What's the easiest, fairest way to buy a house from my father?
February 7, 2017 9:02 PM Subscribe
My dad owns three properties: his actual home and two rental properties. As he's gotten closer to retirement, he has discussed selling the rentals as the tenants move out in order to cash out and pay off his mortgage. And today, one of the tenants did give their 30 day notice. What are some ways I can buy the house from him without coming up with a 20% down payment and buying it like any one else would?
My main goals in this are:
* Allow my father to extract as much equity as possible
* 0% or minimal down payment on my part.
* Not pay PMI on a new mortgage
* Transfer ownership to 100% in my name as soon as possible while minimizing taxes and fees
* Keep everything on the up an up, income tax/capital gains wise.
* Bonus: Keep current property tax amount, if possible.
With a loan of 100% of the current market value, I could cover the difference between what tenants would pay in rent and a mortgage. If worse comes to worst, I could just live there and pay much less than my current rent in a much hipper part of Los Angeles.
But, since no bank is going to make that loan, is there a relatively straightforward way of my dad selling me like 80% of the house, and then having me pay off his 20% over time? Would there just be a new loan with my father as co-signer? Would he just add me to the deed and have me pay a monthly payment directly to, and therefore skip the whole mortgage process only?
Obviously the required professionals will be retained when/if the time comes, but I was wondering if there hive mind new of common/popular ways of doing this type of transaction.
For sake of numbers, let's say he owes $150k and the home would sell on open market for $400k. Current renters were paying $1650, but the prop management people think it'd go for $1850 with new tenants. We are also located in Los Angeles County.
My main goals in this are:
* Allow my father to extract as much equity as possible
* 0% or minimal down payment on my part.
* Not pay PMI on a new mortgage
* Transfer ownership to 100% in my name as soon as possible while minimizing taxes and fees
* Keep everything on the up an up, income tax/capital gains wise.
* Bonus: Keep current property tax amount, if possible.
With a loan of 100% of the current market value, I could cover the difference between what tenants would pay in rent and a mortgage. If worse comes to worst, I could just live there and pay much less than my current rent in a much hipper part of Los Angeles.
But, since no bank is going to make that loan, is there a relatively straightforward way of my dad selling me like 80% of the house, and then having me pay off his 20% over time? Would there just be a new loan with my father as co-signer? Would he just add me to the deed and have me pay a monthly payment directly to, and therefore skip the whole mortgage process only?
Obviously the required professionals will be retained when/if the time comes, but I was wondering if there hive mind new of common/popular ways of doing this type of transaction.
For sake of numbers, let's say he owes $150k and the home would sell on open market for $400k. Current renters were paying $1650, but the prop management people think it'd go for $1850 with new tenants. We are also located in Los Angeles County.
Allow my father to extract as much equity as possible
You don't say how soon he needs to extract the equity.
If he's willing to extract it over time, he can carry the note.
One possible issue with this is that he might not be allowed to record a sale and transfer it into your name before the mortgage is paid off.
Keep current property tax amount, if possible
If the home is sold, it's generally reassessed. I'm not sure if CA has a special rule for children purchasing from their parents. There are ways to avoid California reassessment if you are a child inheriting from a parent though.
What is best to do here might depend on what your Dad's retirement and estate planning is looking like, as well as whether you have any siblings. Talking to a professional who handles retirement and estate planning might yield some interesting ideas.
posted by yohko at 10:04 PM on February 7, 2017 [1 favorite]
You don't say how soon he needs to extract the equity.
If he's willing to extract it over time, he can carry the note.
One possible issue with this is that he might not be allowed to record a sale and transfer it into your name before the mortgage is paid off.
Keep current property tax amount, if possible
If the home is sold, it's generally reassessed. I'm not sure if CA has a special rule for children purchasing from their parents. There are ways to avoid California reassessment if you are a child inheriting from a parent though.
What is best to do here might depend on what your Dad's retirement and estate planning is looking like, as well as whether you have any siblings. Talking to a professional who handles retirement and estate planning might yield some interesting ideas.
posted by yohko at 10:04 PM on February 7, 2017 [1 favorite]
Why do you want to do this? The mortgage is more than the house is worth as a rental and you'll lose money each month. I guess I'm asking because it affects how you can pay for it but no bank will loan you money for a $400K house that only rents for $1800/month as an investment, you'll likely have to live int it.
posted by fshgrl at 10:12 PM on February 7, 2017
posted by fshgrl at 10:12 PM on February 7, 2017
If your father refis another house and uses proceeds to pay the remainder of this mortgage and owns this one free and clear, he could sell it to you and he could write a mortgage to you, so he is the bank, sets the downpayment requirement, the interest rate, and collects the interest. It's a stable rate of return for him and good for you.
