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REE.com - where the real estate investor market is always hot. With real estate credit virtually non-existent, facilitating a direct 1031 exchange between property owners is a great alternative. REE.com is the oldest, most trusted, and fastest-growing online exchange website for the trading or property swap of commercial real estate properties.


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 EXCHANGE AND BUY BACK
(Very similar to the R.E.O. except done with individuals)
When -   When a person wants to establish a value on the property that they are exchanging in to another individual or when they want the option to repurchase that property.
Situation -   Jones has a four-plex that he feels is well worth the money. The rents, however, are not at their peak and therefore most people look at the property with the idea that it is not worth what he is asking.
How -   Jones exchanges the four-plex at a value of $120,000. He then agrees to buy back the property at that figure within 1 year’s time. That time may be extended to as long as 5 years where he would have the option to repurchase the property at a price of $130.1000.
Results -   If Jones buys the property back he then has established that the property value would be correct. Also he is establishing a new basis when he does buy the property back. If he just has an option to buy the property back within 5 years, Jones might find that the property values increase considerably and he could buy the property at a “bargain” price.

 LAND PLUS CASH FOR INCOME
When -   When a party owns land with no income and is unable to exchange it for income property.
Situation -   Jones owns a $50, 000 lot free and clear on which there is no income Jones would like to have some income from his equity. Jones finds Smith who carries a $60,000 equity in a tri-plex.
How -   Jones offers the lot plus $10,000 to Smith for his equity. Smith did not want a lot but the cash gives him the added incentive to make the transaction.
Results -   Jones ends up with a cash flow tri-plex and Smith ends up with the cash plus the lot which he will build on later.

 EXCHANGE OR SELL THE OPTION
When -   When a person sells or exchanges out of the property if he can retain an option to repurchase the property at a modest inflation rate, he can sometimes do extremely well.
Situation -   Jones is selling a parcel of ground at the edge of town for $100,000. As part of the terms, he negotiates an option to repurchase the ground within 5 years for $150,000. Later the land increases at a much faster value than anticipated and the property becomes worth $200,000.
How -   Rather than exercise the option and acquire the property and then resell the property, Jones merely sells his option for $50,000. It has suddenly become quite valuable. He can also exchange the option for property that he would prefer. Caution: an option is not considered real estate so it would not be “like kind”.

 DEED BACK
When -   When a person has a high interest, low equity, negative cash flow property.
Situation -   Jones had been forced to take another property in an exchange situation. He didn’t really want the property as it consisted of a small house worth approximately $40,000. The loans against the house totaled $36,000. With the interest rate at 14.5%. The property payments were $447.00 per month and the property was rented at $325.00 per month. Accordingly, this “$4,000.00 in equity” was costing him almost $200.00 monthly negative cash flow including the taxes, insurance, and upkeep.
How -   Jones approached the lender, indicating there was really no equity in this property and he was interested in “deeding back” the property rather than allowing it to go delinquent, bringing about a foreclosure. The lender appreciated his contacting them and working out arrangements to allow the “deed back”.
Results -   The lender did not have to foreclose on the property and Jones got out from under a big negative on a small property.

 GENERATING CASH ON PAPER WHILE DEFERRING THE TAX
When -   Jones has $100,000 in several mortgage notes he has carried back on real estate sales. All tax on these notes has been deferred. He will not enjoy the benefit of the $100,000 for several years and Jones understands the “time value of money”.
How -   Jones creates a $90,000 note, secured by these $100,000 in notes. The notes are retained by Jones but pledged as security for this $90,000 note. Payment on the $90,000 is $950.00 a month including 10% interest. This $90,000 note plus $5,000 cash is exchanged for a free and clear home or condo. (it can be done). Once acquired, Jones borrows 80% on the home ($79,000). He now retains $74,000 less costs, which is non taxable because his basis on the house is $95,000. He now sells the house for $95,000, $10,000 cash down and carries back a $6,000 2nd. He has now generated $84,000 in cash and a $6,000 2nd from his $90,000 in notes (about 93.3%).
Variation -   If the house won’t sell for $95,000 and he drops to $89,000 and does not take back a 2nd, he will be able to show a $6,000 tax loss after generating 93.3% on the paper.

