Private Reverse Mortgage / Lifetime Lease

4 Replies

My neighbor, a 68 year-old guy with no family or kids, started a renovation of his house and never finished it. The property is located 2 blocks from the beach in Santa Monica, needless to say it's worth a lot...even it's present torn-up condition. The land itself is worth about $500-600K. He currently owes about $350K in a HELOC he took out to do the renovation, and then ran out of money....8 years later it's mostly bare studs.

My idea: Pay off his debts, finance the renovation of house, and let him live in it for the rest of his life, and he would be responsible to pay the taxes, insurance, utilities, and basic upkeep. When he passes or if he defaulted on his fiduciary responsibilities, I would get the house . This would be similar to a reverse mortgage, but private, and therefore uninsurable by the federal government. So, to give myself some assurance I would prefer to take title of the property....but if the property taxes are reassessed the guy will not be able to afford them. He has owned the house for 40+ years. So the question is: what is the best structure to buy the property (or refinance his existing debt) that protects my interests and the title of the property? A deed trust? 

Looking forward to hearing your thoughts...


Maybe an irrevocable trust with you as the beneficiary? But I sure as hell am no lawyer and really have no idea :) Sounds like it could be a gem though. Only worth $500k-$600k? Contractors are buying tear downs on 5500 sq ft lots in Sunset Park for $995,000 right now. And that's 30 blocks to the beach.

I think an irrevocable trust would only work if I were a family member (and could receive the property through an exclusionary transfer, which wouldn't trigger a reassessment) 

Yeah, the property could be worth more, although the lot is tiny....36 by 45 feet, and no onsite parking or even a yard to speak of. The after repair value could easily be $1mil or $1.2mil....but how to protect the investment by managing the risk involved in tying up $500k for 30 years? It may sound like a steal to get a property worth a million bucks on a $500k investment, but if you invested $500k and made a 5% return annually, you'd have $2million at the end of 30 years. In this scenario, it might be a house worth $1.5mil in need of another full renovation at the end of 30 years....

I thought the best way to fund it would be using Self-directed Roth IRA investors in their thirties (like me) Since that money can't be touched until age 59-1/2, it might be a good vehicle to park some money into. The Roth investors would buy shares in an LLC set up to be legal entity to buy the property. (this seemed like the cleanest way to do it, by taking title of the property) However, when I figured what the taxes would be after reassessment, the lifetime lease becomes impossible with higher taxes. And I'm not sure what sort of legal safeguards there are as an investor / mortgagor when the borrower still holds title and could potentially run up other debt against the asset. This would be non-recourse debt (I think), but I'm not sure who has first dibs on the real property in a messy case of multiple creditors going after debt.

1 does he have capacity to made a decision?
2 does he have income
3 does he have assets
4 if you do this without him getting legal advice, you may have a problem in the future.
5 look up the elder abuse laws in ca. & your county.
6 connect him with legal assistance for seniors.

First step, attorney.  Sounds like maybe a life estate situation, with you as the remainder, and a mtg.  Don't know how this would affect the tax assessment.  Attorney.

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