Another idea:
If you can't qualify for a loan you may be able to do a contract for deed. You could set the balloon very far out. These vary state by state in how they work, and they aren't too common anymore so ask a pro that's done one.
I would try to stay away from you getting a new loan. It seems unnecessary and expensive compared to other solutions.
posted by littlewater at 10:39 PM on February 7, 2017
Another idea:
If you can't qualify for a loan you may be able to do a contract for deed. You could set the balloon very far out. These vary state by state in how they work, and they aren't too common anymore so ask a pro that's done one.
I would try to stay away from you getting a new loan. It seems unnecessary and expensive compared to other solutions.
posted by littlewater at 10:39 PM on February 7, 2017
Response by poster: Why do you want to do this?
It seems like the easiest way for me to get into the property ownership game, even if it means losing a bit of money each month for a few years.
Owning a home in the neighborhood I currently live would mean coming up with $200k as downpayment. In all likelihood, it would actually require $700k+ cash since almost all the homes around here sell that way in the first few days on the market.
posted by sideshow at 10:41 PM on February 7, 2017 [1 favorite]
It seems like the easiest way for me to get into the property ownership game, even if it means losing a bit of money each month for a few years.
Owning a home in the neighborhood I currently live would mean coming up with $200k as downpayment. In all likelihood, it would actually require $700k+ cash since almost all the homes around here sell that way in the first few days on the market.
posted by sideshow at 10:41 PM on February 7, 2017 [1 favorite]
Couldn't you just do a rent-to-own contract?
posted by kevinbelt at 5:00 AM on February 8, 2017 [1 favorite]
posted by kevinbelt at 5:00 AM on February 8, 2017 [1 favorite]
While it's not as financially sound as coming up with with 20%, you can get a mortgage for 5% down. 20% is better, but 5% is not insanely unwise or anything. You will pay PMI, but can (generally speaking) get it removed once you've paid off 20%. If you're the only buyer, you won't have to compete with others on terms and contingencies, so no, you won't need to come up with $700k.
The only realistic way for your dad to extract money *now*, is for you to get a normal mortgage. If he doesn't need the money *now*, then he could carry the note, and you'd effectively take out a mortgage from him and pay him back over time.
posted by so fucking future at 8:10 AM on February 8, 2017 [1 favorite]
The only realistic way for your dad to extract money *now*, is for you to get a normal mortgage. If he doesn't need the money *now*, then he could carry the note, and you'd effectively take out a mortgage from him and pay him back over time.
posted by so fucking future at 8:10 AM on February 8, 2017 [1 favorite]
The rules may have changed since we bought our house five years ago, but we were able to get a loan and pay points to get rid of the PMI. I think it was $1k or 1.5k. We only put down 5%. I think they called it a "community development loan" or something similar. We live in the suburbs. I hate to advertise a major bank, but PM me and I'll tell you which bank and loan we used.
posted by Bistyfrass at 10:53 AM on February 8, 2017
posted by Bistyfrass at 10:53 AM on February 8, 2017
I'm not sure if CA has a special rule for children purchasing from their parents.
It does. My parents bought this house in 1978 and I was able to keep that tax rate when I purchased (not inherited) the house from them.
(My property tax was $897 last year. A house down the street that sold for the same amount this year just paid $1,952. Given the property prices you're talking about? Dear god, keep your dad's tax rate if you can.)
posted by elsietheeel at 12:10 PM on February 10, 2017 [1 favorite]
It does. My parents bought this house in 1978 and I was able to keep that tax rate when I purchased (not inherited) the house from them.
(My property tax was $897 last year. A house down the street that sold for the same amount this year just paid $1,952. Given the property prices you're talking about? Dear god, keep your dad's tax rate if you can.)
posted by elsietheeel at 12:10 PM on February 10, 2017 [1 favorite]
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But I still have no clue how it all worked because my mortgage broker took care of it all.
posted by elsietheeel at 9:34 PM on February 7, 2017