How to handle this sale?

11 Replies

I have an odd situation where we want to sell our old primary residence to a very good friend.  This is to help everyone involved but there is the caveat about business dealings with friends or family...

Our old house still has about $165k left on the mortgage and it's ARV is around $195k. We recently upgraded to a larger house as we simply outgrew the old house and really needed more space. We have a friend who we have an extremely high degree of trust in, in fact they may end up being named as getting custody of our children if something were to happen to both of us, serious trust here. However, they have crap credit do to a variety of reasons but now that he is getting back to work from a period of unemployment, he is an oil field foreman, they are ready to buy a house.

Our friend actually wants to purchase our old house and pay it off in literally 3-5 years.  When he is working he makes literally $250k+ so this is not some unrealistic goal.  Obviously the concern is the economy and oil prices to keep him employed at this level but I digress.  

My thought is to go the contract for deed route. I believe that with this option everything would stay in our name so we would avoid the DOS issue. Obviously this involves a great deal of trust on both parties but this is in ample supply as I mentioned above. Does the CFD protect us from the DOS issue? Is there a better option for getting them into our old house? Aside from doing business with friends/family and the trust issue what else might I be missing here?

In the event that this makes a difference...  We live in Texas.

Thanks in advance for any/all feedback on this issue.

What is the plan if he loses his job? Oil prices are at their lowest in years with record production dropping prices to as low as $57 a barrel. If Iran agrees to a deal where they drop their nuclear program, they could release another 30-40 million barrels on the market, dropping the price further. 

I think as long as the property remains in your name and the mortgage payments are made on time, the DOS won't be tripped. What is the plan if he loses his job? Can you afford two payments?

You keep mentioning trust. There are people I would help like this, too. But what happens to the relationship if they cannot meet their end of it? You should get a real estate attorney to draw up papers that detail all aspects of this arrangement so you are both protected. 

There are things you can do in this case since it involves helping a friend more than just making a decision about managing your real estate business. 

First thing first. 

.You want to make sure your payments are made on time on your first loan.

 .You want to make sure somehow a reserve gets built up for when your friend might be unemployed

. If your friend makes that much money when he is employed and that is based on history I would ask why did your friend not save money during a time when he did earn so much money in  a short period of time?

. Again if your friend earns so much money at one time during the time he is employed can you use real estate as a tool to help both him and you? For example instead of paying off your loan is such a hurry can you buy rental property that will provide for the payment of your loan and also create a positive cash flow situation for your friend?

. Maybe pay off the loan as best you can and refinance the property to get your money or some of your money out of the first property to bring the payment down.

. Would a lease option be a good solution for you?

Sit down with your friend and work out a real plan and consider every applicable contingency. Do this is a professional manner to which there will be a commitment made to see things through as planned. 

. Can your friend's credit issues be solved? You will have to be honest with this one because somethings there really may not be a viable and realistic solution. It took allot to work himself into a terrible credit situation and it will take allot to work his way out if it. Will credit consoling work?

These are some things to come to mind but I am sure you can think well on your own. 

Good luck to both you and your friend.

If you love your friend don't ever, ever do a contract for deed sale

I would do a month-to-month lease with top market rent

I would give him a "right of first refusal" and bring him down with a filled out mortgage application 1003 app to a mortgage broker or originator or bank

If he runs out of income then he just cancels his lease and you've  kept your friendship

See a lawyer about the ROFR

@Bill Gulley

@Hattie Dizmond

Thanks for the feedback so far.  As to the questions about the income and his current financial woes...  Both of them have been thru rather unpleasant divorces and I know that this has contributed greatly to their current financial picture.  The other aspect is that he is trying to get to a point of being debt free, of course a house purchase would be the exception here.  Currently about the only debt they have to their name is about $3700 still owed on his vehicle.

The good news is that he does have an alternative skill set that he can fall back on as he has been doing for the past several months.  That doesn't pay nearly what he makes in the oil fields but they can definitely make the mortgage payment and still have money to live on if he has to rely on his current, reduced income.

One other caveat to the issue is that he wants to pay off the mortgage as quickly as possible because they do still have young children at home.  (Their little boy is a dead ringer for a miniature Eddie Van Halen.)  The oil field work is 14 days on, 14 days off so is a big impact on the family life so he doesn't want to do that indefinitely.  He places a lot more value on family than money.

I agree with Brian Gibbons. I had a friend who lost a ton of money on a contract for deed sale.  If you don't like the idea of a lease with the right of first refusal, and his income can truly cover the mortgage, then run it through an RMLO and owner finance it on a wrap. 

A contract for deed is a bad idea, IMO, it trips the due on sale clause, it's also so difficult to do in Texas that most attorneys just don't want to do them and they are rarely done. 

I see this as you wanting to sell and taking your friend to the corner of Hope and Desire without having bus fare  to finish your trip. Not the best buyer or arrangement, but, if you must.....

Lease it to him. Do a handshake on selling when he can buy it after he gets his act together, then contract and sell. Options are limited in Texas to 180 days, John Jackson does options in Texas, might contact him. 

