My husband's grandma is the sole owner of a great apartment complex in Aptos, CA a block from the beach, which is really expensive to buy and to rent right now. Currently they are charging $2200 per 2bd unit in rent and they are always full. She owns the property out right and has several other sources of huge income that she gets each month, so she would still be well off if she sold the complex. We would love to be the sole owners of it, but we don't want to ruffle the feathers of the family too much by making an offer to his grandma without talking to anyone. We know that the family is likely to fall apart after she passes because with money, frequently comes greed and we've already seen that greed and favoritism. We just want to be ahead of the curve in buying the property now rather than waiting to see who inherits what.
Just looking for advice on when and how to make the offer that will benefit everyone, if that is even possible. Is it best to offer to buy it before she passes or should we wait and buy everyone out after she passes? How do you suggest we pay for such a large purchase? We have access to private money, we have equity in our primary residence, we have some savings. How would you start this conversation and would you only talk to her about it or make it a family discussion? Please help!!
You're playing with fire. If you're already concerned about heartache after she dies then you must have some basis for those concerns. Surely there are other properties in the same area that you could buy. Buy one of those. If you specifically want to buy grandma's place so you can get a better deal or better terms, then you're just pouring gas on all the emotions at play and pretty much guaranteeing a family squabble. Your statement "so she would still be well off if she sold the complex" is what raises my eyebrow. If she sold it at market value, her financial situation would be unchanged by the sale. So, I'm reading between the lines and seeing "Even if she sells it to use for less than its really worth she would still be OK. She can afford to give us a good deal."
To avoid that, do the purchase at market price. Get it appraised and buy it for that price. And finance it on your own.
However, there is a HUGE advantage to NOT buying it now - taxes. If she sells it to you now she will pay taxes on the gain on the sale. If she's owned it for a while, her basis may be quite low though a combination of buying it at a much lower price and the depreciation. So she will have a big tax bill, which will reduce the eventual inheritance. But when she dies, it goes to her heirs with a "stepped up basis". That is, the "basis" for any subsequent sale. So, if it passes after she dies and then the group of heirs sells it to you right away, there would be no tax bill at all.
Now, if she sold it with seller financing, the tax bill could be spread it. But then you're back into fire territory.
Assuming this is more than four units, you would be doing commercial financing. Figure 20-25% down, amortization of up to about 20 years and either an ARM or balloon. There also seems to be a requirement on these loans that your net worth be larger than the loan amount. You'll need to talk to commercial banks in your area to get a real handle on terms. You won't get 30 year fixed rate financing unless this is a 1-4 unit property.
@Jon Holdman It is a 24 unit complex that she's had for decades.
Mostly, we are thinking we will just be able to get a great deal on the complex if we buy from her before she passes (which is probably 10 years away), however, if we wait until she passes, we will have to pay market value to pay off the family. I just meant she'd still be well off as in it isn't her only source of income, so we wouldn't be making her go broke by getting a good deal. We are definitely worried about the backlash from the family, but we already know there will be a falling out when she passes because it is already happening between her kids and grandkids.
So the tax benefit of waiting is for her benefit, not ours, correct?
I will look into the stepped up basis you mentioned.
Thank you for your opinion. VERY helpful!!
I think you need to ask what problem would you be solving for her in order to get you that " great deal"? Does she want cash to further estate planning because its easier to split other investments among heirs than a building? Does she want guaranteed income without the building effort? Has she been thinking of selling but doesn't want the hassle?
standing alone, "we are thinking we will just be able to get a great deal" has the risk of coming off to her as selfish if you are not offering to somehow make her life richer or easier. Not sure of the ownership structure of the building from your post but if the family has to sign off on a purchase...which it sounds like it does (?) wow, that is certain not to go well in a below market deal, as others have pointed out.
And I might not lead with the notion of her only having 10 years remaining...she is likely pretty attached to them :)
@Jonathan R McLaughlin Thank you for the conversation advice. I wasn't really sure how to approach the conversation without sounding selfish, but those are great ideas. I think if I approach the conversation from one of your suggested perspectives, it might work out without ruffling too many feathers.
I don't think she has been thinking about her finances at all... her husband handled all the money and she is a widow now. Most of her income is passive at this point.
You're operating under the assumption she even is willing to sell it. Instead of that you should ask her if she's willing to sell, if yes under what terms. If she is still open but has no idea of the terms then you can make an offer and go from there.... but if I had to guess based on some of the comments and your sense of urgency she's probably not willing to sell it to you guys.
Account Closed There's no good answer here, it's all "playing with fire" as other people have suggested. What's more challenging is that your husband is the grandson not the son so he's one level removed. The only moderately good way to bring it up is to ask his parent about grandma's estate planning. Who knows what's in play as far as estate planning, power of attorney, etc. It's not a "given" that the apartments will be split among the heirs. You could have one ending up with other assets in lieu of real estate.
In my opinion, if the family is more important than that property I would stay away from it. Even at market value cousin Eddie is going to believe that it was worth 3 times the amount it is. If you take it and are successful people are going to wonder why you are entitled to it and they are not? There is no upside from this apartment, if it fails, well you may still have family problems. If it succeeds you will for sure have family problems.
Now if this property is more important than your family, then just go give grandma a nice low ball offer, let her know it needs a ton of work. Let her know you will take this problem off her hands and when the family gets lippy, just quit answering their calls and de-friend them on Facebook.I know several people who this is a better option for so I am not judging.
Good luck in what ever you decide!
Thanks for the advice everyone... My husband decided he doesn't want to pursue it to avoid the likely family issues.