Buying Parent's House to Save the Farm (House Hack)

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Buying Parent's House to Save the Farm (House Hack)

William Richard Arens
Rental Property Investor · Purcellville, VA · Member since 2018 · 17 posts · 2 votes

Hi all,

I am a 26 yr old prospective real estate investor. I currently make about 65k-70k/yr at my W2 and have run a small mowing company for the last 7 years which makes me another 12k/yr. 2 years ago I discovered bigger pockets and have been absorbing as much information as possible since then, reading every book they have published and listening to nearly 300 episodes of the real estate podcast and every episode of the money podcast. I have been implementing the ideas and currently hack my housing in an unconventional way (my girlfriend and I trade work at a farm in Northern Virginia in exchange for rent and board for her horse). 

I have been planning to buy my first house hack this year and have accrued about $20k to put towards this first investment. However, about 3 months ago, my parents dropped the ball on us that my father (previously having about $3million in savings) has only $10k left in savings after the business he has been investing in over the last 6 years has almost lost him everything. My father's company has been appraised at $70mil but it has obviously not worked out yet and I digress. My father doesn't make money outside of mowing for my mowing business and my mother only makes about $45k so they are unable to afford their nearly $4k/mo mortgage and are very close to short-selling their proper since my mother was just denied for a refinance.

My question and topic for discussion is as follows: My parent's 14 acre farm in Northern Virginia (Loudoun County) has a tax appraisal of about $700k. They currently owe about $325k on their first trust and another $50k on their HELOC for a total of about $375k. additionally, they have a 10 stall barn on the property and the entire family pays board to keep horses there (9 horses, 3 dogs and 2 cats on the property). I currently have a 760 Credit Score and $20k in savings. I have spoken to them about the idea of me purchasing the house and they have agreed to allow me to purchase the home for $450k and then sign a lease for $2000/mo for 2 years. If I were able to buy the house, I have told them and they have agreed that I will treat it like any other house hack. I will rent them the top of the house and I will live in the basement while renovating it. Then, after my 1 year requirement is finished, I will move out and rent out the basement to make the property cashflow even more.

Numbers:

Appraisal: +$700k

Purchase Price: $450k

Total Expenses: -$3425/mo

Estimated Principle & Interest: -$2000-$2200/mo

Insurance: $350/mo

Taxes: $500/mo

Utilities: $375/mo

-----------------------

Total Income (During Hack): $3000-3400

Total Income (After Hack): $4000-4400

Rent Income: $2000 for top & $1000 for basement after moveout

Horse Board income: $200/horse *5-7 horses = $1000-1400

So, by my math, I will be out of pocket about $400/mo to cover all expenses of the property. To me, this is very affordable and when you consider that it will cash flow between $600-$1000 after I move out, it becomes a self sufficient investment with a lot of equity. my plan would be the hold the property indefinitely and cash-out refinance it every 10-15 years (maybe even sooner for the first one since I am buying it for such a discount). 

My Questions:

(1) is this a good deal?

(2) should I be able to use the lease agreement with my parents for $2k/mo to count towards my debt to income ratio when qualifying for a mortgage?

(3) is there anything that will prevent me from buying a family member's house for a discounted price? (some law that prevents property from being conveyed between family members for below market value *even though they are about to short sell it anyway and they are dealing with debt issues and will likely sell it for cheap regardless*)

I apologize for the lengthy post and I appreciate anyone and everyone's input. 

Thanks,

Billy Arens

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Heather SkowronskyPro Member
Real Estate Agent · Manassas, VA · Member since 2013 · 118 posts · 63 votes
6y

@William Richard Arens Hi there!  So from my reading - you say the home is worth approx $700k per the tax assessment.  If they only owe $375k then there is no reason/way they could even short sell.  Short selling means that they owe more to the lender/bank than the property is worth and they are asking the lender for permission to sell it for below the amount they owe.  In my opinion it is in their best interest to sell this property and make a very nice profit, especially given their financial situation currently.  I don't know all of the specifics of what they owe but it looks to  me that they could easily walk away with $250,000-$275,000 cash in pocket after fees.  Even if they priced it for a quick sale, it would sell quickly in the market we have right now.  The lack of inventory is astounding and they would stand to make a nice profit still.

