Townhome sale help

[rattlsnak]

To make a long story short, there is a developer who approached my GFs community and has made a very generous offer to buy everybody out so he can redevelop the area. There are a few hold outs of course, so not sure if it will go through at all in the end but we cannot wait for that to happen either way. The time frame is 18-24 months from start to completion once he gets everybody to sign by the deadline of March 1, 2017. We were already looking to sell and is scheduled to be put up on the market in three weeks. The developer found out about that and wants to buy us out now at fair market value and then if the deal ends up going through, he will give us the rest of the money in a lump sum (which could be two years later).

My question is, how would that work? What are the tax implications? I would assume since the sale was long ago that it couldn't be attached to the sale so how would he be able to give us the money legally and would it be taxed? . What kind of written legal document do I need to make sure we get paid if it goes through?

Thanks!

[Paul_Heery]

You are taking on all of the risk with this deal. If he wants your property, come to an agreed on price and schedule the closing according to your timing. 90 days out would put you at Jan 1, so check if you want to make it sooner based upon your tax situation. At closing, ALL funds are paid to you. You walk away with the money in your account with no worries about his other dealings,

[stomachmonkey]

Money now.

What happens if he goes tits up?

As Paul says, you are taking all the risk.

Fair market?

He'd need to sweeten the pot, a lot, like diabetes inducing sweet, to even consider it.

[1990C4S]

Originally Posted by rattlsnak

The developer found out about that and wants to buy us out now at fair market value and then if the deal ends up going through, he will give us the rest of the money in a lump sum (which could be two years later).

Originally Posted by Paul_Heery

You are taking on all of the risk with this deal.

How is he taking the risk? He says the developer is buying it at 'fair market value'.

I would have my lawyer draw up a contract of sale with full payment at closing and a balloon payment in two years if certain conditions are met. You get market value and maybe something down the road.

Frankly, I do not understand the incentive for the developer to do anything for you 'post-sale'. Any increase in value beyond the market value at sale belongs to him, not you.

[jwasbury]

From a tax perspective, if you worked up a contract with a 2nd contingent payment, this could be treated like an "installment sale" (see IRS Pub 537) https://www.irs.gov/publications/p537/ar02.html.

If the guy is willing to pay fair market value now, with an additional payment in the future if his redevelopment is a success, this doesn't sound bad to me so long as you are happy with the "fair market" initial price. If that number is what you expect to get selling today, seems like a good result as you avoid the hassle of showing the place, possibly real estate commission, and you have potential upside if the redevelopment project goes well. If the contingent payment doesn't come to fruition, you still had an easy sale of the property at a price you were comfortable with.

On the contingent payment, the milestone to trigger the payment needs to be explicitly defined in the contract. An example I've seen in a business purchase/sale context is: "business X will continue to maintain x% market share for a period of 6 months subsequent to close of the transaction"

[Norm K]

If you can, make certain any subsequent payment is tied to the original transaction. Doing so might substantially impact your tax burden, as the first $250K ($500K for married couples) of gain on the sale of a primary home is exempt from taxes. And since you're talking about a townhouse it seems unlikely she'd get close to the $250K number. If any subsequent payment stands alone, it might be subject to the prevailing income tax rate.

_

[sugarwood]

Seller is taking all the risk since he's only getting fair market value yet not getting paid in full.
In that case, just sell via a realtor and get all your money at closing.
Like others said, you'd need to get a hell of a lot more than market value to consider deferred payment. I'd sell as normal, not worth the headache and risk.

[jyl]

Let's use some numbers. Suppose FMV is $200K and the developer is willing to pay $250K should all owners agree to sell.

The best possible outcome is (1) the developer buys the town house now for $250K in immediate cash payment no broker commission, no closing costs, no contingencies, (2) Marc's GF gets to live there free (or rent or AirBnB it out) until the project starts, (3) if the project doesn't start by a certain date GF has an option to buy the townhouse back for $250K (suppose FMV has risen >$250K?)


The next good outcome is (1) the developer buys the town house now for $200K cash, no broker commission, no closing costs, no contingencies, (2) pays $50K more when the project starts, (3) Marc's GF gets to live there free (or rent it out) until the project starts, and (4) if the project doesn't start by a certain date GF has an option to buy the townhouse back for $200K (suppose FMV has risen >$200K?)

You'll want a document that defines what "project starts" means (don't want to see everyone else get their money while GF waits), specifies who maintains and insures property during GF's free occupancy (should be developer, as the owner), and specifies when and how GF can exercise her option.

