Buying Grandma's House
Philadelphia, PA · Member since 2017 · 8 posts · 3 votes
Hi there! My grandmother owns a duplex that she wants to get rid of. She is willing to sell it to me for $60k. Both units need a lot of work (sound structure, but extremely outdated) and I'm currently awaiting a contractor's estimate to have them rehabbed. Comps in the area are $200-$250k, but I would like to rent the units out. Can I purchase this home from her without using a realtor or going through a traditional mortgage? I know she would add me to the deed if necessary. She just wants to make sure she gets her $60k.
Thanks for any help with this! I own my own home, but am a newbie to RE investing :-)
You don't need a realtor to do a real estate transaction in this case, but you should have an attorney, preferably someone knowledgeable about estate planning.
Based on the facts as presented, the property will be sold to you at a greatly reduced price. If it's from an unrelated third party, it's handled as a regular sale. But between family members, intrafamily, there may be gift tax issues involved. The trick is to set it up so that it would involve the least taxes involved, or in the best case, none. She can do annual gifting, or if she does not have such a large estate, a one time gift that does not exceed the lifetime limit for tax free gifting. For you, you'll assume her basis so you'll pay the proper capital gains when you sell.
Then does she want the $60,000 right away? If she can do seller financing, in which case you'll give her a note, and pay her off, perhaps in a matter of a few years. On the other hand, they do issue mortgages for $60,000 particularly for property so undervalued, produces rent etc. I can't give you exact advice here as I don't know your credit worthiness.
These are the issues if you do it the right way. Some folk do it under the radar and just quit claim.
You don't need a realtor to do a real estate transaction in this case, but you should have an attorney, preferably someone knowledgeable about estate planning.
Based on the facts as presented, the property will be sold to you at a greatly reduced price. If it's from an unrelated third party, it's handled as a regular sale. But between family members, intrafamily, there may be gift tax issues involved. The trick is to set it up so that it would involve the least taxes involved, or in the best case, none. She can do annual gifting, or if she does not have such a large estate, a one time gift that does not exceed the lifetime limit for tax free gifting. For you, you'll assume her basis so you'll pay the proper capital gains when you sell.
Then does she want the $60,000 right away? If she can do seller financing, in which case you'll give her a note, and pay her off, perhaps in a matter of a few years. On the other hand, they do issue mortgages for $60,000 particularly for property so undervalued, produces rent etc. I can't give you exact advice here as I don't know your credit worthiness.
These are the issues if you do it the right way. Some folk do it under the radar and just quit claim.
Is the duplex paid off free and clear? I'm guessing it is and she wants to sale it to you at a reduced price. I think the best possible way would be to do seller financing and not use a bank. But if the house needs 25k in rehab costs to bring it up to date then she's really selling you a 85k duplex. Like @Frank Chin said you shouldn't need a realtor to do seller finance. Is it possible to pull equity or refinance your current home to purchase it? How soon does she need the 60k and how soon would you be able to pay it off? Is it currently vacant or does it have long standing tenants who have been there for awhile?
Any good title company can do it all for you. You certainly don't need a realtor. The title company should have an attorney on staff that can draw up a note and mortgage if you want to do owner financing from your grandmother. You'll just need to come up with money to pay for the closing and rehab.
Thanks everyone! Your responses are really helpful. To answer some of the questions posed:
@Frank Chin Yes, she would like the $60k right away - pretty much as soon as I take over the property (she's in her 80s). I have excellent credit, so a 2nd mortgage could definitely be an option, but I would like to avoid this route if possible so I don't have to put anything down/pay closing costs.
@Joseph M. The duplex is paid off free and clear. I haven't received a rehab estimate yet, but I'm guessing it'll be closer to $60k (it's really old - like 70s/80s old). I may be able to pull equity from my home (I believe I have roughly $30k). She would like the $60k right away - pretty much as soon as I take over the property (she's in her 80s). There are currently no tenants in either unit as of this Summer.
Based on the facts as outlined, you'll need $60K to buy her out and another $60K to rehab, conservatively, meaning you need $120K cash to swing this. You don't appear to have the resources to do this, not $120K laying around, without a NOO mortgage, which you'll qualify for assuming the property is worth $220K. You also would need your aunt to be patient for a few months.
