Buy Parent's house?

Question

Short story is that I've been taking care of various family members for quite a few years and have no income or credit. And even though neither of my parents is in any position to take care of their rental property (previous home) well, there is still some resistance to selling it outright.

What I intend to accomplish by buying parents house...

• Defer their capital gains
• Real estate investing experience for myself
• Income & credit for myself
• Get them out of property management

The terms I've worked out to buy the house... It 3BR/1.5BA 2+GA on 1 acre 1977

• Pay appraisal value (guestimating around $180,000)
• Wrap around seller financing at 3% 30 years $25,000 secured & the balance unsecured.
• Seller continues to pay on existing $34,000 mortgage
• Current tenant rents for $1000/mo (2 years)
• Expenses are taxes $3300, insurance $750, water softener $60/mo, maintenance & repairs $50/mo, miscellaneous $15/mo.
• NOI $540, Cash flow $90 (interest only first year) -$210 (PI after first year)

What I intend to do after buying the house is a bit unclear. It's a 3BR/2BA 1500sqft on 1 acre with 2+GA built in 1977. There's plenty of deferred maintenance & even though the septic works fine, it'll have to be changed to a mound ($15,000) in order to sell. Assessor says it's worth $233K and maybe it could be after a good renovation, although I think $220,000 might be closer.

I've mostly determined that selling within the year is my best bet, and keep the unsecured note in place to invest in other rental property. Does anyone see any huge gaping holes in my plan?

Lynn McGeein · Answer

Are you an only child, or are there siblings to deal with as well?  If there are others, it might be wise to get their feedback as even if your parents agree, something like this could cause rifts in the family.   If your parents do not need to sell right now, the best way to avoid capital gains for everyone might likely be passing it to you through their estate when the time comes as then it's my understanding you inherit at the stepped up basis.  If your proposal benefits them more than if they either sold outright or just kept the property, then explain it to them and let them decide one way or the other, then honor their decision without it getting in the way of your personal relationship.  From the parent's perspective, there is no way that I would personally take that deal as you are basically asking them to hand over title to their secured asset to then finance $120K unsecured, no way to collect if you decide to sell and not pay them back, with them still responsible for the first mortgage, potentially forcing a due on sale clause from their mortgage company, all for 3%?  If one of my siblings came to my mom with that offer and she even thought of accepting it, I'd have her evaluated and declared unsound and ask the court to let me take over her finances. If they want to do something now to help you establish yourself in return for your help with the family, there are likely better ways to accomplish that, and an estate lawyer can probably help find something that's best for both of you.

Anthony Dooley · Answer

I think this will put a strain on your relationship with you parents. If they are resistant, then I recommend that you find another property to buy.  Ask yourself: If my parents didn't own this house, would I be interested in buying it?  If the reason is to "help" your parents, who are not asking for help, then you are making a bad investment.  An investment needs to make sense mathematically. This sounds like a money pit. Deferred maintenance? To me, the house is worth $80,000 strictly based on the rental income.  Or, fix it up and raise the rent.  Also, the tax assessment is usually not an accurate indication of a home's value and neither is Zillow.

Pete T. · Answer

There is likely a reason to the resistance, so you might not want to push too far unless you are willing to get an answer you don't want and you also risk having everyone on bad terms w/o anything changing.  If you decide to press forward, just ask what terms the would find acceptable and see if you can get to the source not wanting to sell.  Some big reasons that might not change could include: they don't really want to sell, they are not confident in your abilities to pay and manage, they reject the idea of seller financing if they sell, they feel 3% is inadequate, are not fans of you selling the property and not paying off the note- which of all of the red flags above, is probably the biggest.  I personally feel like they would take a lot of risk for minimum reward.  What would 3% net them?  Do they have a balance to pay off?  What would be their motivation to sell?  These and many other questions need to be worked through before you can determine what might be a deal for them.

Jeanne T. · Answer

@Pete T.

It depends on what the appraisal comes back at, but assuming $180K, about $90 less on an interest only payment.

Pete T. · Answer

what is the difference in what they would receive from you in payments vs what they collect in rent now?

Jeanne T. · Answer

Their basis is about $50,000. I'm waiting for appraisal, but I think it's going to come in close to $180,000. Capital gains are going to be significant, but not exactly unexpected.

Jeanne T. · Answer

No, I have two sisters and we do talk about the situation. While my parents don't need the money now, they will. The longer they keep things the way they are the less control they have over how & when the sale does happen. Medical bills are likely to eat up whatever equity they have and more. As an inheritance, that was never going to happen anyway, nor is it anything any of us expect.

If they sold the property to a third party now they full $25,000 (not gain, actual tax) in capital gains would be due right away and then there is the problem of what to actually do with the proceeds other than stick it a bank. I've been trying to motivate them into taking out an equity loan to make improvements on the property, but that isn't working and I'm concerned they'll loose the tenant they have.

My sister's have more resources to do a more conventional purchase and possibly defer some of the capital gains, but are unwilling to take on the investment right now. I totally understand, they have families to consider. The only way I can do anything right now is with creative financing.

Jeanne T. · Answer

@Daniel Mohnkern (sorry, can't get these working sometimes)

IF it wasn't my parents' property a discount would definitely be in order, but there are other factors because it's not an arms length agreement.

Jeanne T. · Answer

Whoops, @ mention wasn't working right.

@Jesse T. I am doing that somewhat now and I have previous job experience that was more than 10 years ago. My parents not having any previous property management experience has made it a challenge to do things. For example the mental leap from raising rent $100 was that the kids could become homeless.

Even if they did need the money, not sure that would be the deciding factor in what they chose to do. Still going to keep trying though.

Anthony Dooley · Answer

correction,  if their basis is more than you pay, no gain to them for taxes.

Buy Parent's house?

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