Any options for seller to provide down payment?

Question

Hi! I'm new here (25M). Currently working on my first BRRR property. I have a former co-worker who wants to sell his starter house. He says if I pay him full asking, he would provide me with the 20% down payment since we could avoid realtor fees, and make up the rest by paying full asking (he had it appraised), rather than accepting an offer under asking. The list price is set to be $80,000. (For my area, this is average for a 2 bedroom starter home with no need for major repairs).

Anyway, I was hoping to get a DSCR loan for the rest. Are there any legal ways of going about this? Neither of us want to break the law. Thanks in advance!

Daniel Vanhala · Answer

Could you message me? I'm still new to this and can't figure it out. Thanks!

Dana Powell · Answer

@Rick Albert I agree about CPA consultation.  Thanks!

Jason Wray · Answer

Yes, that would be fine and you do not need to source and season a gift other than show it came from her account.  If you get it into the DIL account 3 months prior to the application for the investment the bank/lender does not see the large deposit to source the funds.  Banks and lenders only require (2) months of checking or the account from which down payment will come from for underwriting.

Feel free to reach out to me if you want to get more clarity.

Rick Albert · Answer

I would consult a CPA. She may run into gift taxes to the kids depending on the amount. If she lived in the property 2 of the last 5 years, the first $250K gain is tax free for her.

I wonder if the DIL is going to buy an investment property, why not just go in on it with the MIL and then he gets it through right of survivorship. This way he never touches the money (therefore never taxed) and she is good because the gains aren't tax anyways.

This isn't my specialty but just my high level understanding. You really need to chat with a tax specialist.

Dana Powell · Answer

@Jason Wray and @Rick Albert, thank you for your responses.  How can a direct line be drawn between the MIL's gift 3 months prior to DIL purchasing MIL's property?  Technically, what's happening is that the MIL is selling her residence and giving all of her children a portion of the proceeds, to do with as they will. It just so happens that rather than buying a car and paying for a family vacation, the DIL is going to purchase an investment property 3 months after receiving her gift, albeit it from MIL.  Would this not be acceptable?

Jason Wray · Answer

The only way to do that is if you used it as a "Gift of Equity" but it would have to be for a Primary residence not a DSCR.  DSCR is for invetment only.

Rick Albert · Answer

I'm going to let @Jason Wray confirm this as I'm not a lender. I'm not sure what the gift guidelines are for primary versus investment.

Dana Powell · Answer

@Jason Wray and @Rick Albert,  a friend of mine would like to use a DSCR loan to purchase her mother-in-law's house as an investment property.  The MIL has owned the property for 4 years and there is no mortgage (purchased in cash by her grandson; I raise this to you in case there are capital gains implications for MIL and DIL when the latter sells).  Is the DIL considered to be "direct family," and if so, could the MIL gift her enough money for the down payment and closing costs?  If it makes a difference, the DIL could purchase in her name or in her construction company's  LLC name.  TIA!

Rick Albert · Answer

The better option is for the Seller to pay your closing costs. As already mentioned, unless the Seller is direct family, gifting equity doesn't really work.

Double check with the lender, but here are a couple of options:

1. Could the Seller just pay some of the vendors through the net proceeds? Less money out of your pocket.

2. DSCR loans can be expensive because of points, etc. Have the Seller pay it.

Benjamin Krebs · Answer

Hey Daniel, let's chat I have a good solution for you.

Any options for seller to provide down payment?

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