How do I buy this house while helping the owner?

Question

It's been a while BP and I could use your guidance! Here is the situation:

I know an older women who had a stroke and is currently living in her daughters 5th wheel so that she has assistance. The women desperately wants to move back into her house and her kids want that as well, but are afraid that she is not ready to live alone again. They have considered transferring the home over too a care facility in trade but then they are losing their entire inheritance. I would like to offer to purchase the home from them by giving them a down payment that will help pay for in home care and allow the home owner to live the remainder of her life in the home. After she passes away I would owe the remainder of the previously agreed on price (or it would turn into an owner financing agreement). The home is located in Portland, Oregon which is one of the hottest markets in the U.S. with virtually no signs of letting up. Is this a crazy idea? How could a deal be structured to ease their capital gains tax? The house is owned out right (purchased for ~35k) and is probably worth ~300k-325k in its current shape. Any guidance is greatly appreciated!

Account Closed · Answer

To eliminate capital gains, then as long as the sale price isn't more than $285k (250+35), as far as I know, that would do the trick.

The whole thing seems risky though, because what happens if they become tenants and they don't pay rent?  You'd need to sort out all of that in advance and make your lease really explicit about the arrangement, because it seems like they could be easily taken advantage of if they don't completely understand the setup.

Would you be able to rent the house to them at market rate, no matter how high market rents become over the next 20 years?  (Because she could live another 20, you never know.)  And if not, would you be OK with that?  What if you need to sell the property while she's still alive?  What if the market softens?

If you can buy the house at a low enough price that you don't mind sitting on it for years and years while it doesn't earn you market rent, and as long as they know all the implications of essentially renting what was their own house (e.g. the rug could be pulled out at any time), then maybe you could make it work.  There are so many variables.   But for them to sell their house if they still want to live in it doesn't seem like the best solution for them.  They could do a reverse mortgage and have more housing security than selling it on contract to you.

I'm no expert on creative finance though so maybe other people have better suggestions.

Todd Ashley · Answer

@Luc Boiron I actually recommended that they look into a reverse mortgage. In my ideal scenario she would just be covering the operating expenses of the house while she lives their (I would be responsible for capital expenses).

Todd Ashley · Answer

*not be buying it

Todd Ashley · Answer

@Omar Merced Thanks! I will look into life estates.

@Jessica S. I am actually taking my test in a few weeks (I took on a large remodel that ate all of my free time). They don't want to sell the house until after she passes (which could be years). I love the house and would not be it as solely an investment but with the plan to update it and move in. I will definitely look into an option fee!

Luc Boiron · Answer

There are definitely ways to do this, but the question is whether it would be worth it to you and to the family.

One option (and they could likely do this without you) is a reverse mortgage, or home equity conversion mortgage. This would be putting a mortgage on the property, but instead of them needing to make monthly payments to the lender, the lender pays them monthly. Interest accrues on the balance. Once she passes, the house is usually sold to pay off the reverse mortgage and give any value remaining to the heirs. Of course, it is possible that the balance goes higher than the lender has agreed to, and the lender needs to force a sale. This would happen in many years.

So in the situation above, the lender could make the homeowner a payment of, say, $2,400 per month. Interest would accrue on the principle balance outstanding, which would increase every month. You could set this up to lend the reverse mortgage, and have a purchase agreement at current market value for when she passes.

Another option would be to buy it, and have her rent it back from you. Buy it as you would any other rental, but have in the agreement the rental rate and that she can continue to rent as long as she wants as long as she is making the payments. You would want to negotiate a discount for doing this, and try to get market rent.

Jessica S. · Answer

Did you recently get your real estate license?  (I read your earlier posts.)  Why don't you just help them sell the house for market value?  I'm sure you would prefer to buy it yourself with owner financing but I think you would be putting yourself in a vulnerable situation.  The heirs may welcome your help now while they're in distress but they may view the situation differently in the future.  If they were to sue you down the line, sick old lady vs real estate investor probably wouldn't go in your favor in court.

That said, if you did want to pursue this, maybe you could pay her an option fee.  An option fee gives you the right to buy the property at a later date for a set price.  You can search BP for more info on it.

Omar Merced · Answer

You could try a life estate. Where she would have ownership until she passes. Also, the sky is the limit as far as structuring the deal. You can easily agree on a set amount of price every year or a few lump sums over several years. There is no real wrong answer. Just make sure she does't transfer it to her kids by way of a deed as that from whatI know would trigger capital gains.

How do I buy this house while helping the owner?

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