All Forum Posts by: Account Closed

Here is my draft reply...

The assignee borrower does not qualify for the seller carryback they are seeking with 101% CLTV. Assignee borrower is a disregarded entity whose debts cannot be adequately secured by the personal guarantee as agreed. Borrower has provided inconsistent, ineffective and inaccurate documentation in his efforts to frame the assignee borrower as something other than a disregarded entity. Under these circumstances, the assignee borrower qualifies for no more than 33% CLTV.

You can relay this to the borrower.

Quote from @Chris Seveney:

@Tyson G.

No buyer can force anyone to give them money for a loan if terms have changed. Assuming you never agreed to finance 101% all you need to say is we will only carry up to 70 or 75%.

If you haven’t gotten a lawyer involved yet then this is shame on you - as a lawyer could also easily answer these questions.

Thanks Chris. I've spoken to 3 attorneys. The first had conflicts. The next had limited time and just went out of town. The 3rd has limited time and just got back in town. The borrower appeared like they might be trying to perform up until the day after Thanksgiving when the 8832 arrived.

To be clear, I will not sign off on the seller carryback. Our agreement stipulated only that I would do a seller carryback of 31% LTV in 2nd place. The amount of the 1st was not stipulated in our agreement. The buyer argues that he gets to do a 1st of any amount. His offer stipulated he would seek financing for the 1st... I'm not sure if they snuck in the amount of $1M as a line item on the offer. The personal guarantee was added after we entered escrow. If they did manage to sneak in the amount of the 1st, can I disqualify the borrower on the basis of the inconsistent documentation provided? He did send a fake W-9.

UPDATE!

The buyer is attempting to secure 101% (CLTV) financing on the purchase. Attempts to qualify the buyer and reduce the total size of the financing failed, so I've focused on the personal guarantee. (The buyer assigned the purchase to his living trust and also agreed to sign a personal guarantee. I think the broker was able to convince the buyer to sign the guarantee because they both knew it would be unenforceable. Incidentally, I've found public records showing this broker and buyer were TIC on a property last year. Seems the broker's MO is to buy the listing, botch the marketing, then feed deals to this buyer.)

In any case, I was able to intervene with the living trust assignment and declare that the assignee borrower could not be a disregarded entity, essentially because a person can't guarantee their own debts -- and a disregarded entity is "still them". However, the buyer has been playing games with the assignment ever since. The buyer's 2nd attempt at making the assignee borrower look like it wasn't a disregarded entity was to change the assignment to his sole prop LLC. I pointed out that it was still a disregarded entity. So the buyer's 3rd attempt at making the assignee borrower (LLC) look like it wasn't a disregarded entity was to amend the Articles to essentially say "we won't treat it as a disregarded entity anymore". He also added his wife to the LLC because the Articles had a typo that stipulated the LLC had to have "at least more than one member". Attached was a W-9 saying the LLC was classified as an S-corp. Then I pointed out that the Articles provide no security and the W-9 didn't change the classification election of the LLC. And since the LLC had no past tax returns, they had to fill out an 8832 to make the new election with the IRS. So the buyer's 4th attempt at making the assignee borrower (LLC) look like it wasn't a disregarded entity was to fill out an 8832 electing to be classified as a partnership... (not an S-corp). And since the LLC is owned by a married couple in a community property state, it can still be treated as a disregarded entity.

So I pointed this all out, said the buyer had provided inconsistent documentation and made false statements to me as lender... and said I couldn't sign off on the seller carryback under these circumstances.  (We're scheduled to close tomorrow.)  Broker and escrow then asked for permission to show the buyer my email, which I thought was strange... but before I could get any feedback from my attorney, the broker sent a "notice to perform" from the buyer.  The buyer claims he has done everything I've asked.

I'm ready to be done with this headache and let them cancel. The only question remaining is whether I'm at risk of anything more than the buyer canceling.

Can they actually force me to do a seller carryback under the circumstances?

In this article, an attorney presents a template for a California Personal Guaranty...  https://www.stimmel-law.com/en...

It seems to address 2 of my top 3 concerns...  