But to your question about them even being able to sell it to you.   Yes they can sell it to you if it's not a short sale, nothing prohibits them from selling it to you for any amount of money (below what an appraisal would be).  But if it was an actual short sale, the bank would not allow them to sell it to you at all.  They will have to sign an "arms length" transaction form that states that the buyer is not related to the seller in any way.

And about using the income to help you qualify, that will depend on your lender. Most lenders allow a percentage of the rental income you will receive to off set your debt to income ratio.  Usually it's 70% of the monthly rental amount.  You will have to provide the lender a signed lease prior to closing to show you will be earning this money.

So ultimately it seems like a better situation for your parents to just put the property on the market, take the money and run.  

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  • Heather SkowronskyPro Member
    Real Estate Agent · Manassas, VA · Member since 2013 · 118 posts · 63 votes
    6y

    @William Richard Arens Hi there!  So from my reading - you say the home is worth approx $700k per the tax assessment.  If they only owe $375k then there is no reason/way they could even short sell.  Short selling means that they owe more to the lender/bank than the property is worth and they are asking the lender for permission to sell it for below the amount they owe.  In my opinion it is in their best interest to sell this property and make a very nice profit, especially given their financial situation currently.  I don't know all of the specifics of what they owe but it looks to  me that they could easily walk away with $250,000-$275,000 cash in pocket after fees.  Even if they priced it for a quick sale, it would sell quickly in the market we have right now.  The lack of inventory is astounding and they would stand to make a nice profit still.

    But to your question about them even being able to sell it to you.   Yes they can sell it to you if it's not a short sale, nothing prohibits them from selling it to you for any amount of money (below what an appraisal would be).  But if it was an actual short sale, the bank would not allow them to sell it to you at all.  They will have to sign an "arms length" transaction form that states that the buyer is not related to the seller in any way.

    And about using the income to help you qualify, that will depend on your lender. Most lenders allow a percentage of the rental income you will receive to off set your debt to income ratio.  Usually it's 70% of the monthly rental amount.  You will have to provide the lender a signed lease prior to closing to show you will be earning this money.

    So ultimately it seems like a better situation for your parents to just put the property on the market, take the money and run.  

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  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    6y

    Great advice from Heather above- one thing to add. If you haven't invested before, banks are not likely to count rental income towards your DTI. Typically, they want to see at least two years experience in owning or managing rental property before they credit you for that income. Check with your lender to see how that would shake out for you.

    1Reply
  • Sudhanshu Singha
    Investor · Colonial Heights, VA · Member since 2015 · 78 posts · 53 votes
    6y

    @William Richard Arens I agree with @Heather Skowronsky  that your parents are much better off selling the home and dramatically increasing their savings and even in this market I can see them selling their farm for 700k relatively quickly due to lack of supply in northern va area in general. But if you work out agreeable arrangement to prevent that from happening I think you may cash out big time down the road. 

    In the long term the 14 acres of land will eventually be more valuable than the home. Especially if a future silver line expansion (phase 3) takes the metro to leesburg from ashburn since then the real estate values in purcellville will skyrocket since that is not that far from leesburg. 

    I can definitely see a developer wanting to convert your farm into a subdivision with a lot of homes or build a large townhome community. I know there will be a fight to rezone land in western loudoun county but eventually there is going to be the need to convert the rural areas of western loudoun into a more suburban landscape to increase housing supply and keep economic growth going. 

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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    6y

    @William Richard Arens a tax appraisal is meaningless for fair market value. It’s probably worth a lot more.

    They should sell the farm (not to you).

    What kind of business invests 3 million, is worth 70M but you can’t get your money back??

    If this a private business? Or is it a scam? Something seems off.

