DEAR BENNY: I am selling a Victorian three-flat in a commercial urban area which has been upzoned several times since the purchase. The likely buyer will be a developer who will raze my building, apply for further upzoning, and build a dense multifamily building. I may procure a premium price if I carry back a mortgage for three to five years. Is this sensible? Can I lease the land? How do I learn more? And whom can I trust to advise me? This is my nest egg. – Kathy
DEAR KATHY: It is your “nest egg,” so please retain both a real estate attorney as well as a financial advisor. You will learn more from those professionals.
You want to carry back a mortgage. To be completely protected, you want to be in first-place position. However, a developer will be obtaining what is known as an “acquisition-construction” mortgage. The bank will lend perhaps 70-75 percent of the purchase price and will also lend more money for the construction costs.
But no lender will agree to be in second position. You will be asked to subordinate your mortgage to the first trust lender. That means you will not be protected. Should the developer go broke and go into default, the lender will foreclose on the mortgage (in most states called a deed of trust) and your second trust will be wiped up. You certainly have the right to sue the developer on the promissory note it signed, but collection will be difficult if not impossible.
No, I cannot recommend taking back financing unless you will remain in first trust position.
Can you lease the land? Why would a developer agree to such an arrangement? If the plan is to convert and sell condominiums, again, would you buy a unit knowing that at some future date, the land will go back to the original owner?
No, I cannot recommend leasing the land.
Here’s one suggestion: You can enter into a partnership agreement with a developer. You create a limited liability company, and you contribute the property and the developer contributes the money and the construction. Of course, there is no guarantee of success. If you have any interest in this, you will need your own attorney to assist and review everything.
Here’s another suggestion. I assume the property has appreciated over the years. Since it is commercial investment property, you may have a lot of capital gains tax to pay. Ask your accountant to run the numbers. If the tax bite seems prohibitive, consider a 1031 (Starker) exchange. Under this arrangement, you sell what is known as the “relinquished property” and end up owning the “replacement property.” If the new one is of equal or greater value than the relinquished property – and assuming you follow all the rules – you will defer having to pay any tax and instead put those dollars into the new property.
Your attorney can assist you in understanding this process.
DEAR BENNY: Our homeowner’s insurance keeps going up and up. Is there any way to lower the yearly premiums? – Kyle
DEAR KYLE: Yes, there are a number of ways. First, increase your deductible. According to an analysis by the AAA, if your current deductible is $500 and you raise it to $1,000, you may be able to save as much as 25 percent of the annual premium. Keep in mind, however, that if there is a claim – for example, a fire – you will have to pay the insurance company $1,000, instead of the lower number.
There are other things to consider. If you have other insurance – such as automobile – and you use the same company (it’s called “bundling”) you will save some dollars.
Triple A also recommends making your home safer. Have good, strong locks with deadbolts and make sure you have smoke detectors and that you change the batteries every time you change the clocks at daylight savings time. These items will lower your premium.
Finally, talk with your insurance agent. They may have discounts so as to encourage you to stick with that company.
Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: [email protected].