Conundrum...buying house from recently disabled family member
recently a family member found out he had diabetes the worst way...passed out and woke up in the hospital minus 1/2 of his foot and a toe was also amputated on the other foot. He has not been able to work and has had a tough time making his mortgage payment. He has been in his house 10 years. he has been relying on family to pull him through. After listening to the bigger pockets podcast I made him the following offer:
His purchase price: 80,000 (after 10 years he still owes 72,000)
I am offering to buy his home for $100,000. I will put down 20% ($14,400). He will pay closing costs. Once the deal is done, he will return my down payment and have roughly $10g in his pocket. he will then begin paying me rent for $550-600 a month (mortgage payment plus $100 toward any repairs), property taxes and insurance will be in escrow. That will give me my first deal with essentially no money down, and give him $10g to hold himself over until he can get back on his feet...no pun intended :) His mortgage is currently $900 per month. Am I missing something or is this a win, win? I just want to make sure I'm not overlooking anything. Any advice would be greatly appreciated.
It may be a win-win from a sense that you stabilize the housing and finances of your family member and in return you get your first investment property, but this just looks like a bad opportunity for you. The rent is way too low for the price you are purchasing the house for. Even if you took it over for the remainder of the mortgage ($72k) and your family member breaks even, you'd still have to charge north of $700/month in rent and that's really in a best case scenario (i.e. low maintenance, low property taxes, etc.) However, it's likely you'd need much more than that on a monthly basis to make this a viable investment. Hopefully other forum members will be able to identify something I'm missing but it doesn't look good at first glance. Best of luck to you and your family.
I looked at the comps in the neighborhood and the houses are selling at $130,000+ in his area. I thought that getting the house for $100000 would already mean that the house would have equity in it that I may use at a later date to purchase another home should the need arise. I'm just looking to break even on this deal to help him and get my feet wet on investing out of state. I also plan to see if in a year or so I'm able to get a HELOC to help with rehabs. I forgot to mention the comps. Does that make the "deal" more palatable? I don't want to put myself in a hole trying to help him. Also, thank you for your advice. You are giving me a lot to think about.
Finding a property with equity in it, and such a substantial amount, is great. However, I don't know if it will really benefit you in this scenario. Before we address the impact tapping that equity may have (via a HELOC), it's crucial to determine what you'll experience from a financial perspective.
Recovering your down payment is huge but once monthly expenses start to hit, you may have that coming right back out of your pocket. From what you've described, it sounds like your family member will cover the mortgage, property taxes, insurance and kick in an additional $100/month for maintenance. A couple things you'll want to clarify here. Does their current $900/month mortgage payment include property taxes and insurance or not? If it does, they are not going to have any easier time paying their bills now than they have in the past as their new $600 plus property taxes and insurance could come really close or even exceed the $900/month they are accustomed to. I'm hoping this isn't the case.
You didn't mention utilities. I'm going to assume they'll continue to pay them as well. If they aren't that will obviously be a significant amount of money out of your pocket every month. The same for maintenance. Though I don't know the area, I feel pretty confident in saying the $100/month they contribute will not cover maintenance for the year in the long run. You may have some years you are able to skate by with it, but anytime you have to address the roof, windows, heating, cooling, etc. you're going to be out thousands more.
The way you have it structured is the property won't cash flow under any circumstances. The family member is covering the majority of the bills but there are a number of pitfalls that you'll be stuck addressing. Any equity that you did have will be lost through the negative cash flow you have month to month. I'm guessing market rent for this home would be higher than $600 and for good reason. Doing this favor for your family is incredibly commendable but it may be very costly to you. I don't see a path to making any money here. I genuinely hope I am missing something in the details as I'd love for this story to have a happy ending but based on what I know so far, it's not there.
I don't even want to address the HELOC in any detail at this point because we would be getting way ahead of ourselves but that would only increase the negative cash flow as you would be taking on more debt, which would increase the monthly cost of your mortgage and if your family member isn't able to pick up the increase, you will be paying for the difference. Despite them paying the majority of the bills, you'll still be stuck with other expenses and no revenue to cover it.