This article is the seventeenth in a series of seventeen articles that will provide readers with information on how real estate investors can transact with little to no money, no credit, and little to no risk. In this part of the series we will discuss the technique of selling the shares of a corporation. This method actually transfers the shares of the corporation to someone or another entity at or before closing.
In the heyday of condo sales, many developers would not allow investors to sell their newly purchased condos for months or even years. These were restrictions that were called “write restrictions”. Even today, the FNMA (Federal National Mortgage Association) has deed restrictions on the sales of their bank properties (REO). The restriction is for a period of ninety days and during this period, if the property sells for more than 120% of the purchase price, there is a $5,000 penalty. After ninety days, there is no longer any restriction.
Investors who purchase these deed-restricted properties in corporations have the ability to sell the corporate shares to a new owner without a change of ownership on the public record. The entity that purchased the property remains the owner of the property. Some people may dispute this and I suggest you always consult a local real estate attorney about what to do in this situation.
While all of this sounds logical and is used virtually every day somewhere in the United States, there are potential pitfalls for the investing buyer. A corporation is a legal entity that must pay state income taxes where applicable and always federal income taxes. Therefore, a tax identification number must be issued for the corporation to function and open a checking account.
The corporation must file in its home state where it is located to apply for authorization to do business. These steps take time, so an existing corporation with some financial history is generally used for these transfer transactions. The names of the officers are in the state’s public records and cannot be changed unless a form requesting the change is submitted. The corporation has tax returns that are the responsibility of an official designated by the state and the IRS (Internal Revenue Service).
When a corporate stock purchase is made, the buyer assumes the assets and, unfortunately, the liabilities of the corporation as the new owner. This is the potential problem for the buyer: is there a hidden problem that has not yet surfaced and will become a financial burden on the buyer? Only time will tell, but the buyer should be aware that this potential exists and that while the deed restriction period does not start again, there will still be a deed restriction for the corporation.
For an investor looking to sell a property using minimal money, this method requires some preparation, but its biggest expense is the seller’s deposit and the cost of starting up the corporation. The shares of the corporation are then sold for the profit the investor will make on the deal.
