Buying The House And Lease Optioning The Land
I want to buy a house which is selling for $1.5 mil. Seller, who has plenty of $ and is conservative, would take proceeds,put it in CD for<3%int..I want to offer him $500k for the house, and 5% on $1 mil. for the www.land.I will then turn around, and with my contract which allows assignment, assign the contract for $1.6 mil.A)A win-win-win for all?Seller gets> than he'd get in bank, ultimate buyer gets 5% mtg(less than going rate), I make $100k.B)Can seller deduct property taxes?He doesn't own house after this, only the www.land.C)I heard that generally, property with a bldg. is apportioned 2/3 for land, 1/3 for bldg. Is this true?D)Any flaws with this scenario? Just starting out & need help.
Please ignore the "www" in the previous post. The "system" automatically posted it.
You asked if there are any flaws? Two answers.
1. Yes
2. Maybe - depends on the objectives.
The biggest flaw is the idea of separating the house from the land. For the most part the US residential property market revolves around freehold deals. Some places, (HI for example) see a lot of leasehold deals but most of the time freehold is the norm. People have come to expect it and also to prefer it as many think it is simpler to deal with.
So, a leasehold deal will run into buyer resistance and lender issues. Hence the value is impaired.
In one market I invest in leasehold is the norm and the lenders prefer it. The rules of the game are rather different so watch out if you do this deal.
Second major concern from my view. You are creating a note that benefits the seller. You said he is very conservative but appears to have some money. I am not sure that he will go for you switching borrowers. Hence you might find the note needs to be paid off when you sell the place. You can do what you want to try to avoid this. I would suggest you get his prior permission to assign rather then try to fool him.
Last problem. A piece of land with a leasehold interest on it is not worth what you think. It is effectively only worth what the income produced is worth discounted over the live of the lease. A lease that is close to ending will cause the deal to have an income value and a future appreciation value. In some legal jurisdictions, the holder of the lease can force the land owner to renew so be careful for how that impacts the future value. If a lender is going to lend on the place assume they will want to see a long term lease that is much greater then the loan term. They want to know that the asset (the home) will have value long after then should be paid. The asset is their protection. Hence the land owner is not looking at anything like 2/3 for the land. Maybe closer to 5% or some really minor figure so you deal structure will not stack up using the numbers you are quoting.
I suggest STRONGLY that this approach is really a dead end.
John
[addsig]
Thanks to all who responded!