 USING “NO PAYMENT” NOTES
When -   When you wish to acquire a proper on which the payments are already too large.
Situation -   Jones wishes to acquire a four-plex which is bringing in approximately $1,000 per month. This would leave approximately $600 per month for making payments. The existing payments on the property are already $700 per month. Jones would lack $15,000 on his down payment so would be asking Smith, the owner, to carry back another $15,000 note. In the event Jones had to make payments on this note, the negative cash flow would be too much to make the transaction beneficial.
How -   Jones offers the $15,000 note to equalize equities, however, there would be no payments on the note for two years at interest only at 10% then the note would be amortized over 20 years.
Results -   Jones could afford property with the $100 a month negative but would not be able to acquire the property with a $250 per month negative
Variation -   In the event that Jones would offer a contract or a wrap around note instead of the $15,000 2nd the wrap could be made where there would be no payment to the other party on his portion of the wrap at least for a period of time.

 EXCHANGING NON-PAYING NOTES
When -   When you have a note on a friend or relative or perhaps a client and they are not making the payments . You also do not wish to push for the payments.
Situation -   Jones’ friend Smith owes him 425,000. Jones took back the mortgage on Smith’s property. However, he does not wish to lose Smith’s friendship over his not making payments.
How -   Jones exchanges this note on which Smith is supposed to be making payments with Johnson who happens to have a $25,000 note on a client of his who is not making payments. By exchanging these notes, (or purchasing each of the notes at a substantial discount) the acquiring party can put pressure on where the other or the original owner did not wish to do so.
Results -   People will usually pay a stranger where they will not pay a friend!

 BUY AN INCOME STREAM
When -   If you are going to buy a mortgage, trust deed, or contract that has a balloon payment or a long term pay out, the discount can be extremely heavy. This often makes the seller reluctant to sell. In many instances, however, the purchaser can purchase a 3 or 5 year income stream just buying the payments for that length of time at a lesser discount and get a greater yield giving the seller the balloon payment or long term payment to repay.
Situation -   Jones was interested in purchasing Smith’s note which was written for a 10 year period with a balloon at the end of the tenth year. Payments were $100 per month, interest only, at 12% with the entire balance due at the end of the tenth year. Jones wanted to buy at a yield of 24%. With this kind of a situation, Jones would only pay Smith $ _______ for the note.
How -   When Jones finds that Smith will not sell the note for the above amount, he refigures his offer just offering to buy the $100 payment for a period of 10 years leaving the $10,000 balloon for Smith. He can now pay Smith $_______ for the income stream leaving Smith the benefit of the $10,000 balloon and still retain the same yield.
Results -   Smith now is interested in selling the income stream and will obtain a great deal more for the note overall then he would just selling the entire note.

 PERFORMANCE MORTGAGE
When -   When you’re acquiring a property that is supposed to have a certain income which the seller has told you the property will make.
Situation -   Jones is interested in acquiring a commercial rental that Smith owns. Smith tells him that he has a lease on the property for $1,000 per month. He has never had a vacancy and the property can be depended upon to bring in that amount of cash.
How -   Jones makes an offer on the property for $20,000 cash down with Smith to carry back an $80,000 mortgage which pays at $850 per month including interest at 10%. Jones writes into the mortgage that in the event the income on the commercial property falls below $1,000 per month, the payment will drop to $500 per month. Should the building become completely vacant, there is to be no payment and no interest to accrue. Smith takes the offer!
Results -   As long as the building performs, Smith will receive his payments. Should the building not perform as Smith indicates, Jones will not have to make the payments.

 SANDWICH LEASE
When -   When you are able to lease a parcel of land or income property at a very reasonable figure.
Situation -   Jones is in the real estate business. He comes across a parcel of ground that Smith was interested in disposing of. Smith has had the property on the market for some time but has had no buyers. Smith is looking for income. The value of the property Smith has is $50,000.
How -   Jones offers Smith a 6% return on the $50,000 property in the form of a lease. Jones feels that the property can be used for a parking lot. Jones offers Smith his $3,000 lease with cost of living raises over the next 20 years. Jones then finds a used car dealer who is willing to pay the equivalent of 10% as a lease payment under the same cost of living increases.
Results -   Jones picked up $2,000 per year on the lease of the property in which he has no investment.

 SHARED APPRECIATION
When     
and     
Situation -  
Jones and his wife are a young couple just getting started. They don’t have a and down payment and don’t qualify for the loan on a house they would like to Situation - own. Smith is an investor who likes the benefit of real estate ownership and shelter but doesn’t want management.
How -   Smith and Jones agree to purchase the home Jones wants. Smith puts up the down payment and qualifies for the loan. Jones then “rents” the house for the payment and pays all taxes, insurance, utilities, and any and all repairs. The lease period is for 5 years with the contract between Smith and Jones stating that at that time the house would be appraised and Jones would pay Smith all of his down payment, plus ½ of the appreciation.
Results -   Smith has a 50% equity getting all the shelter and 50% of the growth. He has no management. Jones gets the house he wants and 50% of the “growth,” at the end of the 5 years Jones can qualify for a new loan.
Danger -   In some cases, such as divorce, the occupants of the property have sued the investor for “their share” of the growth even though they haven’t lived up to their part of the bargain and gotten it. The author believes a “lease” with “option to buy” may be a better vehicle for all. Consult your attorney!

