Posted on 05/12/2015 7:14:54 PM PDT by doug from upland
ping
Another variation, if the seller is in a financial position to make the premiums, is to offer him perhaps 4 mil in policies. That is fine for the buyer, who can get those policies for around 800K or so.
The formula works particularly well with land. Large parcels of land typically take a long time to sell, usually have a down payment and carryback note, and often are asked by the buyer to subordinate to construction financing for a project. The formula will not wpr with cash flow apartments and commercial. Owners are not going to give up cash flow real estate for LSPs.
And some people do want it now, even at a substantial discount. We all have different motivations and needs.
Another transaction we are trying to do is on a 12.5 million estate in a western state on a large parcel of land. It has been for sale for over 4 years. The guy is very wealthy, and all this property is doing is eating money. He gets no benefits from living there, since he is across the country.
This is an interesting premise.
I’m still not clear on the benefit to the seller; he’s getting ±25% of his cash (on a $2 million sale) at closing. If he lives past 7 years he gets more cash.
Is it because the property wasn’t going to move any other way?
Presumably as the broker of the deal, you’re taking a commission– from the seller?
bump for review
May be a bit iffy in Texas right now. Two stories from this week:
The Texas Supreme Court bolstered lawsuits by the state and a group of investors against Life Partners by ruling life settlements are securities subject to the Texas Securities Act and not mere life insurance contracts.
http://www.courthousenews.com/2015/05/12/embattled-insurer-dealt-blow-by-texas-high-court.htm
Regulators (SEC) file complaint against North Texas financial firm
http://www.chron.com/news/texas/article/Regulators-file-complaint-against-North-Texas-6256088.php
States regulate and I work through an insurance broker. But it is a potential concern. Insurance companies do not want them sold. They want them to lapse for failure to pay premiums.
Most likely scenario is seller cannot readily sell and is overpriced. Upon policy maturity, the seller is getting the two mil. That number is set. But only God knows the time.
Great explanation. Thanks!
I recall hearing a radio program (NPR?) where terminally ill people were selling their life insurance policies for a (reduced, balloon) payment, up front to brokers, while the person was still alive.
From what I recall, things were on the up and up contractually, but the sellers (and their previous beneficiaries) cried foul when all was said and done. Predictably, lawyers got involved.
M4L category Housing Scheme
I knew a life insurance agent some years ago who would approach elderly folks with a big net worth and offer them, for example, a $10M policy. The premium might be $9.5M but the advantage to the insured and his heirs would be the money payout at death would escape estate and federal taxation. The agent made a nice fat commission and the heirs paid no tax. I am not sure if this is still legal.
Any experience with this sort of arrangement?
BFL...
bkmk
I do not have an expertise in that area.
My apology for not making it clearer.
At closing, the cash going to seller is to give him the money necessary to make the premiums on the life expectancy on whom the policy is written.
There is no more cash after 7 years. The first policy my best client acquired paid off in about 9 months. The death benefit is a set amount that does not change.
In this formula, the seller is giving up interest on the money he could have earned. The million dollars does not grow. But if this were an asset that was not used personally, was costing money to own, and was not easy to sell, it may give him the benefits he needs to make the deal. If he needs the money from this property to acquire another, this scenario will not work for him. It will work in a very small percentage of transactions, but I posted this to give FReepers a creative idea for which they may someday find use. :)
Yes, I will earn a fee and those things are negotiated with the principals. In the exchange market, it is typical to be paid by the client you represent. In this case, I represent the interest of the client with the LSPs.
Thanks for your excellent reply. I was trying to imagine all of the gears and incentives to all of the parties that make this type of deal possible. Now I get it
: )
I find it fascinating that people are able to conceive and complete deals like this, with a positive outcome for all involved. It’s a necessary and efficient use of capital and resources.
It’s also a shame that people who don’t understand capital (or are jealous of it) try to prevent people like you (and Wall St.) from doing business.
Good for you, I hope you have many more such deals.
5.56mm
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