How to buy from Grandpa?

Question

Hey, Everyone. I'm looking for advice on purchasing a SFH rental from my grandparents...

Backstory: My grandparents have owned a couple of rentals in rural mid-Michigan (where I grew up and the majority of my family currently lives) for 20+ years now, but are ready to divest; I'm interested in buying one of them. They don't necessarily need a lump sum right now, but to maintain some monthly income.

It's a 3/1 SFH built in the mid-1900s set on 4 acres, in good condition but could be modernized a bit, most likely going to be priced around $60k - $65k. Has a solid rental history; currently occupied by single male paying $750/month. He's lived there 10 years with no issues and doesn't plan on leaving anytime soon.

The intent of this post is to get your opinions on approaching my grandparents and structuring the deal, and not as much on analyzing the specifics that I don't yet have (to be hashed out after Thanksgiving dinner). To me, this seems like an opportunity to use seller financing to appease both parties and get ahold of my first rental property. Any suggestions on financing, terms, minimizing taxes for either party, words of caution, etc., would be greatly appreciated. I'm all ears.

Amy A. · Answer

Don't do it.  I invested with my grandfather and it was a nightmare!  Even though I worked really hard and he made money, some of my relatives were jealous and spread rumors that I was somehow taking advantage of him.   There has been a big rift in our family.  Even my grandfather became convinced that I must have done something wrong (he was starting to get a bit senile).  We made amends before he died last year, but the pain will always be there.  Ask your grandfather for advice, he'll be flattered that you understand how wise he is, and then go buy something on your own.

Garrett H. · Answer

Thanks for replying Amy!

It stinks when this sort of situation draws lines between family members, and unfortunately you can personally attest. In my case, this isn't a huge concern as there is only one other family member in the picture, but definitely something I need to factor into my decision.

Great advice. Ultimately, using him for guidance will drive the transaction (or lack thereof).

Ronald Bourgeois · Answer

I have a wall plaque in my office that reads.   "Stay away from Family and Fiends"  Then they will remain your friends and family.    I only regret that I did not have this plaque when I started out in Real Estate.

Garrett H. · Answer

Obviously, it's hard for me not to approach this situation optimistically with the "there will be no hard feelings" attitude, but as you and Amy alluded too, things can get a little sticky within the family. I still have a lot to think and talk about to get a better feel of the situation, and will definitely keep your advice in mind.

Thanks for responding.

Garrett H. · Answer

He doesn't as of now, but I'm sure going that route hasn't been completely dismissed. Unfortunately, using him as a private lender through IRA isn't an option...

It is free and clear, and I checked out your recommended post. Great information! The IRS rule of imputed interest even on private loans was interesting.

As I'm understanding, installment sale and contract for deed are one and the same?

Also, being that only equitable title is transferred in an installment sale, the Buyer wouldn't be able to borrow against the property through a home equity loan or HELOC in the future?

Thanks for the response, Brian!

Charlie Fitzgerald · Answer

I tend to agree with @Amy Arata on this one.  Unless you are going to buy it outright and cash the grandparents out completely, I would not do seller financing.

Brian Gibbons · Answer

@garrett

grandpa might have plans in his Estate plan to bequest the  property to his kids not his grandkids

If it's free and clear of mortgages, look at installment sale

Search on BiggerPockets "Brian Gibbons installment sale"

@Garrett Hyde

Consider asking him to be an IRA private lender

How to buy from Grandpa?

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