    1Reply
  • Paul Ellington
    Leesburg, VA · Member since 2019 · 34 posts · 19 votes
    6y

    Hi Billy,

    I have had a different experience with house hacking than other people here are referring to. My wife and I moved to Leesburg last year to buy our first SFH and kept a condo in Tysons Corner as our first house hack. We needed to negate the mortgage on the condo for our DTI to qualify for the house we wanted and our lender (from Loudoun) had no issues counting 100% of our rent towards the DTI without any prior land lord experience. The only stipulation was we needed a signed lease, which given your situation shouldn't be hard to get from your parents.

    After considering your entire situation I'm not sure why your parents wouldn't sell the property and pocket some money but if they don't want to move and want to "save the farm" as you've said I would recommend finding a lender who will count the entirety of rent as a way of negating your mortgage payments. My in-laws live in Purcellville off Snickersville turnpike and this is something my wife and I will likely be considering as the in-laws age and my wife and I continue our REI journey. Of note,@Sudhanshu Singha is right in that land in western Loudoun is at a premium but you can get a significant discount/break on your property taxes if you sign something saying you won't subdivide or sell to a developer.  I'm not sure on all the legality of that form but my in-laws have mentioned it as they have 6 acres and a few horse stalls themselves.  

    That's a very interesting situation you've got but I tend to believe anytime you can buy and hold real estate in this area (especially if that means keeping your parents in their house) then you should at least explore that option.  Obviously your parents may just want a fresh start with some money in their pockets but if you choose to pursue the property please share the journey on here as I will likely be doing something similar in the years to come.  Also if you need a lender reference who I know used all of our rent to negate a mortgage in the pre-approval process you can direct message me. Just out of curiosity where is the farm located?

    Best of luck,

    Paul

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  • Adrienne Green
    Real Estate Consultant · Chattanooga, TN · Member since 2018 · 384 posts · 330 votes
    6y

    Hi @William Richard Arens, there's a lot of great advice in this thread! As a Loudoun County Realtor, I echo everything @Heather Skowronsky says: short sale doesn't seem applicable here, and your parent should be able to sell it to you for whatever they like.

    Your issue with this potential purchase may be having enough cash to close. $20k for a $450k purchase gives you <5% down, and doesn't consider closing costs. 

    I'd emphasize that tax assessment of $700k means market value and potential sales price of well over $700k, exact amount depends on the exact location and condition of the house of the house and land.

    The best financial situation for your parents may be to sell and pocket cash from the sale, but I understand there are always more factors in play: maybe they don't want to move, maybe they couldn't afford buying another house that would meet their wants/needs, horse boarding, etc.

    As far as if this is a good investment for you, I'd say yes! If you can buy a property worth $700k+ for $450k?! That's fabulous!