A ROFR is good to make a buyer feel comfy if  they really don't understand the document and to soak up spilled beer. Usually done in leases so a tenant may match or beat any offer received by an owner, in the event they do agree to sell, with the tenant acting within a time frame to close the purchase. The right the tenant gets is the right to refuse to buy under contract terms agreed to. A contract is easier setting off closing to almost a year. 

Your friend needs to see a lender to know for sure that he can't get financing, you or he won't really know for sure, there are all kinds out there, so shop. Lease it. Give him a purchase contract, set closing off, if he can't buy, renew a sale contract keeping one in force that he can use. Don't make it longer than one year, 6 months at a time would be better. You can renew forever without tripping the due on sale and keeping the lease to less than 3 years. Shouldn't be an issue with the "trust" you have. :) 

@Hattie Dizmond

I'm just paranoid about the DOS clause. I know that everyone says it's incredibly rare but it's a definite concern for me. Unfortunately it sounds like the contract for deed is not a good option either so I'm a bit stumped.

Another aspect of this is the down payment...  We really want to get $20-25k back out of the property to replenish our rather depleted savings from buying our own new house.  The thought was to basically defer their down payment and the excess "principle" we would pocket as the down payment for the first few months until we received the agreed upon amount.  Then the excess would apply directly to the principle to pay off the mortgage in their 3 - 4 year time frame.  I'm not sure exactly how to accomplish this with any financing option?  It's not an issue with a normal sale as we would simply get a check for the excess proceeds from the title company after the closing but in this situation...

@Scott Nipp

Paranoid is the right word, but I understand!  :-)

Given your friend's situation and your issues with the DOS, @Bill Gulley 's last paragraph is your best answer and course of action with this situation.  It protects both you and your friend.  You can set a "rent" payment high enough to net you your down payment in whatever time frame you and your friend agree upon, as long as the lease is less than 3-years.  If you really want to do a quasi owner finance for your friend to pay off the property within 3 - 4 years, you could simply set a monthly rent that is high enough to accomplish that goal, do a 6-month purchase contract and reduce the purchase price each time by whatever he's paid, with a handshake that you would adjust the actual purchase price, if he ever decided to finance it in the middle of a contract term.  For that matter, you could execute a new purchase agreement every month, after your receive the rent.  It's just a matter of changing the purchase price and the closing date.

@scott nipp

Keep things simple.

1.) Set up a one year, renewable, rental agreement that amortizes the cost of the property (be sure to include appreciation in the future value of the property) over 5 yrs.

2.) Determine a market rate rent. Then escrow the difference between the rent and amortized payment.

3.) When the escrow account reaches the purchase price, execute the sale.

This way, you still own the house and it gives you some flexibility to extend the purchase timeline based on your buddies income and still cover your note on the property. In the event that your buddy falls on hard times and needs to move out, set up a termination fee paid by the escrowed funds.The remaining escrow balance then goes back to your buddy.

As far as your $20-$25k, call it nonrefundable earnest money and pull it from escrow as it comes in.

@Scott Lewis

Thanks for this feedback.  This is kind of the way the wife and I were leaning on how to handle this but didn't have the escrow account idea in the plan.  This sounds like a great way to handle the situation.  I guess we now just need to figure out how to draft the documents for this arrangement.

I also assume that we could somehow designate any maintenance/repairs issues that would typically fall on a landlord to be responsible for would be deducted from the escrow account?  The idea is that while they are "renting" they are really purchasing the house.  The other question becomes are we getting sideways with any legal requirements as we obviously don't want to open ourselves up to these kind of potential issues.

I also assume that we would reduce our homeowners insurance to a structural only kind of policy and allow them to obtain a renters insurance policy of their choosing?  This is not a matter of trying to stick them with extra costs, only making things easier in the event of a claim for something like a break-in and them being able to deal directly with the insurance company.

I guess the other issue to resolve is the homestead exemption.  Not sure exactly what to do about that one.  I think we do better transferring that exemption to our new residence since it has a higher value and is in the same taxing authority.  Might save us a few hundred bucks a year.

Does Texas allow transfers of real property from yourself to an LLC without incurring a transfer tax? If so, you could transfer the house to an LLC which would protect you from any lawsuits related to the house (all of our rentals are in LLCs.) When your buddy has the money in escrow, the LLC sells the property to him. I would consult a TX accountant to see if what tax implications there are here.

As far as insurance goes, get landlord insurance and force renters insurance on your buddy. 

For repairs, in the lease, stipulate that 100% of repairs are the responsibility of the renter and if he cant pay them directly, the money then comes out of escrow. You might also force your buddy to pay for a home warranty. We have these on our out of state rentals. 

You want your buddy to feel as if this is his house. If you allow money to be pulled from escrow for everything, he'll never get to the amount necessary to execute the sale. 

Another option to look into is a "land contract." I dont have much experience with these but my general understanding is this very similar (with some nuances) to what you're trying to do.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here