I recently was asked for an opinion, specifically to poke holes in a proposal, on a transaction that involved personal residencies in affluent New Albany, Ohio, a potential investment property, and a means to satisfy contingencies during a market that has been more than tough on the residential real estate business.
I could find no holes after analysis, and in fact had read of this scenario being tried in one other market. I recommended the parties also talk to a CPA to talk about any tax implications. We could find none, and all agreed it was a strong approach that others might mimic if the right circumstances warrant.
Now, you should know that despite the news about tens of thousands of lower- and moderately priced homes being in danger of foreclosure, most people don't realize there are problems among the affluent as well. Locally, I heard a number that shocked me. The statement was that one out of every three or four homes in New Albany, an extremely well-heeled area in northeast Franklin County in Ohio, have some sort of "financial issue." There are half-million dollar homes that are being rented -- owned by investors. There are homeowners who have problems with their lenders and the ARM fiascos. There are homes for sale, but many more homes are being offered in "pocket listings," listings that are not publicly advertised for any number of reasons (one might be that people do not want their neighbors to know the house is for sale or that there is financial difficulty).
So the scenario follows. A Seller in northeast Franklin County has a $2 million-ish home that is for sale. He has lowered the asking price to $2 million from a higher number, and is reluctant to drop it any farther. On at least three occasions he has been in contract with Buyers who could not perform the transaction because they were unable to sell their northeast Franklin County homes, valued at $750,000 to $800,000 each. He has already purchased a $3 million apartment overlooking Central Park in New York City. He needs to get rid of his Ohio home. The plan is this. He will leave the price of his home at $2 million. To make the transaction happen this time, and to satisfy the home sale contingency of the Buyer who is purchasing his home, he will buy the Buyer's home at approximately $750,000. As I said, this will satisfy the sale contingency of both parties' contract. Once in possession of the $750,000 home, he will either hold it and use it as a luxury rental, or list it for sale at that price for about 30 days, then lower it by $100,000 if it is not yet in contract. He is willing to take a loss just to get rid of the $2 million.
Consulting with a CPA found no problems with the plan. From what I was told, in the original Buyer's mind -- so far -- it is worth the loss to be able to complete the sale of the $2 million property. Interesting, yes?
In this market, no matter whether you are talking about residential or commercial/investment, creativity is the key.