Some of the best advice I ever heard for managing match play in tennis, or any sport for that matter, is to compare your inner voice to a GPS. Instead of getting emotional when things don’t go the way you planned, you simply pivot and update the directions you give yourself and the strategies you use to get to your intended destination.
Turns out this works well for many other parts of life—like real estate—where fortunately, as with tennis, there are other ways you can reach a successful result when your Plan A doesn’t work. The key is to recognize the changing conditions and respond accordingly.
While many buyers have temporarily given up in the current market hoping that rates come back down to restore their buying power, others realizing how much equity they have gained are selling their current home to buy their next home with a much smaller loan, or in some cases paying all cash. Along the way, we are seeing a return to more creative deal structures, including seller carrybacks, lease options and contingent offers. And sometimes additional steps are needed for proper tax planning.
For a client of mine seeking to move to a less expensive market, he will be able to pay all cash since his home here has gone up 10X, but he also faces a potentially huge capital gains tax event, so we will need to find a seller in their slowing market who will consider a lease option to give him time to structure a tax deferred exchange before selling his home here. The lease on the replacement home will be in the name of someone other than my client, while the option and purchase agreement will be in my client’s name, with a sizeable non-refundable option fee paid to secure the property once his due diligence is completed.
The option should run for the duration while we also lease out his current property to establish income producing use, at a rate that would more than cover the lease payments plus the option fee on the replacement home. And after closing escrow on the replacement, he must be the landlord on that home for an acceptable period before transferring his primary residence exemption there, putting the balance of his proceeds into an additional income property or qualified income-generating instrument in order to get off the capital gains merry-go-round.
Alternate routes to the concurrent close of escrow could include seller financing cross-collateralized against his current place, or a third-party bridge loan up to 70% of the CLTV for both properties with a reverse exchange, but these would involve increased expense, risk, and possible tax consequences that both sides would need to carefully consider.
The path to the finish line can vary greatly depending on the moving parts and obstacles encountered, and it often requires the parties to adapt and be creative, but if navigated correctly the solutions along the way ultimately result in the process becoming less of a contest and more of a collaboration.