1. The Guarantor has an ownership or family interest in the Principle (Borrower) -- Is it sufficient to simply include this as a recitation?

[Commonly, the guarantor has an ownership interest in the entity or a family interest with the principle and that fact should be recited in the guaranty. Typically, a clause will read... "X agrees to pay all debts of Y, a company in which X has an ownership interest"]

"GUARANTOR agrees to pay all debts of BORROWER, an entity in which GUARANTOR has an ownership interest or family interest"

2. Lender need not exhaust any remedies against Principle (Borrower) before seeking recovery from the Guarantor.

"Should BORROWER default in the prompt payment of sums due LENDER, LENDER may immediately proceed against GUARANTOR, and shall give written notice to the GUARANTOR, together with an accounting of all sums due as to which BORROWER is in default, by regular or certified mail. LENDER may, from time to time, extend the time for payment or accept partial payments of or additional security for balances due or to become due from the BORROWER without or prior to, such notice to the GUARANTOR. GUARANTOR hereby waives the right to require LENDER to first proceed against BORROWER prior to enforcing this Guarantee."

The remaining concern is...

3. Are these clauses suitable if the Principle (Borrower) is the Guarantor's living trust? (rather than the Guarantor's corp) The article focuses on a personal guaranty for a corp loan / LOC.

Quote from @Wayne Brooks:

@Account Closed Well, an assignment to their living trust sounds more legitimate/sage than a wholesaler assigning to some random buyer. A personal guarantee should be fairly straight forward, but I’d use an attorney to draft all the documents since if this eventually goes sideways, you’ve got major dollars and headaches involved.  The amount of the first mtg is still the major issue.

 Thanks for the feedback.  Assuming the personal guaranty is valid, strong and enforceable, I'm guessing the amount of the first mtg is still the major issue because even a big fish can go bk in a downturn.  Is that the crux of it?

If I'm at 30% LTV in 2nd position, what would be safer in your opinion... having 80% CLTV and no personal guaranty or 100% CLTV, a personal guaranty, and a list of assets with $10M equity

Quote from @Wayne Brooks:

@Account Closed Yeah, with “buyer qualification” docs being due, there is an implied approval/qualification factor. 
As I read it, your “big fish” is not the one you’re going to end up married to. And guys wanting to over leverage properties aren’t looking to volunteer personal guarantees. 

 I have a countersigned commitment for a personal guaranty from the buyer...  (written on a CAR form addendum with the extension of COE and assignment to the buyer's living trust).

It seems the "buyer qualification" part of the escrow timeline was a mistake...  but my broker is sending me buyer's qualification docs in any case.  I have requested a schedule of assets.

How do I know a personal guaranty with teeth when I see one?  Is there a good resource for such things or do I just need a good real estate attorney?  Escrow has apparently agreed to draft the note but their contract explicitly disclaims any responsibility for same.

Quote from @Wayne Brooks:

@Account Closed  Yeah, a couple of important things you didn’t consider…

1) the amount of the 1st mtg, and his resulting down payment, is crucial

2) the deal needed to be contingent on you approving the credit/resources of the buyer…without this you have no control on who your ultimate borrower is.

Having said that, your best scenario is if they don’t place the EM in escrow by the deadline.  If they are 1 minute late, Immediately send a notice of cancellation, assuming your contract allows this immediate cancellation, or a notice to cure within a certain amount of time, whatever your contract allows.

 Thanks for this feedback, Wayne.  Chris seems to think I still have the opportunity to qualify the buyer, and there does seem to be some evidence of this in the docs. (Buyer qualification docs are due Oct 17)  And when I ask about it, I'm ignored.

While I agree it would have been better to explicitly structure the deal to be contingent upon the terms of the first, it sounds like there's still some room to maneuver and negotiate on this. The broker has already volunteered to "probably" convince the buyer to sign a personal guaranty. The buyer is a big fish, so I think this alone could salvage the deal. Ideally I'd demand max 90% CLTV too... but I'm wondering what feedback you might have. The escrow opening docs are currently in my inbox. They show an as yet undetermined amount for the 1st.

