of the situation I am asking about.  Myself and another investor in the suburbs of Detroit are looking at a 140 unit apartment complex being sold by a larger investor who wants to recycle his resources into a larger deal.  Its on the market for about 4m.  We walked it with the broker's assistant (the broker was out of town for the holidays), looked over the pro-formas, and decided everything looked good enough to write a letter of intent.  A few hundred K in capital investment is needed fairly quickly, and in order to make sure were not short on cash during the reposition, we need a seller carry back of about 10%.  We called the brokers assistant to ask if this was possible, he called someone on the seller's side and returned a response of 'the seller will entertain a 10% carry back'.  'Great!' we thought.  Then, a couple hours later, the actual broker direct emailed my partner and said 'A carry back is not an option here, the seller is doing a 1031 exchange with the sale proceeds'.

So here is what I am looking for advice concerning.  A) Can the seller simply split the 1031 proceeds and maintain his tax advantages on at least the 90% he recycles if not also the 10% he leaves in the property via-us?  B) We have enough funds to close this property on our own but need this extra portion for cap ex after we buy.  Could how we structure his 10% carry back effect his 1031 eligibility?  In other words, instead of him leaving 10% in the property, could we buy it and pay him then, through a PPM or some other legal doc, have him reinvest the cash equivalent of 10% of the sale price back to us to leave his desired tax deferment intact?

This is a deal I would like to close but am not willing to risk being underfunded for.  I think the broker may be viewing the entire transaction as a little to linear.  My partner gets the impression the broker thinks of him as 'amatuer-ish' because were both relatively young and this would be our biggest investment to date.  There is some merit to that notion, were not large investors yet, but why not just walk away with a sale and nice commission check then watch us fall on our face from a distance if this is how the broker feels?  Who knows, maybe we'll succeed and bring a repositioned deal back to him.  We havent replied to the broker with what we plan to do yet.  I would like a sound plan that achieves our funding goal while maintaining the tax benefits of the seller before we reply.  That way, even if were 'ameture-ish', how we conduct ourselves will be 'pro-ish'.  I appreciate any advice.  

Hey Josh,

I think you are right that it is ultimately up to you and the investor.  That said, in my opinion, 50/50 doesn't seem appropriate. That amounts to awfully expensive capital for you. If, say, you were new at this and had no track record then you'd be a riskier investment and any partner would deserve a reward commensurate to such risk. That, however, doesn't appear to be the case hear.  

I have a 2 unit property I bought with an investors money.  Truthfully, it was the second property I ever purchased. He funded it entirely. If we sell he gets his capital back first. Any capital gains beyond the initial investment and rental profits are split 50/50. He gets 'mailbox money'. We contributed time and knowledge, nothing more.  

Good business deals benefit both parties in obvious ways.  I'd imagine that you have a number of options for raising capital. 50/50 seems like an awfully expensive option for you in this scenario.  For the investor, it's seems great!  In fact, let me know if you want to go that route, I'd invest in that!

Just my two cents. 

@Josh Sterling

My initial thoughts reading your post were in line with what you and I have discussed a few times before. Scale seems to be the biggest hurdle, but as you basically said above, you are more or less there. At least enough so to justify a part time person.

I like the list, seems to be the exact things I would need as well. Though with only 11 units, these aren't task that trouble me and Sam too much.

Have you considered pairing with a couple other local investors, then, as a group, finding a qualified person to handle all of the collective properties? Each investor could pay a part that represents their portion of the total properties handled. It would be a better deal for the sub-contractor (person you hire) and cheaper for each investor. I actually have a person or two in mind that may work well in this kind of position, a stay at home mom like @Brandon Turner suggested. I'm not sure if the person in mind would want the job, but she seems like a prime candidate.

In my normal business, had I never stepped out of my own way and trusted other people to be competent, which they were because I paid them fairly, I would be a bottleneck to this day. Sure, I've had to fire a couple people and there have been a couple hurdles along the way, but none of it was too big a deal. I'd be much worse off if I would have continued to micro manage. I think, what exactly this person gets paid, and if they screw up a call or two every now and then, are the smaller picture issues that aren't even worth your worry to be honest. I think there is an opportunity cost situation here, that may be hard to quantify, but is very real. For example, if, tomorrow you spend the day showing a unit, posting a unit, painting something.... whatever, you may save yourself the cost of paying someone to do that. But, lets say, rather than that you paid someone else to do those tasks and instead you spent the day looking at deals and found your next apartment building. How much would what you do tomorrow, in this example, have made you in a year? Lets say you still own the building in this example 20 years from now. How much by then? Ray Crock didn't flip burgers and Donald Trump doesn't plunge toilets. I have tons to learn about real estate, which is why BS-ing with you is fun because you know a lot I don't. But one thing I found to be very true is that time is a finite resource. Maybe the only finite resource. When you spend your time doing things that are drastically beneath your pay scale, you are doing yourself no favors. One of my good friends once told me that 'money is the physical form of time'. (he's pretty much broke which is ironic and beside the point, but kinda funny) I like that metaphor. If someone is willing to sell you their time for $500 or $1000 a month, I think you should jump on it sooner rather than later. Whats 10 or 20 more hours per week of your time worth to you? If they work 20 hours per week for you for $1000 per month, you are essentially paying $12.50 per hour to buy your own time back. Sounds like a great investment to me.