I am looking for advice on purchasing a house in which my aunt has gained ownership most likely through quit claim deed from my grandparents 10 years ago. My grandparents had owned it since sometime in the 1950's. I gather through my research that there would be tax implications if I purchased this through a normal mortgage process since the price would be below market value (it needs a lot of work). From what I understand, it seems I will need to verify how the transfer was done in 2007 (quit claim (bad?)/warranty deed (good)) and then warranty deed myself on the title for at least 6 months and then remove her the same way and then get an equity loan for the agreed purchase price as well as rehab funds. I believe the purchase price/rehab funds will be about 60% of market value when complete. I am assuming I should have a real estate lawyer draw up documents to get all this done? This is my 1st deal so all advice is welcome!

I don't know all the intricacies of your deal, but we've done some intra-family deals with the advice and help of an attorney.

For tax purposes we got an independent appraisal of the property. The appraiser did ask us who the appraisal is for, and we told them that it was to complete an intra-family transaction, and we needed something to establish a tax basis. The reason he asked was there's a high end, and low end appraisal depending on what you need it for.

Now, if it's intra-family, and you're getting it below market, to play it safe, do the sale based on the appraised amount, and have the difference handled as a gift. For instance, if the appraisal comes in at $200K, and they're selling it to you at $150K, then have them do gifting of $50K, keeping in mind annual limits on gifting gift tax free, if that concerns you. This will preserve the value for mortgage purposes because the bank will grant loans based on the value of the contract, even if the contract is way below appraisal. I ran into this problem once where the contract is $50K below appraisal, and they'll only consider the contract value.

The way it turned out, I got a lot less from the bank than expected, but in the long run, it did me some good as my cash flow was better because of the lower mortgage.

Originally posted by @Phillip Witt :

I am looking for advice on purchasing a house in which my aunt has gained ownership most likely through quit claim deed from my grandparents 10 years ago. My grandparents had owned it since sometime in the 1950's. I gather through my research that there would be tax implications if I purchased this through a normal mortgage process since the price would be below market value (it needs a lot of work). From what I understand, it seems I will need to verify how the transfer was done in 2007 (quit claim (bad?)/warranty deed (good)) and then warranty deed myself on the title for at least 6 months and then remove her the same way and then get an equity loan for the agreed purchase price as well as rehab funds. I believe the purchase price/rehab funds will be about 60% of market value when complete. I am assuming I should have a real estate lawyer draw up documents to get all this done? This is my 1st deal so all advice is welcome!

 From your writing and your questions, its quite evident that you are brand new. I also get the feeling that you are mixing lot of issues, and confusing yourself and lot of your audience. 

You should never buy any property without doing full title work. A real estate attorney or Title Company will do that for you. With Quit Claim Deed, no title insurance can be obtained. With title insurance If any type of encumbrance, lien or other defect to the title is discovered following the transfer of ownership or the placement of a mortgage lien, you are protected..General Warranty Deed is the way to go to avoid future headaches.  Quit Claims is what courts use when auctioning the property. They basically guarantee nothing ! 

Now you say something about purchasing the property through normal mortgage process and tax implications. Not sure what you are trying to get at there...Taxes are determined by the county/city.  They do annual tax assessments of the property - not the banks.

You also say the property needs LOT OF WORK. What is LOT? Do you think the property will meet appraisal. LOT is different for different types of appraisals. FHA appraisal and Conventional Appraisal are different as night and day. If no bank will touch it, it will have to be purchased using cash or private money/hard money.

Also, as a side bar, no lender will allow you to buy property without General Warranty Deed and Title Insurance. There is also owners Title Insurance Policy and Lender's Policy.

So...back from the dead;) Thanks to those that replied. Just to close out this post, here are the answers to the posed questions and what ended up happening. The home did appraise for more than the purchase price, I did get a mortgage for agreed upon amount which was $20K less than the appraised value and this was done via a seller gift of equity. As there was a mortgage, full title work was done by a local title company and there were no surprises found. We closed in September and I took full possession last week. 

Now, as far as the tax implications I was worried about, it was based on the fear that my aunt would have no basis for the property and would owe the IRS taxes on the entire purchase amount. This was not an issue as it was well below IRS limits for this issue. 

Lastly, by a lot of work, I mean it needs completely rewired with lots of outlets added to come up to code. It also needs all new windows (22 with most of them being about 19x63) a complete kitchen, full bath, another bathroom added, a roof, full a/c system and all new plumbing. Plus anything else that will undoubtedly be uncovered in the process.

Some good news tho is that the appraisal was based on it being a 2 bedroom house since the one bathroom can only be accessed via a bedroom which would then qualify as a den. So by adding a bathroom, it goes from a 2 bed/1 bath to a 3 bed/2 bath.