Quote from @Chris Seveney:

@Tyson Gustus

As a lender you still need to qualify the borrower.

Remember this is 2 transactions one on the purchase and one on financing. You could review the package and just note that he does not qualify whether it’s because of their income or maybe with you in second you require still no more than 80% ltv.

Thanks so much for this guidance, Chris.  This is the key I was missing.

Follow up question...  Am I obligated to disclose my lending standards, so to speak, to the buyer within a specific (legally mandated) timeframe?
 
The timeline provided by the transaction coordinator shows buyer qualification package is due in 17 days, in this case Oct 17.  I'm currently waiting for the appraisal to land before pressing the issue.

Quote from @Dave Foster:

@Account Closed, In order to defer all tax you must do two things - 

1. Purchase at least as much as your net sale ($600K in your example)

2. Use all of the proceeds from the sale in the next purchase or purchases.

.    these proceeds are

.    a. $200K in cash

.    b. a $200K note (this is an asset and a proceed from the sale)

So, to defer all tax you must purchase at least $600K of real estate using $200K in cash and a $200K note.  This can be tough.

1. You can offer the note to the seller of your new property 

2. You can sell the note on the open market

3. Or you can replace the note in your exchange account with cash (what the quote you provided is all about)

Usually #3 is the only feasible option.  The note must go in the exchange.  And sometime before your purchase you replace the note with cash.  At that point you have $400K in cash to be used to purchase at least $600K of real estate.

And outside your exchange you have a note for $200K that you paid $200K for.  So the only taxable profit is from the interest that comes in..

There's a video on our site if you are looking for another resource

 Thanks, Dave.  This is exactly what I needed to know (if not what I wanted to hear)...

Assuming I plan to buy DSTs as my replacement property, how do I buy $600k of DSTs with $400k?  (Actual numbers are 2.5x this example in case that matters.)  I am/was planning to bring the cash to close (option #3).

Since I was planning to borrow nearly half this money (thinking I'd only need it to close escrow) I will have to structure a different deal over a much longer term.  My "lender" friend will want to know...

Are DSTs exposed to declining value of the underlying asset(s)?  Or are they more like a loan where you're owed the principal invested as a balloon payment (plus appreciation, if any)?

If I'm not able to structure a different deal, I may have to realize some gain.  This would be painful since the note is considered gain and not liquid. 

I'm listening to your videos now.

Can anyone with experience doing an owner carry with a 1031 exchange verify the following?

Do I need to use all my equity, plus the cash I bring to close, and put all of it into the replacement property?

As a simple example, say I'm selling a property for $600k with a $200k loan balance. Buyer gets a $200k owner carry loan.  If I bring $200k to closing to fund the owner carry, do I get that $200k back or do I just get the prom note?  And then do I have to put all the equity ($400k) into the replacement property thru the 1031 exchange?  Or does only $200k have to go into the replacement property?

Better strategies for your 1031 exchange

These strategies are presented in the order which we prefer. In each case, consider a scenario where your buyer is asking for $200,000 of seller carry financing to close the deal:

1. You bring cash to make up the difference

If financially able, you substitute new cash financing for the owner-carried note. That new cash — now a lump-sum and not coming as installments — goes into your 1031x escrow account. In effect, you cover the difference ($200,000) that the buyer is asking for, which allows you to show the IRS that 100% of the money in the sale went directly through your escrow account and toward the purchase of valid 1031x replacement property.

Acting as the lender, you now bring the full amount of cash (the face value of the note) to the closing table. A promissory note and deed of trust would be executed between you and the buyer.

Again, now the full balance of the 1031 exchange is immediately available after the sale and is ready to be used for the replacement property purchase. This strategy is doubly beneficial:

1. The 1031x is completed in an entirely tax-deferred way (including deferral of recaptured depreciation).
2. The tax basis in the note is now its face amount instead of a carried over basis from the relinquished property. This is the best/easiest option for completing the 1031 exchange, but it requires that you have the financial means available!

https://1031x.com/investment-s...