[jyl]

Originally Posted by sugarwood

Seller is taking all the risk since he's only getting fair market value yet not getting paid in full.
In that case, just sell via a realtor and get all your money at closing.
Like others said, you'd need to get a hell of a lot more than market value to consider deferred payment. I'd sell as normal, not worth the headache and risk.

You are misreading the OP. Developer's offer is to buy now at FMV and pay the rest (difference between generous offer and FMV) later,

[id10t]

Originally Posted by jyl

You are misreading the OP. Developer's offer is to buy now at FMV and pay the rest (difference between generous offer and FMV) later,

If someone already owns the property, why would they just give the prior owner more money?

There must be more to the deal... I can't imagine that they'd want to be stuck having to sell IF they don't get buy-in on their grand project...

No matter what they say on the phone or by mail or whatever, spend the $ on a good attorney to review the contract(s) and determine what they *really* say...

[stomachmonkey]

It ties up the funds and property for up to two years.

We are in an election year.

Who knows what the economy is going to look like in two years.

If the market drops the developer won't get funding and the deal goes south

Now OP is stuck

[stomachmonkey]

Originally Posted by sugarwood

Seller is taking all the risk since he's only getting fair market value yet not getting paid in full.
In that case, just sell via a realtor and get all your money at closing.
Like others said, you'd need to get a hell of a lot more than market value to consider deferred payment. I'd sell as normal, not worth the headache and risk.

Exactly.

What is the benefit of this deal to OP at FMV.

I don't see anything beyond an expedited sale at the risk of hassles.

[1990C4S]

The OP should clarify this. What's it worth now, what's the expected value, what's he getting up front?

Fair market value means just that. He is getting what the place is worth now, and he's selling now. There is a element of future value in the fair market value.

I do not understand the comment 'only getting fair market value'. How can you sell an asset and expect more?

My 911 is worth $30k today, it might be worth $40k in two years. Can I sell it contingent on a subsequent payment in a couple of years if the buyer flips it? If I want to capture that value I need to own it....

[DanielDudley]

Buyer doesn't want to risk a new owner screwing up his development deal.

Worst that can happen is that you ''might'' be responsible for extra taxes on money that would in reality be extra income at that point. Still a net plus.

If you want to sell, why not sell to this guy if his current offer is fair ? Get a good lawyer to tie up the loose ends. There is no way that you can lose with this deal, unless you become a greedy shark, or get a bad lawyer.

A buyer ready to buy does not seem like a bad thing to me, as long as every party gets something that they want. You aren't taking any risk at fair market value, and neither is he, except for the hassle of dealing with the property if his development doesn't go through. Trying to get more now could sour the deal, and possibly lead to difficult dealings later on.

I like doing business with people who have solid funding, and are ready to buy. Can you agree on a price ? It could save you a lot of hassles, and if you cut out the realtor, there is an extra incentive that sweetens the pot for you, without adding to his costs.

Tell me again how this is a bad deal ?

[ossiblue]

Originally Posted by 1990C4S

The OP should clarify this. What's it worth now, what's the expected value, what's he getting up front?

Fair market value means just that. He is getting what the place is worth now, and he's selling now. There is a element of future value in the fair market value.

I do not understand the comment 'only getting fair market value'. How can you sell an asset and expect more?

Originally Posted by rattlsnak

To make a long story short, there is a developer who approached my GFs community and has made a very generous offer to buy everybody out so he can redevelop the area. There are a few hold outs of course, so not sure if it will go through at all in the end but we cannot wait for that to happen either way. The time frame is 18-24 months from start to completion once he gets everybody to sign by the deadline of March 1, 2017. We were already looking to sell and is scheduled to be put up on the market in three weeks. The developer found out about that and wants to buy us out now at fair market value and then if the deal ends up going through, he will give us the rest of the money in a lump sum (which could be two years later).

I believe the OP means this: The developer is offering everyone a "generous" offer to sell now--something above current fair market value (though the OP hasn't detailed it in dollars)--if everyone agrees to sell by March 1, 2017. If the OP's GF sells to him now, he will not pay the "generous" price because there is doubt the entire complex will sell and his development may never materialize. Therefore, he offers them the current fair market value if they do sell now, and will pay the additional amount(the difference between FMV and the "generous offer) if and when the development is completed.