    1Reply
  • William Richard Arens
    OP
    Rental Property Investor · Purcellville, VA · Member since 2018 · 17 posts · 2 votes
    6y
    @Caleb Heimsoth the business is in Intellectual Property for a system to convert natural gas and carbon biproducts into nano-materials such as graphene. Essentially, you can take coal or landfill gas and turn it into diamonds. My father, believing in the technology (but not being a businessman) started a company to hold the IP and further the development of the technology. He has investing his lifesavings along with 2 other partners but since it is IP and he is not a businessman, he has done a poor job converting its potential into realised returns.
    0Reply
  • William Richard Arens
    OP
    Rental Property Investor · Purcellville, VA · Member since 2018 · 17 posts · 2 votes
    6y
    @Caleb Heimsoth I also agree that the tax appraisal is meaningless. The property’s ARV is likely north of 800k, but the house itself is 14yrs old and needs work so will likely appraise for between 600-650k right now. In a few years I do expect it to be worth upwards of 900k-1m.
    0Reply
  • William Richard Arens
    OP
    Rental Property Investor · Purcellville, VA · Member since 2018 · 17 posts · 2 votes
    6y
    @Paul Ellington I agree with what you, @Heather Skowronsky & @Sudhanshu Singha have recommended - that my parents are better off selling to a third party and attempting to get market value for the property. The X-Factor in all of these shenanigans is emotion/fear. They have deep emotion tied to the property, they view it as their dream home. They also have 4 of their own horses and 4 from the rest of the family. Long story short, the fear of losing their horses, emotional attachment to the property and the belief that this property is what keeps the family together (regardless of how true it is) is very real to them. I have walked my parents through all of their finances for several months now. Talked them through what it would look like to stay in the property, sell it to family (me) or sell it to a third party. Bottom line is that they do not have any money to put into the property to get it ready to sell. It needs new floors, new paint, new counters (cosmetic upgrades/rehab) the driveway to the barn needs redone as it has eroded, bridges across creek are 15yrs old and need replaced. Small things like this make them believe they wont get market value if the sell. Couple this with the urgency of an impending $35k tax bill in July (i have coached them on payment plans with the IRS) make it so that if they sell to a third party the would just rather go for a cash buyer who has offered them $580k. The options then are these if they are unwilling to put it on the market: 1) stay and refinance - they dont have the credit or income to qualify for a refinance, they have tried and were denied. 2) they sell for $580k - if they do this, they will receive about 200k after paying their current mortgage off. - the issue is now they either would have to rent or buy. Rent: They cant rent because they have 2 Great Danes and the vast majorty of landlords would like not support the idea of two small horses living in the house. Buy: They would have 200k ($165k after paying their tax bill). Market value for homes in (or around) Loudoun County VA hover around 400k (you could get something cheaper if you move towards winchester/front royal, or go across the river to Charlestown WV. The issue with this is multifaceted: 1) my mother works in Chantilly and is 60yrs old. They could move further, but she would then have to quit her job (which I have recommended), or she would drive 1hr+ each way to work. For her health I would really prefer this didnt happen. 2) regardless of where they buy, the more money they use for their down payment, that leaves less in reserves...basic maths. If they buy a 400k property at 20% down, thats 80k down plus closing costs. (Conservatively $85k). That leaves $80k leftover after acquiring their house, no assets to their name, around $1900 PITI, and no property for their horses - meaning they will either need to sell their horses (break my mother’s heart) or pay board for their horses which generally costs between $400-$700per horse. ^ this plan could work. I explained to them how they could try to move a little further out of the city where things are in the high $300k range and maybe get a finished basement and rent that out (househack), but they are clear that they do not want to be responsible for tenants if they have to sell. I have explained how we could rent a large horse boarding facility and #HORSEhack to offset the costs of keeping the horses, but there is push back on that front too. Long story short, I am currently under contract on my parents house. I am offering $460k, after calling 20 lenders and making a spreadsheet with all of their responses, I found a quality lender who is knowledgeable about investing and has no problem working with property’s zoned Aggricultural with 10+ acres (more of an obstacle than I anticipated). I am set to close in July, my PITI will be about $2800/mo. I will rent the main floor and upstairs to my parents for $1500/mo. Finish the basement into a 1-2bedroom apartment with separate entrance (probably called an in-laws sweet, but you get the point). Then rent the basement for $1099/mo initially and gradually walk that up over time. This puts me at $2600/mo income which will be offset by board coming in through the barn. My sister and brother currently pay my parents $200/horse for board, I plan to continue this which will get me another $800/mo to offset the property. All said and done, I will bring $24k to closing on a 3% down conventional loan. Since I have so much equity starting out, my lender will assist me to not have any PMI. My parents owe $390k, I give them $460, now they have 70k after paying their mortgage. $35k tax bill. Now they have $35k. $20k for renovating the basement and getting it rented out. Parents Benefit: After all of that, they have gained $15k cash, lowered their monthly payment from $3700/mo plus utilities to only $1500/mo everything included and they are debt free and get to stay in the house. They also get to keep all of their horses and dont have to stress about uprooting their lives. My benefit: After all of that, I am out of pocket $24k that I was set to deploy for a house hack anyways. I now have roughly $200k equity in a market that is set to drastically appreciate over time. I have $2800PITI but $3400 income from that asset. I get to live there for 1 year and save money on rent elsewhere (probably another $1000 in savings). Plus I get the satisfaction of seeing my parents smile and feel like everything is going to be okay for the first time in a long time. Note: my girlfriend is a trooper. We have dated for around 3 years now. She and I moved in together last September to save money as she had a work for living situation setup in the horse industry. She is now set to split the workload with a friend and they will movein together (and live for free) while I fulfill my 1-year occupancy requirement at my parents house (where I will also live for free). Thank you all for your insight and support. I will do another update in a couple months after I have completed closing the deal and get the basement renovated. Billy
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  • William Richard Arens
    OP
    Rental Property Investor · Purcellville, VA · Member since 2018 · 17 posts · 2 votes
    6y
    I appreciate the advice @Adrienne Green thank you!
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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    6y

