Chapter 14 THE DISCOUNT SALE AND LEASEBACK AND BUYBACK

Question 1

What is the goal of the chapter on discount sales?

Answer 1

To provide investment alternatives for property owners seeking capital.

Question 2

What is a discount sale in real estate?

Answer 2

A sale at a drastically reduced price with an option for the seller to repurchase the property.

Question 3

What is the primary advantage of a discount sale - buyback or leaseback?

Answer 3

It allows the seller to generate capital while retaining interest in the property.

Question 4

Fill in the blank: A discount sale is often used when there is no reasonable ______ available for the property.

Answer 4

financing

Question 5

What happens in a typical discount sale transaction?

Answer 5

The seller sells the property for cash but retains the option to buy it back later at a higher price.

Question 6

True or False: The seller loses all rights to the property in a discount sale.

Answer 6

False

Question 7

What might prompt a property owner to consider a discount sale?

Answer 7

The need for immediate cash due to unfavorable market conditions.

Question 8

In what situation might a seller use a discount sale to avoid financial disaster?

Answer 8

When there are no other viable options for generating capital.

Question 9

What is a potential risk associated with a discount sale regarding the IRS?

Answer 9

The IRS may view the transaction as a method to evade taxes if not properly documented.

Question 10

What checklist item could raise doubt about the acceptability of a discount sale?

Answer 10

Is the sale price below the assessed value of the property?

Question 11

Fill in the blank: A discount sale generally means ______.

Answer 11

cash

Question 12

What example illustrates a discount sale generating immediate cash?

Answer 12

Roscoe selling an apartment lot for $100,000 cash with a buyback option.

Question 13

What is the purpose of leaseback, buyback, recapture, or option in a discount sale?

Answer 13

To provide future gain potential to the seller while securing the buyer’s position.

Question 14

Why might a seller need to sell at a discount?

Answer 14

Due to a poor market where demand for the property is low.

Question 15

What should a seller consider before proceeding with a discount sale?

Answer 15

The financial obligations and the minimum price they are willing to accept.

Question 16

What can happen if the seller has a mandatory recapture provision?

Answer 16

The IRS may treat the transaction as a mortgage rather than a sale.

Question 17

True or False: The buyer in a discount sale is guaranteed a high profit.

Answer 17

False

Question 18

What is an essential condition for using a discount sale as a strategy?

Answer 18

The seller must need immediate cash and have limited options.

Question 19

What can a seller do if they cannot recapture the property after a discount sale?

Answer 19

They may lose the option to buy back the property forever.

Question 20

What is the primary reason for a discount sale?

Answer 20

To resolve a problem when there is no other remedy than to sell the property at market price.

Question 21

What is the difference between ‘value’ and ‘market value’?

Answer 21

Value is what you paid and invested in a property; market value is what someone else is willing to pay.

Question 22

What does a seller often want to retain in a discounted sale?

Answer 22

Either existing use, future benefit, or both.

Question 23

What is a sale and leaseback arrangement?

Answer 23

A transaction where the seller sells the property and then leases it back from the buyer.

Question 24

What is a recapture clause?

Answer 24

A provision allowing the seller to buy back the property at a fixed or adjusted price later.

Question 25

Fill in the blank: The most common extra provision used with the discount sale is the option to _______.

Answer 25

buy back

Question 26

What is the example given for recapture to recoup?

Answer 26

Aston selling his farmland with an option to buy back.

Question 27

What price did Aston determine as the discount price for his land?

Answer 27

$500 per acre.

Question 28

What are the potential future values of Aston's land mentioned in the example?

Answer 28

$3,000 per acre and $30,000 per acre.

Question 29

What is the advantage of a short option to recapture?

Answer 29

It allows the seller to negotiate a lower recapture price.

Question 30

True or False: A discount sale guarantees the seller will recoup their investment.

Answer 30

False.

Question 31

What are the four basic advantages of a discount sale?

Answer 31

* Cash in a hurry * Fast closing * Action in a bad market * Very flexible

Question 32

When is a discount sale effectively utilized?

Answer 32

* Seller needs cash * Market is difficult * Property is difficult to sell * Seller needs a fast transaction * Seller needs a cash-out for an exchange * Can be a catalyst for a joint venture

Question 33

What are the disadvantages of a discount sale?

Answer 33

* Price may be too low * Buyback terms may be too high * Missed appreciation gains * Risk if market value does not increase

Question 34

What should a seller consider before proceeding with a discount sale?

Answer 34

If fast cash is needed, no other options are available, and the property is difficult to sell.

Question 35

What negotiation element can provide protection to the seller in a longer option?

Answer 35

Setting a predetermined base price with appraisal adjustments.

Question 36

What is a buy-out option in a discount sale?

Answer 36

A provision allowing the buyer to nullify the recapture option for a payment.

Question 37

What is the buyback recapture option during the first three years?

Answer 37

You have the right to buy back the recapture for $45,000.

Question 38

How is the buyback recapture option similar to buying property?

Answer 38

It is similar to buying the property for $95,000 with a deferred payment at zero interest over three years.

Question 39

What should you do before entering into a transaction involving buyback terms?

Answer 39

Run the details past your tax advisor.

Question 40

What is a first right of refusal?

Answer 40

A right that allows the seller to have the option to purchase the property before it is sold to another buyer.

Question 41

What is a potential risk of granting a first right of refusal?

Answer 41

It can tie your hands in trying to sell the property.

Question 42

What must be clearly spelled out in the terms of a first right of refusal?

Answer 42

How the right is to be exercised.

Question 43

After how many years does the seller retain the right of first refusal?

Answer 43

After the second anniversary of the closing.

Question 44

What is required from the owner of the property if they receive a bona fide offer?

Answer 44

Provide a copy of said offer to the seller.

Question 45

How long does the seller have to match the bona fide offer?

Answer 45

Five working days.

Question 46

What happens if the seller matches the bona fide offer?

Answer 46

They have a period of 30 days of inspection time of the subject property.

Question 47

What complicates events if the bona fide offer includes an exchange?

Answer 47

The seller can negotiate the price of the exchanged property or boot.

Question 48

What is meant by escalating option or lease price?

Answer 48

The seller may agree to a series of higher prices in future options to buy back.

Question 49

In what type of properties are long-term options or provisions used more often?

Answer 49

Vacant and non-income producing properties.

Question 50

What could discourage the seller from wanting to recapture the property?

Answer 50

Too difficult buyback terms.

Question 51

What is a discount sale?

Answer 51

A technique to raise quick money at reasonable interest rates for short periods.

Question 52

What are some pitfalls for the buyer in a discount sale?

Answer 52

* Price manipulation * Contrived leaseback terms * Insufficient future benefits.

Question 53

What are some pitfalls for the seller in a discount sale?

Answer 53

* Excessive capital gains tax * Market decline affecting future benefits * Insufficient time to plan for recapture.

Question 54

What should you consider when thinking about different scenarios in real estate deals?

Answer 54

Propose ways to balance equities or sweeten the deal.