Father-in-Law is Motivated Seller! Advice for Buying his House?

Question

Hi,

I've been planning on getting into real-estate at some point within the next 6-12 months (I'm currently in the planning, education and saving up cash to invest phase).  However, my father-in-law just bought a new house (downsized) and is getting ready to retire.  He told me that he is going to sell his current house to an investor because he didn't want the hassle of having to walk people through the house and deal with "tire-kickers."  Additionally, he said that it was a plus that an investor can close in 10-15 days, vs waiting for a conventional buyer to close in 45 - 60 days.

The house is in San Diego, CA and would sell for about $1.2 million.  I believe he wants around $1 million for it.  The house doesn't need much work, so I think I would probably be able to just resell pretty much as-is.  I don't necessarily feel completely ready to jump into real-estate quite yet (based on my current knowledge), but I think this deal is too good to pass up (ready or not) and I think I would be capable of figuring things out on the fly.  They say the hardest part is finding the deal/motivated seller and one just happened to fall into my lap here.

What do I need help with?  The strategy:

My thought was that I should ask him if he would be willing to sell it to me. I figured that to incentivize him to sell to me vs. the investor, I would offer to split the profits with him (the $200k) on the back-end, once I sold the property.  There's a reasonable chance that I could qualify for a $1 million conventional home loan (based on my income, debt-to-income ratio and excellent credit score) and I could ask him if he'd be willing to wait for the 45-60 day close on the conventional loan (which he may be ok with, if he's selling to me); however, I only have about $30k to put down (not the $200k+ required for 20% down plus closing costs).  If I can't qualify for the loan on my own, I was thinking that I may be able to partner with someone, or maybe there is some way to use the existing equity in the property to reduce the down payment?  That's were I'm a little fuzzy on the details.

Wondering if anyone has any suggestions on:

1. General strategy

2. How I can finance the deal if I'm not able to get the conventional loan with the $30k?  Maybe some combination of loan and seller financing would work? (no idea) and

3. I'm not sure about the tax implications of selling to a son-in-law.  That would have to be factored in.

Any guidance that anyone can give would be greatly appreciated!  I would love to make this my first deal.  I figure it's a little less risky, since I know and trust the owner and he's been there for over 30 years, just not sure exactly how to make it work yet.

Thanks!

Mark Frattini · Answer

The lender I use can close in 21 days. Find a lender who can quickly tell you if have a chance at qualifying for this loan size. Talk with your CPA about the tax implications of flipping and paying taxes on the gains. Make sure you know your numbers inside and out. That's a pretty expensive home for your first attempt at real estate investing.

My advice would be to help convince him that $200k is a lot of money to leave on the table. There are plenty of ways to filter out the looky-loos and only show the home to qualified buyers who are ready to write offers. You only need a weekend worth of open houses and then review offers on Monday.  It should not take a buyer 45-60 days to close in today's market.

Thom MacFarlane · Answer

Ask father-in-law for a gift of equity. Gift of equity, when selling to a relative, can be used in lieu of a down payment.

HOWEVER, conventional lenders do not wat to be an interim lender and thus the intend would be to occupy the home.

PM me for gift of equity idea if interested.

Robert Williams · Answer

@Brady McClendon @Dan Heuschele Seller financing seems like a pretty good option, especially since you can save him on the capital gains tax. Figure out a way of telling him how you’ll protect his pockets by him selling it directly to you with terms. Using a realtor will effectively cut your profits.

Dan H. · Answer

Any chance your father-in-law would finance?   I suspect it depends on his need for the money and his trust of you. This would likely be best option for you and could be good option for your father-in-law.

If it is a good deal, you can obtain hard money loan if necessary.  If the turn around is going to be quick, the interest rate has little impact (points have big impact on short loans).

Are you local to San Diego?  Contractors are expensive and in short supply.  Today I will be working one of my units because I need something completed today and was unable to get someone else to do it.

20% margin is not bad, but it goes fast.  If you sell it on open MLS market with an agent, RE commissions will be 5% to 6% (sometimes you get what you pay for so 5% is not always the better value). As indicated contractors are not cheap.  Holding costs will consume some of that 20%.

My point is do your research.  Make sure you run your numbers conservatively.  If it is a good opportunity, the numbers should show it.

Good luck

Don Gouge · Answer

I see disaster written all over this. If you sell with an agent you are going to lose 60-70k. How much is this hard money loan going to cost you even if you can get it of the margin is thin? You say it dosent need much work but you can easily spend 30-40k on not much work. What will be your holding costs between purchase and sale? What if you have overestimated the sale price? You have a razor thin margin here 200k sounds like alot but it can. Evaporate quickly when dealing with a million $ plus property.

Will Barnard · Answer

This is your best advice. Convince him that leaving $200k on the table is not worth any headaches of listing with a broker and several people coming through the home. If this was a full fixer, i would say otherwise.

Mark Frattini · Answer

The three day weekend open house strategy has served us well in San Diego. There's a lot more that goes into the marketing and advertising side but the homeowner is only displaced a few days and gets to take a little vacation away from home. The other option is to allow private showings only to pre-qualified buyers that can show proof of funds before scheduling a tour. This will quickly separate those buyers who are serious from those who are curious.

Brady McClendon · Answer

@Mark Frattini thanks for the advice! The more I think about it, the more I lean toward taking another shot at convincing him to sell to a conventional buyer.  Good tip on the open house weekend. He may tolerate that better than individual appointments.

Brady McClendon · Answer

@Dan Heuschele thanks for the reply.  Yes, I am in San Diego as well. Do you have any suggestions for a local hard money lender that I might be able to work with?

Good point about the contractors.  I don't think the house needs a lot of work, but I would definitely need to find that out before pursuing the purchase.

I haven't run the numbers yet, or even confirmed the $1.2 million estimated selling price, but I'm planning on calling him tonight to get more details to put into the analysis.  I'll definitely make sure to be extra conservative, because I won't have a lot of room for error, given my current financial situation (not a lot of money to spend on contractors if needed).

@Scott Wolf he's currently working with an agent and a separate company that is supposed to be finding a reputable investor, so the fees are going to be egregious, I'm sure.  That's part of the reason I'm trying to jump in.  I don't want to leave that amount of money on the table if it can be avoided (even if none of it comes my way, but just stays with him).  I think it may be hard to change is mind at this point, though. It seems like he's just over it for the most part and wants to find a buyer with as little disruption to his everyday life as possible.  Thanks for the reply!

Scott Wolf · Answer

@Brady McClendon, I think you should advise your father in law to sell with a broker.  I think leaving $200k on table is a huge mistake.  Additionally, a good broker will make sure someone buying a $1.2MM property is not a tire kicker, and has a preapproval or proper proof of funds.  He can then use that additional capital to invest with you to help kick start your RE Investing career.

Father-in-Law is Motivated Seller! Advice for Buying his House?

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