90 Year Old with a Dead House - 550k - How to Structure

Creative Real Estate Financing
2yFollow

90 Year Old with a Dead House - 550k - How to Structure

Timothy Michael Mick
Member since 2021 · 5 posts · 0 votes

I have a 90 year old friend with a triplex. A few years ago, a pipe broke in the upstairs. She hired a family member to fix it but ran out of insurance money before he could complete it. Now the building is sitting there, down to the studs:

-550k House ARV

-3 units rental at $4500 to $5000

-140k owed on a mortgage

-105k renovation cost

Requirements:

Her

-No capital gains tax for entire sales price

Me

-Buy and hold

-Deed in my name upon her death

-Low Down, Monthly payment 2k to 3k

What is the creative way to structure this deal so that these requirements are met?

Here are the issues I see with standard ways of structuring this deal:

-Subject to existing financing – deed transfers immediately and she has to pay capital gains

-Executory Contract (Land Contract) – the deed does not transfer upon her death but goes to her family. The biggest risk to me is being taken to court by her family who will inherit the deed.

Is there some creative way such as setting up an irrevocable trust so that upon her death, I inherit deed to the property and her family inherits a note to what I still owe? (The issue I see with this is that 1. Capital Gains tax is triggered upon transfer of deed and I have to pay. 2. Due on sale – from mortgage (or could I inherit the mortgage as well)).

Any advice is helpful.

0Reply
22 views

Most Popular Reply

Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
2y

So she’s getting $4500-$5,000/mo now and you want to give her $2-3k and take the house instead? What’s her upside? Are you planning to pay her heirs upon death or are you saying you expect her to give you the house when she dies?  I’m no lawyer but I’m betting any sane person would call this elder abuse. You may not end up in jail but I bet you don’t end up owning the house. Or are you planning to pay off the bank and her heirs in full when she dies? TOD deeds are meant to go around probate to heirs, not effect the sale of a property. You can certainly buy with a lifetime use of the estate but that would only be relevant if she’s living there. 

Please just imagine she was your great grandma and treat her how you’d like her to be treated. I just can’t see giving her $30k a year for 2-3 years and then claiming the house when she dies going over well. Hopefully I misunderstood your intent and you misunderstood or poorly explained your used of a TOD.

3Reply
See this reply in the discussion

12 Replies

Jump to latestLatest
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    2y

    Options and issues vary by State, so what State is this? There are transfer on death deeds, and you could also explore if a Land Contract term could be inserted that upon death you have XXX time to complete the contract, make a full payment and and own the property...I'm not an atty so that may not be feasible but I'd certainly explore that possibility. 

    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    2y

    @Timothy Michael Mick

    Not sure I'm clear:  what do you want to happen between now and when she dies?  What is your intended "purchase price" and when.

    For example, if you transfer the deed but at her cost basis no capital gains tax, but certainly depreciation recapture.

    But, like I said, what happens now?  Do you have the cash in hand as well?

    Shooting in the dark, have you considered a lease option?

    0Reply
  • Timothy Michael Mick
    OP
    Member since 2021 · 5 posts · 0 votes
    2y

    Thanks Matt! It's in Nevada. The "Deed upon Death" option is new to me. I will explore.

    Side note - I am also an engineer doing stormwater design in CA and live in SD. Small world.

    0Reply
  • Timothy Michael Mick
    OP
    Member since 2021 · 5 posts · 0 votes
    2y

    @David M.

    In between now and her death, we set up a seller financing structure so that I am paying her over 20 or 30yr and renovate/renting it out. She will likely die before the terms are concluded and I want to have control of the deed by that point, hence the post.

    Purchase Price to be negotiated - anywhere 350k to 550k. Whatever I can negotiate with her, based on terms we set up... Contract to be set up in the next month. 

    Cost Basis - she bought the house in 2001 for 100k

    I have 200k for reno and payment until it is stabalized.

    Why would I consider a lease option? Seems like an unattractive "creative finance" option for this deal.

    Thank you

    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    2y

    @Timothy Michael Mick

    Hm...

    What / why are you paying her 20yr to 30yr?

    Has she lived in the property at all recently?  The sec121 exclusion would help with some of the capital gains.

    Since 2001 if rented, then just about fully depreciated.

    Anything you pay her for ownership of the property looks like would start triggering tax liability.  But, would need more much more details / accountant to finalize that.

    So you don't want a "creative deal?"

    Without transferring the deed, you won't be getting deductions since you aren't responsible for much, but would prevent the tax liability.

    I guess at least the seller finance would create a Note that would be part of her estate, and transferred to her heirs.  

    Life estate with remainderman might be a way, but its an estate planning tool usually for families.  but that's also a gift action as I vaguely remember.

    For the investment, you need control of the property, with ownership on her death.

    Your sales strategies will only trigger a sales.

    Is there any wiggle room on taxes?  Or you compensate for the taxes?  I assuming the terms of your "seller financing" will create effective installment payments that would trigger small amounts of tax as I see it.

    1Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    2y

    So she’s getting $4500-$5,000/mo now and you want to give her $2-3k and take the house instead? What’s her upside? Are you planning to pay her heirs upon death or are you saying you expect her to give you the house when she dies?  I’m no lawyer but I’m betting any sane person would call this elder abuse. You may not end up in jail but I bet you don’t end up owning the house. Or are you planning to pay off the bank and her heirs in full when she dies? TOD deeds are meant to go around probate to heirs, not effect the sale of a property. You can certainly buy with a lifetime use of the estate but that would only be relevant if she’s living there. 

