The 18th Street Townhome Apartments in Costa Mesa, Orange County - Getting Creative to Help the Seller Reduce and Defer Taxes

In 2013, Blake Buys Homes acquired a block of six townhomes in Costa Mesa, California, all owned by the same owner. This property was effectively an apartment building purchase in terms of how we determined what we could offer. At the time of purchase, the property was dilapidated and the owner had not done any updating for over a decade - only the necessary repairs and fixes to keep tenants from complaining.

Exterior - Before Renovations

Exterior - Before Renovations

In June, we were put in touch with the sellers, a very nice married couple in their mid 60's, who wanted to sell but were holding off due to the inevitable (so they thought) capital gains tax bill that they would face when the property sold. In case you don't want to keep reading, we did come to a very creative win/win seller financing solution that includes the seller's enjoying a fixed income for the next 35 years and complete deferral of taxes. The best part, according to them, was that theirs heirs would enjoy a 100% step up in basis upon their death which would eliminate the capital gain that was deferred and unless tax law changed, there would be no tax consequence if the loan was paid off and the heirs took the lump sum.

When we visited the property for the first time, we saw the typical list of deferred maintenance items that needed repairs. On the exterior: cracked and peeling stucco, roof tiles missing, saggy roof line, cracked and dangerous driveways, weeds everywhere, etc. On the interiors: evidence of water leaks, old water pipes with corrosion, items not up to code, flickering lights, broken cabinets, and the list goes on. Nothing we hadn't seen or that we were uncomfortable with so we proceeded with our offer to purchase the property. Our offer was for the property "as-is" and we didn't request that the seller make any repairs or updates. Any termite damage and items that were not up to current codes would be our problems to fix on our own dime. 

Interior - Before Renovations

Interior - Before Renovations

After the sellers had discussions with several apartment brokers and factored in all of their costs of selling, and the time and energy to market the property, they came back to us to let us know that they accepted our offer and we very content proceeding with the transaction. At this point, we had only discussed numbers and we had not delved into any creative ways that we could structure the transaction to not only fit their goals but leave them in a much better position of proceeds with lower taxes.

Prior to signing the Purchase and Sale Agreement, we recommended that the sellers think about what their goals are with the money they would receive from a sale, and to discuss the tax ramifications with their accountant, and get back to us. They took us up on the advice and after meeting with their accountant, we discussed their goals in further detail. This conversation gave us the information we needed to propose several creative ways to structure the transaction, one of which they loved (!), which was seller financing. The sellers accountant was very familiar with this method of selling and agreed that this was a great solution for the sellers given their low basis and long period of ownership (15+ years). The seller financing option allowed them to realize the full value of their property (approximately $2 million) in a great market for selling when prices were being elevated by the low interest rate environment (30 yr. fixed mortgages averaged about 4.00%), while simultaneously setting themselves up with a deferred tax bill and the ability to earn interest based on the $2 million valuation. The sellers knew this was a great seller's market and wanted to sell fast, and this was a property that fit our buying criteria so we were able to accommodate.

Here's the nitty gritty on how the transaction was structured: we signed a purchase and sale agreement at a purchase price of $2,000,000. We gave the sellers a down payment of $300,000 which was all they wanted and more than they needed at the time of sale. The remaining $1,700,000 was converted to a loan that was secured by the property, that would last for the next 35 years. In other words, if we defaulted on the loan payments to the seller, they could foreclose and take the property back. Since we were committed to spending approximately $350,000 in the first few months of ownership to renovate the property and increase the value, their secured interest would become much more secure as the improvements were completed. We agreed to make loan payments to the sellers via automatic check to be sent to them on the first of every month. Instead of paying approximately $450,000 in taxes when the property sold, this strategy allowed them to earn interest on the full pre-tax balance ($1.7 million) that was carried back with seller financing. They intended to use this income for retirement and the way we set it up, they now receive a monthly check of approximately $7,000...for the next 35 years! Pretty cool - they were very happy. The structure worked for us and the sellers agreed to allow interest only payments for the first few years so that we could use more of the rental income to make improvements instead of paying down the loan. This had the added benefit to the seller's of not receiving any principal in the early years, so the loan interest was based on the full $1.7 million balance.

This option would have worked whether we were dealing with a house, a condo used as a rental property, or a multifamily apartment building. After the purchase, the Blake Buys Homes Construction Team renovated each residence and all of the tenants couldn't be happier with their new home. All in all, this purchase was big success for everyone involved. 

If you have a property that you are considering selling a house or apartment property fast and you would like to go over some creative ways we could structure a sale, feel free to give us a call to talk about options. With Blake Buys Homes, homeowners pay no commissions and no fees. Visit our home page to learn more about our buying process and the benefits to homeowners that are considering selling their property.

The renovations shown in our pictures are the product of the Blake Buys Homes Construction Team (BBH Construction), which is comprised of the most high-integrity and hard-working subcontractors in Southern California. If you are looking for help renovating, fixing or updating a house or rental unit in Los Angeles County or Orange County, or other parts of Southern California, contact us to learn about ways we can help.

Below are a few pictures of the 18th Street property after renovations.

Exterior - After Renovations

Exterior - After Renovations

Interior - After Renovations

Interior - After Renovations