Strategies for buying family home from parents

[Roy Marks]

Hi BP Community! Excited to receive your advice and guidance on this situation.

DISCLAIMER:

I'm sharing some personal details here of being in a privileged and fortunate position with generous parents. I'm aware of my privilege and don't at all mean to come across ungrateful or complaining. I'm trying to lay out all facts so that I can find the best deal for myself and my parents which also minimizes potential for drama. While we have been fortunate to be comfortable in life, we are not a "business family", so doing deals within the family is new to us.

CONTEXT: 

- I'm a 35 year old dude living in CA. I have one buy-and-hold condo in Denver, and I am currently renting in CA. I'm planning to buy a property sometime in 2020 - either as a buy-and-hold, or (preferably), an owner-occupied duplex that I can move into and househack.

- My parents are retired and live in CA. They have two buy-and-hold rental properties in the same town on the east coast in Connecticut: Property A and Property B. The properties have never been professionally managed - this has been done ad hoc by my parents and I over the years with reasonable success.

- Property A is the house I grew up in. This is an SFH with market value of $300-330k. It has been rented consistently for the last 5 years for $2500/month, providing about $500/month cash flow. We've had to make lots of repairs along the way, but overall net positive. About $140k left on the mortgage. My parents would like to sell Property A. The town's SFH sales market is hot right now, but our house is a little dated and needs work. Not a total fixer-upper but certainly in need of a face lift - let's say $30k of work all around to get it market-ready. We have not done that work and it's been on the market for about four months with no bites - not even a single offer! Given their age and the pandemic, and the location of the house on the other side of the country, they're not keen to do this rehab project before a sale.

- Property B is a SFH with market value of $200k. The property has been rented for about 20 years at $1600/month. It was paid off about 10 years ago so is now in the green. Property B is chugging along as a rental. Great tenants that have been with us for five years now. No major churn expected. My parents would like to sell this one soon, but put it off when the tenants extend, because they are just that great.

SPECIFIC SITUATION:

- My parents know I'm looking to buy in 2020 and that I'm considering a buy-and-hold (vs. an owner-occupied purchase) in another state, not necessarily CA. They're willing to help me out on a down payment with $150k. In order to unlock that cash, they would need to sell Property A. Since it's not selling, they have asked me to consider purchasing it. This means I would purchase Property A from my parents, rehab it a bit, and run it as a buy-and-hold. They would clear their mortgage and grant me the balance to help me buy another property.

- To keep the numbers simple, suppose I purchase Property A for $300k. Downpayment of $60k, closing costs of $10k, rehab of $15k, means I'd put in $85k before the end of the year. Without monthly out of pocket costs of $2100-2200 for me and a rental price of $2500-2700, I could likely clear the monthly costs. My parents would clear their mortgage and have about $130-150k to grant to me after the sale. (Keeping things simple again, not considering their closing, capital gains, depreciation recapture, etc.). This sounds like a great deal all around: I get a new buy-and-hold as well as down payment assistance for a next property, while my parents get rid of Property A and are able to be in the cash position they want to be in, in order to help me out.

- I would put a property manager in place for both Property A and B (owned by my parents), and let the two properties continue as rentals. Eventually, my parents will want to sell Property B.

Questions:

- Does it make sense for me to purchase Property A? I am putting down $85k in order to unlock $150k of future downpayment assistance, the rental is across the country in a market that I don't know well (haven't lived there since high school), and the house is old and in need of work. That all said, I do gain an entire rental asset in the process plus the future downpayment help, and help take this stress off of my parents' heads. I'm not complaining at all here - I know this is an amazing opportunity my parents are providing and that I'm extremely grateful and fortunate to even be in this position. I'm also wondering whether it is too risky (i.e. introducing this into the family dynamics). 

- If we do go the way of transferring the property from them to me, is there an easier way to do things than a sale? Could we set up a family LLC, and put both Property A and B into the LLC? Are there any benefits to going that route? Could we even somehow place my new property in that LLC, given that they would be contributing a large portion of the downpayment?

- Should we instead drop the price (currently $349k, real estate agent recommends $329k) and try to do a straight sale, rather than the inter-family transaction? They could still achieve both of their objectives (selling the home and providing me with cash). I'd have one less asset, but this would be much cleaner on the whole. I'd then have a larger amount of cash to put to work on a new property/properties.

- Any other pros or cons I'm missing out on?

Many thanks BP Community!

Kind regards,

Roy