    Please just imagine she was your great grandma and treat her how you’d like her to be treated. I just can’t see giving her $30k a year for 2-3 years and then claiming the house when she dies going over well. Hopefully I misunderstood your intent and you misunderstood or poorly explained your used of a TOD.

    3Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    2y

    Thanks @Bill B..  I couldn't figure a way to politely say what you said.  I'm still trying to understand the mechanics of this deal.

    2Reply
  • Timothy Michael Mick
    OP
    Member since 2021 · 5 posts · 0 votes
    2y

    @Bill B.

    Yes, there would be major issues if the situation you describe was the case. I apologize if I made the situation unclear:

    "A few years ago, a pipe broke in the upstairs. She hired a family member to fix it but ran out of insurance money before he could complete it. Now the building is sitting there, down to the studs"

    The unit has been down to the studs since 2019 completely vacant and doing nothing but costing her. Her family member left this poor lady with a dead house which is one reason I'm trying to figure out a way to buy this house from her without ever having to deal with the family. A win-win would be providing her steady income of 2-3k per month and me renting at 4.5-5k (this is the number I've come up with due to market research, not actual rent).

    I probably do misunderstand TOD which is why I'm asking if there is a way to make this work so that 1. She continues to hold the deed for her life (she does not pay capital gains tax) 2. I receive the deed upon her death but continue to make payments to her heirs (I gain control of the deed so there is no contest of ownership from her less than reputable family members)

    I don't have much experience with creative finance and this seems to be a unique situation. I am just brainstorming at this point trying to provide value to this lady while still protecting the 200k I would be putting into this. 

    Would this deal be worth touching and if so, how would you structure it?

    @David M.

    Life estate with remainderman is something I am researching now.

    There could be wiggle room with the taxes... such as if I make a downpayment large enough so that she could cover her capital gains and I get the deed immediately. She would have a lien against the property that I would then pay over time. There are 2 issues - 1. Lowball - the more upfront I'd give her, the less I'd be able to pay. This is why she has already turned down lowball cash offers from other buyers. 2. Due on sale - I would have to pay immediately or I would run the risk of the due on sale clause being triggered on the existing mortgage. So I don't see a way that this would work...

    Yes - The seller financing would be would be installment payments that would trigger small amounts of the tax.

    I appreciate both of ya'lls attention on this. Thank you!

    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    2y

    @Timothy Michael Mick

    You mention again "making payments to her heirs."  But, according to what instrument?  granted, that may be part of your question...

    We had another thread looking at the exact same thing recently.  Basically, it doens't work out well.  Usually the "estate-type planning" tools work amongst family or trusted members, not as a business deal.

    Is she living in it?  That can be important to take advantage of the sec121 exclusion...  Also, important to have the deed in her name...

    If the lease option would survive her death, at least you could have the option to purchase the property from the estate.

    Life estate with the remainderman doesn't work well because how do you transfer funds to her without creating tax issue.

    Ultimately, you need to create a Note for at least what you want to do.  

    GOtta run, but I have to think about this more:  purchase on a wrap instead (so deed would transfer now if that's okay), but structure the Note to limit her tax liability somehow --- would need some more detailed info and thought to structuring.  Basically lots of interest and very little principal.

    Can you get your own mortgage on it?  If not now, but in 1-2 years?

    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    2y

    @Timothy Michael Mick

    Oh I guess she isn't living in it if all three units are gutted to the studs

    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    2y

    @Timothy Michael Mick jjs realized doing the purchase on the wrap may mess up the step up in basis... not sure how her liability is handled on her death.  Its still there so her estate would have to pay it --- I think.  That's a tricky one.

    Puts ti back to lease option so that you get control, not ownership, of the property.  Next is figuring out how to get owernship rtansfersed on death.  The only methods i know to cross probate is either via a trust or certain deeds..

    0Reply
  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    2y

    So she paid $100000 and did some maintenance and repairs of guess $50000. The building is only LAND. It's going to take two/three years to get permits, plans and get it rented. She's a protected class so you must be cautious. You say there is a $140000 mortgage if conventional it's amazing they didn't call the loan, or they will. Does she even have hazard insurance on it now?

    Offer her $250000 sale price, with owner carry $100000 at 10% 30 year rate, payoff the first- make a deal with servicer it's surely in the default bin of servicers offer them $100000. Get a copy of the note as part of your offer. $100000 loan at 10% $878 is your payment plus  tax and insurance. Apply for construction to permanent owner occupied loan you can borrow 80% of completed value. Apply for construction non owner you can get 70% of completed value. You need plans approved, specs, cost breakdown, licensed contractor in the city all that is going to take 12 months to get it together. Approval probably at month 18. She doesn't owe capital gains on the sale and gets income on the note which she can spread out or give to heirs but your intention is to pay it off in 24-30 months when you get your ducks in a row. You need $200000, good income showing on your IRS taxes full doc, great FICO, and a team to get this completed. Assume everything that sits on the site will be stolen and pan ahead (fencing, security lights, toilets, a big mean dog on site) (down/ closing costs/ pay architect/ attorney to advise on contracts and note and the heirs are going to get involved FOR SURE.  You will need to actually go there to get the work done and supervise. The family member who told her he could fix the leak is your enemy, he's going to strong arm her into giving it to him. 

    A vacant house to the studs is a liability - fire, kids parties, theft, injury, possible lawsuit plus she has a mortgage that we guess she pays $1000 a month. The mortgage servicing company calls her three times a week and wants payoff. You offer her $878 monthly check and release from the worry. 

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free