All Roads Lead To Home- structuring the transaction

Running a turnaround park requires wearing many hats, one of the biggest is being a Lonnie dealer. This is the business of buying homes at wholesale prices and “selling” them at retail prices by carrying the financing. There are three popular approaches to structuring this transaction. The first, a traditional Lonnie deal, is a straight sale with a note. The home is titled in the buyer’s name and the Lonnie dealer becomes a lienholder (and may retain physical possession of the title until the loan is paid off). This is the simplest and most straightforward approach, but there are some drawbacks. The home must be repossessed (a process whose difficulty varies by jurisdiction) upon default. Typically, sales tax on the full purchase amount is due, which the Lonnie dealer may be responsible for collecting, even if the amount exceeds the downpayment received from the buyer. There is also the issue of having income taxes owed on profit, in advance of the full proceeds being received since the IRS does not acknowledge dealer’s installment sales. Some have adopted an accounting strategy in attempt to address these issues. Another approach is to restructure the sales transaction.

The sales transaction can be eliminated or delayed by using the lease option approach. The “buyer” is merely leasing the home with the opportunity to buy it at a later date. The Lonnie dealer retains title, the “buyer” is a tenant with no equitable interest in the home (for some period of time). Taking back the home is governed by landlord-tenant dispossessory procedures, which are typically less onerous than repossession statutes. There are various ways of structuring the length, how much money is required at the end of the lease period, and the terms under which the option can be exercised. The objective is to structure the transaction so that it does not appear to be an installment sale from a legal or tax perspective. One of the disadvantages to this approach is the increased liability as a landlord vs. a leinholder. Another potential disadvantage is there are no notes created, which could be sold to raised capital. The third approach combines characteristics of both a sale and a lease option.

The approach we use is an agreement for title. Possession of the property is granted to the buyer for as long as the terms of the contract are being abided. Once all the terms have been met, title is transferred. The contract spells out the conditions of the sale and contains some clauses similar to what might be found in a lease agreement. Taxes on proceeds are paid as they are received from the buyer. While this approach has much in common with the lease option, we prefer it because we believe it more strongly confers homeownership in the buyer’s mind. We hope this translates into them being more committed to their home and the Madison Woods community.

No matter which road you choose to take in structuring your transactions, it will result in providing home ownership opportunities to a clientele that would otherwise be relegated to rental housing.

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