Best Way to Buy Primary Residence from Family While Renting It

[Brandon Weis]

One of my friends recently asked me for advice, and I want to make sure there's not something I'm missing or a better option for him. 

He and his wife are renting a property that his parents own. They are paying $1,100 a month in rent. They are thinking they want to stay there at least 10 years, so they want to buy it and asked the best way. I confirmed that his parents had no debt on the property. 

I recommended he talk to his parents about buying the house in an installment sale and using seller financing with them. If all parties were agreeable (and would likely agree on an interest rate lower than a bank's would be), with $0 down his monthly payment would jump $300-$500, but now he would be building equity in the property.

Is there anything else I should tell him or anything I am missing?

[Bill B.]

How elderly are his parents? They’re going to owe capital gains and depreciation recapture if they sell it to their child. If they leave it to them in their will all the taxes go away. (Less important if the property isn’t worth much more an they paid and they haven’t owned it very long.)  If he’s an only child that’s the obvious way to go. Less so if there are other kids as it’s less than fair to them. 

Maybe they could do some sort of private reverse mortgage? (Kids put a lien on the property to protect their interest and pay the parents a higher amount?)

Maybe a blend of the two and sell the kids 1/2 ownership of the house? (Only half the taxes are due and maybe they could afford a 15 year mortgage on the lower amount.)