Now, the developer was willing to pay the full "generous offer" if all sign on by March 1, 2017. If the OP takes the deal and the others eventually sign on, they will get the "generous offer" sometime around March 1, 2017, but the OP will have to wait until the development is complete--up to two years--if it is completed at all. If the development goes south after all have agreed to sell, the OP never gets the additional funds yet those who signed on have already received theirs. The OP gets screwed unless there is a provision in the sale that he gets the additional funds at the same time as the remaining owners get theirs, should the March 1, 2017 deadline be met.

That's how I see it, anyway.

[fintstone]

The developer is willing to pay above market, but only if he can buy all of the townhomes...as the OPs is worthless to him (beyond the value he can quickly sell on the open market) if he cannot buy all the townhomes...so he can redevelop the property. Since the OP cannot wait for the "big deal" where all homes are purchased at once and want to sell right now, the developer is willing to give them the current value now to prevent the sale to a new person that they would potentially have to buy out, the special deal later that everyone else will get when all homes are offered for sale...but only if they can buy all of them. It is a win-win. The seller gets current full market value (under current conditions-no redevelopment) and an additional, specified and agreed-to amount later contingent on the buyer's ability to buy all units.

Obviously the buyer will not pay the premium now for units because they are worthless to him and he will have to resell them at market if he cannot buy them all. He is probably working on doing the same in a couple places nearby and will proceed where he can buy them all, There is always someone who is greedy and wants to hold out and ruin the deal.

The buyer gets market value now (as if there is no deal on tap). The only risk the buyer has is not getting the premium if the deal falls through or the buyer goes bankrupt or possibly miss-out on an increase in offer to the other tenants if they can negotiate a better deal (would make sure that agreement stipulated that the seller would be included in any batter deal)... so, win-win.

[1990C4S]

Originally Posted by fintstone

The buyer gets market value now (as if there is no deal on tap). The only risk the buyer has is not getting the premium if the deal falls through or the buyer goes bankrupt or possibly miss-out on an increase in offer to the other tenants if they can negotiate a better deal (would make sure that agreement stipulated that the seller would be included in any batter deal)... so, win-win.

This is my interpretation as well. If he can't wait until the existing offer comes into play, then he has to accept some down-side risk.

[WolfeMacleod]

There's an area not too far from me that's being developed. Drove bey there for the first timw in two years... wow its changed a lot. Friend of mine said they were offering 2mil per acre, and getting closer and closer to his place by the week. His neighbors and retiring to their boat and will be putting their place on the market soon. Friend thinks maybe $600k, but he'll inquire.
There are two houses.. main house, rental house... and a large shop.

I told my GF we should buy it, live in it until the developer comes knocking at the door.
She didn't see the point...


Another neighbor has a 15 acre horse boarding stable. She'll rake it in when they come knocking.

[stomachmonkey]

Originally Posted by fintstone

The developer is willing to pay above market, but only if he can buy all of the townhomes...as the OPs is worthless to him (beyond the value he can quickly sell on the open market) if he cannot buy all the townhomes...so he can redevelop the property. Since the OP cannot wait for the "big deal" where all homes are purchased at once and want to sell right now, the developer is willing to give them the current value now to prevent the sale to a new person that they would potentially have to buy out, the special deal later that everyone else will get when all homes are offered for sale...but only if they can buy all of them. It is a win-win. The seller gets current full market value (under current conditions-no redevelopment) and an additional, specified and agreed-to amount later contingent on the buyer's ability to buy all units.

Obviously the buyer will not pay the premium now for units because they are worthless to him and he will have to resell them at market if he cannot buy them all. He is probably working on doing the same in a couple places nearby and will proceed where he can buy them all, There is always someone who is greedy and wants to hold out and ruin the deal.

The buyer gets market value now (as if there is no deal on tap). The only risk the buyer has is not getting the premium if the deal falls through or the buyer goes bankrupt or possibly miss-out on an increase in offer to the other tenants if they can negotiate a better deal (would make sure that agreement stipulated that the seller would be included in any batter deal)... so, win-win.

Reread OP's post.

It would appear that is the deal he outlined.

If so, FMV off the table today plus potential bonus later that's a nice offer.

I would not even consider it a risk as the premium is "found money".

[gprsh924]

Originally Posted by stomachmonkey

Reread OP's post.

It would appear that is the deal he outlined.

If so, FMV off the table today plus potential bonus later that's a nice offer.

I would not even consider it a risk as the premium is "found money".

Exactly, plus it's an easier sale today. Buyer is lined up, no broker needed, and no prep work done on the house. Sell as is way easier than he would otherwise. If development goes through, he gets a bonus, if not, he sold a house he was going to sell anyway. No downsided.

Only advice OP still needs is on how to minimize the tax implications.