Flip from a Family Member?

Question

My uncle passed away and left his house to the family trust where my dad is the executer. My dad wants to sell the house to an investor because he wants it off of his plate. I want to be that investor and flip it.

I'd like to agree with him on a price and pay for the rehab and all of the costs and then sell it for him where he would take the agreed upon price and I would take the profit.

I want to avoid holding costs with him holding onto it while we renovate, but how to I make this as clean as possible?

He wants to be as hands off as possible including any liability during renovation, etc.

An investor uncle said he could deed the house to me and include a promissory note that he would be paid by a specific date (4 months). My back up plan if it doesn't sell is to hang onto it and rent it out, but I don't think it should have a problem selling.

What is the best way to handle this? Any advice is appreciated.

Michael Daley · Answer

Yes, I mixed up the terms. He is the Trustee of a Family Trust. He has authority to sell the property. He has another brother that is part of the Trust and he is okay with what my dad decides; he isn't involved at all but my dad wants to be fair in the situation and it would be fair market value for the property and do everything above board.

My wife is a realtor, so we have the benefit of her selling it. I know nothing is easy and there will be challenges along the way but I want to take this step and learn in the process. We have a rental but haven't don't a flip before.

It is in an up and coming area so my thought is that if it doesn't have the activity that we are looking for while trying to sell it, we would purchase it ourselves buying it from my dad/the Trust and then renting it out.

Since the house is owned free and clear and has just been sitting there for 2 years since my uncle's death, my thought was that we would decide on a price let's say $625,000, I would pay for everything else and sell it. He would get the price even if I have to take a loss from the money that was put in. This way I would save money in holding cost of getting a loan to buy it first then renovate it. Is there a way to structure it this way? Any recommendations who I should contact to discuss?

Peter Mckernan · Answer

I agree with Andrew on the arm's length and the bank saying no to that type of transaction. You can do an all-cash purchase if there is no note on it, and just make sure that you are on the same page (even with your dad is the executer)... Make sure the family is good on this transaction happening at the right price, it could get uncomfortable if your dad gives it away to you in the eyes of the family. Just make sure everyone is on the same page of price and terms you would take it on.

Peter Walther · Answer

I think you may be mixing up some terms.  Your dad may be the Executor of you uncle's probate estate, but he'd be the Trustee of the Family Trust.

A number of different things may come into play.  Has the probate been completed and closed? What authority under the Trust does your father have to sell the property?  Are there any other beneficiaries under the Trust and do they have anything to say about selling you the property and any related terms and conditions?  As Trustee your dad has a fiduciary duty to all the beneficiaries and has to look out for their best interests.

I think both of you might want to get some professional advice about your particular situation before moving forward.

Bill B. · Answer

so you promise to pay him in 4 months and then “keep it as a rental” how does he get his promised money?

He could sell tax free, you will pay regular income tax on the sales profit.

Are you paying interest on that promissory note?

Who’s paying the transfer taxes, title insurance, property taxes, etc etc. what if you don’t net enough to pay realtors commissions and your realtor commissions does your dad take the loss?

MANY renovations return less than you spend, much less than the end cost plus 5% of the total sales price. Unless this is your 5th, or 10th flip, expect to lose money buying yourself a job. (Assuming you pay your dad market value. But again. If you don’t, the government will take a cut of what he could have h tax free. And not even a capital gains cut, a full regular income federal and state income tax cut.)

Good luck. But please go in to this expecting to break even and learn for free. And hope for that. Going in to it expecting to make money has at least a 50/50 chance to disappoint whoever ends up taking the loss.

Andrew Syrios · Answer

You can certainly sell it to a family member. The only issue really is that this is not considered an "arms length transaction" so if you were going to a bank they may more hoops to jump through or lend less than they would in an arms length transactions or even pass on it. There could also be tax implications if the price is substantially under market value.

But non-arm length transactions are certainly legal and what you're describing sounds doable.