Options to Buy Out Co-Owners with Private Financing

[Harrisen Hagens]

Hi all—

I co-own an LTR with my parents, the property was purchased in 2022 for $240k and is currently assessed at ~$350k. The current loan balance is about $190k and is financed at 7.825%. The payment including insurance and property taxes is about $1700/month and the house is currently cash flowing about $200/month. When we purchased this property we were banking on interest rates coming down (RIP) to make a long-term venture worth the effort.

We've been discussing options to make this property more financial beneficial to all parties (e.g., my wife and I and my parents) and have been discussing a private loan wherein my parents would pay off the balance of the loan and then finance the property to my wife and I at a lower interest rate (4.75-5.25% for 20-30 years). My parents are approaching retirement age and this would set them up a secure source of recurring income and would set my wife and I up for stronger cash flow than we're getting now.

The current ownership is split about 40/60—this was how the down payment was split. So, I'm trying to figure out how the financing on this would work, because although there is only $190 on the loan, my parents are entitled to 60% of the total value of the sell price (appr. $210k).

Can anyone help me understand better how we would structure this arrangement? Would my parents pay off the $190k loan and we would open a private loan with them for $210k? Having a hard time wrapping my head around all the moving parts here.

Thanks so much!

[Andrew Werner]

The easiest way to do this, if your parents are willing is to have your parents pay off the current loan of $190k and begin paying them as the lender. Your equity position split stays the same. No need to jump through a bunch of hoops with the operating agreement etc. 

Now your parents will begin getting monthly cash flow from the loan payments, AND from the cash flow as an owner. 

All that is required to do this would be to draft a note and Deed of Trust (if you are in a deed of trust state) with the term, amount and rate as would be on any mortgage with your parents as the new lender. Get the payoff from the current mortgage company and pay them off with the new loan from your parents. The mortgage company will file a deed of release and your parents loan will then become in first position.

Now, that is the semantics of how it works, but I would highly advise to just have a title company or closing attorney, depending on your state, to handle the paperwork. They will make sure to get the payoff, handle the deed of release and Reconveyance recording and record your parents new loan in first position. Hope that helps.