Buying Grandma's apartment complex... Ruffled feathers/financing

[Account Closed]

My husband's grandma is the sole owner of a great apartment complex in Aptos, CA a block from the beach, which is really expensive to buy and to rent right now. Currently they are charging $2200 per 2bd unit in rent and they are always full. She owns the property out right and has several other sources of huge income that she gets each month, so she would still be well off if she sold the complex. We would love to be the sole owners of it, but we don't want to ruffle the feathers of the family too much by making an offer to his grandma without talking to anyone. We know that the family is likely to fall apart after she passes because with money, frequently comes greed and we've already seen that greed and favoritism. We just want to be ahead of the curve in buying the property now rather than waiting to see who inherits what. 

Just looking for advice on when and how to make the offer that will benefit everyone, if that is even possible. Is it best to offer to buy it before she passes or should we wait and buy everyone out after she passes? How do you suggest we pay for such a large purchase? We have access to private money, we have equity in our primary residence, we have some savings. How would you start this conversation and would you only talk to her about it or make it a family discussion? Please help!!

[Jon Holdman]

You're playing with fire.  If you're already concerned about heartache after she dies then you must have some basis for those concerns.  Surely there are other properties in the same area that you could buy.  Buy one of those.  If you specifically want to buy grandma's place so you can get a better deal or better terms, then you're just pouring gas on all the emotions at play and pretty much guaranteeing a family squabble.  Your statement "so she would still be well off if she sold the complex" is what raises my eyebrow.  If she sold it at market value, her financial situation would be unchanged by the sale.  So, I'm reading between the lines and seeing "Even if she sells it to use for less than its really worth she would still be OK.  She can afford to give us a good deal."

To avoid that, do the purchase at market price.   Get it appraised and buy it for that price.  And finance it on your own.

However, there is a HUGE advantage to NOT buying it now - taxes.  If she sells it to you now she will pay taxes on the gain on the sale.  If she's owned it for a while, her basis may be quite low though a combination of buying it at a much lower price and the depreciation.  So she will have a big tax bill, which will reduce the eventual inheritance.  But when she dies, it goes to her heirs with a "stepped up basis".  That is, the "basis" for any subsequent sale.  So, if it passes after she dies and then the group of heirs sells it to you right away, there would be no tax bill at all.

Now, if she sold it with seller financing, the tax bill could be spread it.  But then you're back into fire territory.

Assuming this is more than four units, you would be doing commercial financing. Figure 20-25% down, amortization of up to about 20 years and either an ARM or balloon. There also seems to be a requirement on these loans that your net worth be larger than the loan amount. You'll need to talk to commercial banks in your area to get a real handle on terms. You won't get 30 year fixed rate financing unless this is a 1-4 unit property.