Is this an arm's length transaction?

Question

Hi all,

First post so hopefully I have this in the right forum. I'm currently looking to purchase an investment property.  The buyer informed me they want cash and I only have about 20-30% of the purchase price saved up.  If my parents buy the house for cash, could they sell it to me for the same amount so I can get a mortgage on it or is that not an arm's length transaction?

Steve Babiak · Answer

Bill,

You already know that the beginners sometimes don't even know which questions to ask when they are asking questions ...  so somebody has to play that part too!

Alex Smith · Answer

Thanks for the answers, guys.

Steve Babiak, my folks are also acquiring properties for cash so if for some reason I can't get financing, they will keep the property for investment purposes. I'm prequalified, but purchasing a house from my folks throws a kink into the plans.  Trying to work it out with my LO as we speak, but figured I'd get opinions from BP as well.

Bill Gulley · Answer

I knew someone would ask!

Your balloon note can roll into a purchase, you could foreclose, you could have a deed-in-lieu in escrow if the loan was not paid off, things can get messy but not dangerous.

Before you contract you need to know if you can get a loan, get pre-qualified before looking at properties.

Steve Babiak · Answer

What happens to your parents' money if after you buy you CANNOT get refinanced to pay them off?  This is one aspect that Bill's answer didn't cover.  You will have to figure that out ahead of time IMO.

Bill Gulley · Answer

We did a hurry up a buy with cash, an off the market deal at a steal. After closing found out that the seller had flipped it to us after getting it from the little old lady they had been taking care of and had put in a nursing home, lucky the little old lady was competent and agreed to the deal.....after the fact! Be careful with hurry up and buy now for cash deals....

Which makes me ask, if the seller wnats to know it will close, why not get a committment letter from your lender with POF (proof of funds), why is the seller in such a hurry, if that's really the case?

As to structuring this deal, I made the loan to the seller, a 90 day balloon and have your folks file a deed of trust for 75%. You give the seller 25% down as earnest money on the contract. Document where you get your money from. Have the settlement agent close in escrow and release the earnest money. Take the contract and the closing docs (all but the HUD-1) and copy of the note, to the lender and get the loan.

Mom and dad's money doesn't go to you, don't touch it, they show where they had the money from savings or source. Since the loan is in connection with the purchase of a property for a close family member, there are no loan issues.

Lender sends the closing letter to the agent and wires the funds. The HUD-1 is prepared and you complete the closing. The seller, where ever he/she is, will neet to sign off on the HUD-1. Your parents are paid off from the loan proceeds.  One closing....Done...

Another way would be for your parents to place money in escrow and held by contract, you put your money up. Now, that the seller sees all the money is there, set up a future disbursement and go get your loan and close normally, after settlement the money held goes back to your parents. The seller will have to wait but that should take care of the paranoia the seller has. Again you don't touch the funds from your parents, they put it up in their name for the seller as a contigency for the sale.

I'd suggest you see your lender and see how they want you to proceed. They could have the funds deposited, make a bridge loan to fund and close a new loan in escrow all with one closing.

You'll also need an attorney who might provide closing services to put this stuff together for you, but go see your bank, if you qualify they should be able to do this.

The key is not to touch your parent's money, let them make the deposits as might be required. 
Good luck

Donna Smolinski · Answer

I put a transaction together just like this.  We gave a committment letter from the parents stating they would furnish the kids with the cash to close, along with the parents bank stmt.  Seller accepted.
OPTION TWO:  Have parents and kids both take title and buy parents out on a refi BUT BE CAREFUL.... talk to several lenders to be sure they will allow the cash out refi for enough to pay off your folks.  There are limitations on the amount of cash-out and it may or may not be EZ to obtain the amount you need for the refi.

Unfortunately, you are gonna be stuck paying closing osts on both transactions unless you do a No Cost refi (higher rate).
Good luck.

Loc R. · Answer

Why don't you just borrow the money from your parents and you buy it with their cash?

Alex Smith · Answer

The seller was only looking for a quick cash sale -- didn't want to wait 30+ days for the transaction to fund and close.

Loc R. · Answer

Alex,

Why would you need to buy it from your parents vs. the current seller?  You're ultimately getting a loan, so now you're taking on the costs of 2 transactions.

Is this an arm's length transaction?

Most Popular Reply