    @William Richard Arens although there is not a law that prevents them from selling you the property at below market value, since you are their child, the IRS would consider that portion of the sale as a gift. They would be responsible for gift taxes if applicable on the $200K difference. 

    There is a lot that doesn't make sense about what you are saying. Your parents own a business worth $70M, yet your father is mowing laws for income? Why doesn't he sell his share? Your mother makes $45K and father just has lawn mowing income, yet they owe $35K on their taxes this year? Assuming your mothers income had withholding, they should really owe nothing, unless there are other sources of income here that you are not mentioning.

    Converting the basement to a legally rentable unit requires permitting as such and proper zoning on the property. Make sure that is a viable option before banking on it.

    You imply that your parents will be taking $20K from the sale proceeds to finish off the basement. This would also be considered a gift to you. 

    Talk to an accountant about the tax implications of all of this. You have to reconcile how to establish basis and you need a good system for tracking expenses and income. Since family is involved in renting from you, it puts an extra microscope on this for the IRS. Renting to family members is often done under the table or under market as a way to avoid taxes, which is tax fraud. I am not saying you are planning that, but make sure you have a CPA doing your taxes so they can certify it is all above board. 

    I realize you are determined to move ahead at this point, but just be careful because renting to relatives often has problems and most any investor will advise against it. Everyone thinks it will be fine but it rarely turns out that way. Make sure you have good lease contracts with your parents and for the horses. Include annual rent increases in the contracts of 3% to 5%. That way your family understands up front that rent goes up every year. You must do that because your taxes and insurance will increase. Family members don't take kindly to rent increases, so make it a term of the deal or walk away. 

    The equity here makes the deal good, but the cash flow isn't great. Just be careful with the family involved. Good luck.

    1Reply
  • William Richard Arens
    OP
    Rental Property Investor · Purcellville, VA · Member since 2018 · 17 posts · 2 votes
    6y
    @Joe Splitrock to fund his holding company, my father withdrew investments in 2019 - thus taxable income - thus big tax bill. And yes, you are correct about the gift tax. The gift of equity has been discussed with lender and cpa. Any amount of money gifted that exceeds the annual limit of around $15k per person ($30k if my father and mother each make a gift to me) - the excess goes towards their lifetime gift limit which currently sits at about 11.5million and is assessed taxes in their estate when deceased. There may be additional capital gains assessed at the sale of the property as well due to the gift. That is good advice about making it clear in the lease agreement that rents will rise yearly by 3%-5%, thank you. Last notes on the business: I understand that it seems illogical or like something is missing. But it turns out that even if something is worth a lot of money, that doesnt mean you can find a buyer. So, while the valuation of the intellectual property which examined the IP and the market size (other factors, i am not involved with the company so dont know what goes into evaluating IP) it came out to $70m, that does not mean the demand is there or that my father is a good salesman. And no, he is not trying to get $70m for it, he has been looking to sell/sign a license deal for significantly less than that, just trying to reccup some of his money. Regardless of how unlikely this scenario may seem or how poorly i have laid out the details, I assure you it is all too real.
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