Many of you do lots of real estate deals. That means you will be interested in a corporation strategy that will:
Let's say you (personally) contracted to buy a house specifically for the sake of fixing it up and reselling it. You are buying under the following terms:
The Purchase price is $75,000. The Down payment is $5,000. You will be taking title subject to an existing FHA assumable loan. The balance of the loan is $60,000. The interest rate is 8.5%. You will be giving the seller a purchase money note in the amount of $10,000 which makes up the balance of the equity. Here is the strategy:
Step #1. Sign the original contract to buy in your own name.
Step #2. For nominal (named) consideration you assign (transfer) 100% of your right, title and interest in that contract to your newly formed Warbucks Holding Corporation of Nevada. Now the WBC holds title to that property safely in Nevada.
Step #3. Warbucks Holding Corporation now puts the fix-up work out for bid. Many companies submit written bids. (This establishes the fair market value of the work to be awarded and keeps the transaction at arms length.)
Step #4. After fierce competition Warbucks awards the job to Hometown Construction, Inc. HCI is a domestic corporation where you are the principal stockholder. HCI completes the work on time and under budget.
Step #5. Market the property. So Warbucks Holding Corporation hires you (personally) to handle the marketing of the house. You are to sell the property for $115,000 all cash or $125,000 on a wraparound (id est. some combination of cash and paper.)
Step #6. Run ads in the newspaper, go to exchange meetings, send out direct mail and take/make lots of phone calls.
Step #7. Show the property to prospective buyers; take credit applications and charge a $20 application fee.
Step #8. One of the buyers offers $2,500 (10%) down. You agree to execute a variable rate wraparound (or AITD) for the balance, subject to all the underlying encumbrances.
Step #9. Place the wraparound with Warbucks Mortgage Corporation for approval. WMC approves the deal and charges the borrower four (4) points to originate the loan.
Step #10. Close the deal through Hometown Settlement Corp. HMC charges: $100 for preparation of papers; $50 for Notary fees and $425 for a Home Owner's Warranty Plan.
The day after the closing Bill Buyer is transferred to another part of the world. So Hometown Management, Inc. (HMI) agrees to master-lease the property with an option to buy. HMI's sandwich lease position provides cash flow because HMI lease the house for less than the fair market rent. HMI's option is a hedge against inflation because HMI's option is an option to buy the equity at today's price. Therefore, any increase in value or pay down or amortization of any loan becomes the benefit of HMI.
Could you increase your profit with this strategy? Your first question should be "who's profit?" WHC's? HCI's? WMC's? HSI's? HMI's? Or yours? The answer is "who cares!" In this strategy, you own all the stock in all the corporations; and—they could all be formed in Nevada; with some qualified to do business in your hometown.
What about adding new profit centers? Take your pick. There's buying and selling the deal (Step II;) there's the construction contract (Step IV;) there's the marketing fee (Step VI;) and there's the $20 application fee (Step VIII.) How about the origination fee in Step X; or the settlement fees in Step XI? Finally, there's the management fee, the cash flow and the appreciation in Step XII.
How do you reduce the tax liability? To some small degree the rental income from real estate is tax sheltered—And, it's easy to keep the lion's share of the buy-sell profit right in Nevada where there are no state corporate income taxes.
Limiting personal liability is easy too. Nowhere in this scenario did you see me advocate bank loans or personal liability. That's because it's too easy to buy real estate without ever walking into a bank. The secret is not to find a bank that will lend you tons of money; the secret is to find the right seller who will get involved in the financing so you never have to borrow to buy. I have not been to a bank in fourteen to borrow money and believe me I'm as happy as a clam about it...but that's another story.
© MMI By Ray Como. All Rights Reserved
Ray Como has created, produced, copyrighted and self-published 15 audio cassette programs and lots of other forms and tools for business, real estate, corporations, selling, marketing, finance, management and Entrepreneurship.
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