Calling All Members Of The Lease Option Brain Trust
I own a 2 unit multi, which I've recently converted to condos. My initial plans were to sell both units. I've since decided to live in one unit and sell the other as a FSBO.
That's the background, here are my questions:
1) Is a lease option my best and only way to structure this deal as a FSBO, where I'm acting as the bank? Note: I don't own the property free and clear. I have a note of $510K (property appraises at $650K) @ 5.1%.
2) I'm selling to a friend. Sure, I know the pitfalls, but I'm willing to take the risk. He's like a brother to me. Anyway, if I'm paying 5.1% on my note, would it be a "wash" (which is what I'm looking for) to in turn charge him 5.1% on his lease option. I can't wrap my mind around the concept. Yields were never my strong suit. Basically, I'm just looking to get the purchase price back of $333K, which is what I'm charging. But I'm assuming if I charge him 0% on a no interest lease option, then I'll be losing money if I'm being charged 5.1% on the money I'm paying. Make sense? Any takers on this one?
3) That said, if I do charge him some sort of interest, how does that affect my tax implications? Would I lose the tax advantage on my interest payments if I'm also collecting a similar interest? Or would that also be a "wash?"
Maybe those last two questions are better suited for the tax forum, but I figured I'd start here.
Thanks, everyone.
[addsig]
Well there are easier methods than a L/O for this deal.
Assuming you really want to sell to your buddy for no profit then sell it on Land Contract or Agreement for Deed. You can charge an interest rate equal to your own and the whole transactionis much simpler.
As to the tax implications, if you are selling at your cost and charging an interest rate equal to your underlying rate then you will not have any profit, therefore no tax.
Couple of Questions:
What happens if the buddy decides to sell in a couple of years and makes big bucks on the unit you sold him at a discount? Are you going to feel OK about that?
Does your note have a balloon date or other provisions which should be mirrored in the Land Contract?
King, thanks for the quick and insightful response.
Question: If I sell the property on a Land Contract or an Agreement for Deed, how do I structure the deal to protect my interests if I choose to sell in a few years and need to satisfy the note? Do I set a callable date or write in an owner option to call the note at my discretion. My biggest concern is becoming a slave to this note when I go to sell.
As for my buddy making big bucks on the eventual sale of this unit, I'd like nothing more.
Understand that I bought the property at a nice wholsale discount, rehabbed it and stand to make a substantial profit of $30K, even with the discount I'm giving my friend. So I'm good. I see this as a terrific opportunity to help my closest friend, who, in the past, has made some pathetic financial moves. When it comes to making money, he hasn't been lucky. There's no horseshoe up his ass.
Anyway, this deal is a win-win for us both. He'll get instant equity (to the tune of $15K), I'll get a neighbor and a condo partner I love and trust.
And maybe you think I'm crazy for handing my friend $15K, but let's put it this way: I'd much rather hand $15K to my buddy than give it to a lisiting agent, which is roughly what a realtor's sales commission @ 5% would cost me.
Thanks again.
[addsig]