 NO DOWN PAYMENT ACQUISITION
When -   Jones wants to acquire more real estate but doesn’t have the cash.
Situation -   Jones want to acquire a single family home for more tax shelter and growth but doesn’t have the cash for down payment.
How -   Jones finds a motivated seller who really wants out. He has a $60,000 home with a $30,000 equity. Jones offers a $30,000 note payable interest only at 10%, due in 10 years for the equity. Proposal is accepted!
Variation -   Jones offers to get a new loan for $45,000 cash, gives seller $5,000 cash and puts $10,000 in his pocket. He then gives seller a $25,000 2nd back on the property.
Warning -   Author highly recommends against this kind of transaction. They usually end up in lawsuits and everyone loses!
Variation -   Jones gives seller a blanket note for $30,000 covering property being acquired and other property Jones already owns with a reasonable equity. Note calls for a release clause when $15,000 in principal has been paid.
Results -   A no down payment transaction can be good for all if it is properly structured!

 BREAKING UP YOUR EQUITY
When -   There are times when you may have too large an equity to be used in an exchange situation. This equity can be broken up.
Situation -   Jones has a $200,000 four-plex he owns free and clear. He wishes to diversity into different types of real estate for added safety.
How -   Jones can exchange his improvement only at a value of $160,000 keeping the land under the property which he could then lease to the acquiring party. The lease could be a long term lease running for 50 to 100 years with the stipulation that the improvements would revert to the landholders at the end of the lease. Jones could then exchange or sell the land lease valued at $40,000 for another property. In the event Jones wished to retain his improvements, he could exchange the income from those units for a period of 5 years for another property which he wishes to obtain. Jones might even exchange an option to acquire his property at $200,000 within any time during the next 5 years for a considerable amount. Jones must determine what it is that he wishes to acquire and then determine which part of the property he owns he is willing to trade for it.
Results -   Can be a considerable diversification of properties obtained from one larger entity. Also, the owner may value the land lease at a greater figure or the improvements depending upon his tax situation.

 ALLOCATION OF BASIS
When -   In every instance where you receive a property in an exchange or purchase.
Situation -   Jones has just acquired a 20 acre parcel with a set of farm buildings in exchange. His basis on the property is $200,000. Jones plans on selling the land in the near future and retaining the buildings to live in.
How -   Jones allocates as much basis as possible to the land. There is always some leeway in making this allocation and if he can allocate $160,000 to the land and just $40,000 to the buildings, when he sells the land for $160,000 he will have had no gain. Since he is going to keep and live in the building, he can’t depreciate them anyway so, therefore, the basis on the buildings will not hurt them.
Results -   By planning ahead Jones can save himself many thousands of dollars in taxes.

 LAND WITH NEGATIVE FOR IMPROVED WITH MORE NEGATIVE
When -   A person has land or lots with negative cash flow.
Situation -   Jones owns three small parcels of ground located in different areas. He has a $100,000 recreational lot in which he owes $5,000, he owns a 40 acre parcel of currency ground on which he owes $5,000 and he owns a lot in a nearby town valued at $20,000 on which he owes $10,000. His total payments amount to $200 monthly. Jones would like very much to get out from under the negative cash flow, however, has been unable to sell the lots or exchange them into something free and clear.
How -   Jones offers the total land parcel with an equity of $25,000 or a triplex which is on the market for $120,000. The other party’s equity in the triplex is $60,000 meaning that Jones must give back a $35,000 note on the triplex and end up owing $95,000. His negative cash flow on the triplex will amount to $250 monthly.
Results -   By giving back a large note on the triplex with excellent payments, Jones is taking the “sting” out of the negative cash flow on his land. At the same time Jones will be able to depreciate the triplex which he couldn’t the land and also over a period of time will be able to increase rents which will also take the negative cash flow out. The third reason is that the chances of selling the triplex are much greater than selling the individual parcels of land. Sometimes it is necessary to take on more negative cash flow in order to get out of a negative where there is little chance in improving.

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