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Here’s the info:
Grandma’s waterfront house in Wisconsin, with a sizeable chunk of land and long frontage, is being sold. If I had some cash, I would have given her some down payment, rented it out, broke even and paid her a zero percent note every month for the rest of her life, then passing the payment on to her two kids (my dad and aunt). I personally rehabbed the house bringing it into the condition it is. Someone wants to buy the house for $685 cash when I estimate its worth somewhere in the $800k neighborhood. If she is going to sell at that price, I strongly recommended she get an option to buy back at that price anytime for the next 10 years. Her other choice is counteroffer for more money now. I told her the option is worth more than more cash now, and for tax reasons, an option would be preferred.
Obviously I am dealing with an agent in between her and the buyer. I instructed her to have the agent call me so he knows what is going on since I’ve met only two agents ever before that can explain to me what an option is (both were owners of rental properties). What’s the next step? I would think I would have to sit down with the buyer as well and explain it to them. I need to review my Options I & II course notes, but any other advice?
I know I shouldn’t “deal” with family members, but a ton of hours of blood, sweat and tears (and personally financed repairs) are in this house. I know emotion should not be part of a transaction, but since all of my best childhood memories are there, I really want to keep “control” of it if possible. I can then buy the option from my grandmother for a song.
Thoughts?
So– it sounds like you really don’t want your grandma to sell the house to someone else and you would prefer to keep it in the family — is that correct?
Jackie
Greg,
You know I’m not the L/O expert (yet), however you’ve confused me. It’s not clear to me, has Grandma signed a contract to sell yet?
If not, won’t the capital gains hit her hard and you should point that out and then control it the way you would like (via Option/Lease Option) or move it into some form of trust that avoids inheritance liability down the road.
Good luck working with family – that’s a whole new dynamic.
Hank
Hank,
If this is Grandma’s primary residence then she will not pay taxes on the first $250,000 in profit under IRC 121 ( for now — Obama wants to get 30% of profit from the sale of YOUR personal residence so he can share YOUR wealth)
Greg — the question is WHY is grandma selling?
If she needs money, I bet we can some up with a way for her to get the money and keep the house.
She could sell you the house with seller financing then sell the first 5 years of payments. She gets cash – you get the house with seller financing.
She could do a reverse mortgage ( preferrably with one of your private lenders) – would have no payments and money for her to live on now.
If she wants to stay in the house but just can’t afford it – then you could buy an option and pay for it with monthly payments that would give her the money she needs — or your option could be for annual property taxes and insurance costs.
You could buy a remainder estate — so she gets to enjoy the house now and you get to enjoy it later.
Why does Grandma want to sell?
Jackie
Jackie, yes, I would like to keep it in the family. Grandfather built it 60 years ago. Stone, mahogany inside, unbelievable views, right on the bluff.
Hank, yes, working with family is usually brutal. She has not yet signed the contract yet. She is countering right now–I think the problem is I need to be sitting with the agent and buyer to explain the option. Since this is out of state, and a few hours away. The quickest I can get there is next week Friday. I told her about the taxes. Does the 250k tax free (on the 121 exclusion) come off the top or after all closing costs (agent fee, docs, taxes, etc)? My wholesaling efforts have failed thus far so I am cash poor (the last few months I have been rehabbing former ?tenant? caused repairs and I will be doing this the rest of the year since I will have another vacancy at the end of the month).
Jackie, she wants to sell for 3 reasons. 1) She bought a condo 2 years ago (and failed to make me a part of the negotiations thereby getting gouged–she owes $240k on the condo she has been living in). Taking care of the house and yard was too much. Being a depression era girl, “being in debt” is anathema. 2) The house will need some significant repairs in the next 5-10 years–two new furnaces which need to be switched over to propane and a roof. She needs piece of mind. 3) Debt relief on her payments–she is still obviously paying taxes and insurance on the house (it is free and clear). Her savings is being drained by the condo mortgage and two sets of taxes and two sets of insurance.
The rehab we did on the house took about a year and we dumped a ton of cash into it ourselves. I never crunched the total cost numbers–out of pain
But I did learn how to fix about anything in a house and do it right. My goal was to rent it out after being done, but it took me a few months to find the market rent since it was such a unique property. She grew impatient and decided to put it on the market–that was October 07. We have talked about me buying it (and I know she would take a zero percent loan which would be passed on to my dad and aunt after she passed). I could give her debt relief (pay the house taxes and insurance AND her monthly condo payment not including condo taxes and insurance). I could give her piece of mind about the big repair costs coming up who knows when. I could NOT pay off her debt entirely. I think that would be good enough for her. I would settle for a small-moderate negative cash flow for a few years. Being a few hours away though–whew–headache. Although I know plenty of people on here invest out of state. That’s a lot of info, but I perhaps left something out. Thanks a lot for the help. This has been a nagging concern for a while–I may be best off forgetting all about it and just letting it go and pressing forward in my own market. Still, I would love to further rehab and expand the house in the future and turn it into a real gem and use it for a vacation home for friends and family. Best laid plans of mice and men…
Trevor, thanks, but we finished the house October 07, and she is closing next week. Which is good-put it behind her and the family.
Tax wise though, if we did a bunch of work and repairs, can she take the write off for all of the purchases and mileage we racked up if we fork over the receipts? I want the government to steal less of her money. I believe she can just repay me as if it were a two year loan, correct? I should have to pay taxes on any of the money she gives me for my materials, mileage, etc right?
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