First, add your name to the deed as was suggested. I am sure your aunt has this property for a while. So when you both apply for the mortgage, it would be a lot easier as a owner who had it for a while, paid off the mortgages, now going back to refi to do the rehab. Doing it this way, banks will extend a mortgage based on the appraisal. Otherwise, the bank has no paperwork on the value of the deal, and you have to search around for a lender that would lend you money based the $60K you and you aunt somehow agreed on, which is doubtful. I did a deal with a seller where a property was sold at a big discount at $70K, had a contract for $70k and the banks will only lend based on the $70K, not the appraisal, which ran twice as much.
Second, you can do this deal in two stages. Tie the property up with you aunt, give her a note for $60K, have you add your name to the deed. This way, it eliminates a good part of the gift, if lets say the $60K is buying half the property, and you actually paid for half of it. Then you have the other half of the house that you'll decide if it's a reportable gift or not.
Third, I done deals intrafamily, had an attorney working on it, and he insisted I get my own appraisal of the property, to avoid tax and fraud issues later on. In other words, more transparency, less problems. But if you get a mortgage, the bank will have an appraisal done, so you could use theirs.
Fourth, after you get the mortgage, rehab finished, pay your aunt the $60K, then you can have you aunt deed you the other half of the house. Don't know why your aunt is doing it at this stage, maybe she's a tired landlord. You can decide at this stage for her just to quit claim, or if she want to also do gift tax reporting. That's why it's better to have an attorney working for you to avoid the pitfalls. I used someone who's a tax attorney and CPA who filed all the paperwork for us, gift tax forms among others. Title companies can do the paperwork too, but they don't offer the advice.
I think its important to note that you have to be careful in choosing your contractors. You will notice their estimates will vary greatly for whatever reason. Do you want cheap or do you want quality (would be nice to get both)? Make sure you get references and actually go check out their previous work. This deal could turn horrible if you pick a bad contractor and you're not satisfied with their work. Ask to see their license also -- Oh and make sure they pull permits!!
@Tiffany Miller , if a stranger offered your grandma $94k as is, and put $60k into it (total $154k) and the ARV is $220k, then the fix/flipper would be buying/rehabbing for about 70% of ARV.....so, yes, your being able to buy it at $60k is a "screaming deal"...if the numbers hold up.
Read up on the BRRRR strategy. Consider financing it (hard money lender if need be), and then when the new appraisal comes in at $220k (or higher), you can get a 75% LTV mortgage (might be after "seasoning" time) as a rental property and take a $165k mortgage. If your costs are only $120k, then you have $45k in your pocket, you've paid off your acquisition and rehab loans (your down payment/equity and some HML), and you have the duplex "free" with none of your own money in it. Does it rent and cash flow at that point....to pay mortgage, expenses, repairs?
Grandma may be propelling you toward financial freedom. You will have made $100k in your first BRRRR investment. You'll be in the Bigger Pockets Hall of Fame on your first deal. (of course, research your remodeling estimates, and all the income/expenses of renting it.) But yes, I strongly urge you to consider saying "yes" to this deal.
An unintended consequence may be from other family members, if you make $100k off Grandma's acquisition. Why didn't you share the profit with Grandma, or why did Grandma give this opportunity to only you, and not your cousins, uncles, etc??? Should you give Grandma a "bonus/share of the profit" when the new appraisal/refi comes in at $100k over your costs????
Good luck.
@Steve K. Thanks so much for your advice. My grandmother has had a string of lousy tenants (mainly due to lack of doing due diligence) and wants nothing more to do with the property. She purchased it in the 60s and is over it. I'm not sure where she came up with $60k (I am her favorite...lol), but that's what we're going with. Not worried about family. None of them want to deal with it and are supportive of me taking it over so the house can "stay in the family." I will do my research based on your suggestions and go from there. I'm excited!
@Steve K. Hey Steve, just wanted to follow-up on this post and let you know that your advice was gold! I ended up taking equity out of my home, as well as a hard money loan to purchase the home from my grandmother for $60k and then rehab. The rehab ended up totaling $100k (I was ready to give up several times and wondered if this was all worth it). Well, it was! I just got the appraisal back as a part of the refinance process and the house came in at $265k! My first go around was a huge learning experience and BiggerPockets was such a great resource! Thank you for your advice!
@Tiffany Miller , Congrats; that's amazing for your first deal. Happy to hear my modest post helped convince you to look further into it.
So....does it cashflow nicely as a rental? Looks like it truly was a BRRRR ,and you have none of your original money in it?
@Mindy Jensen , if you're watching, I nominate Tiffany for the new investor deal of the year! or the BP Hall of Fame!
@Steve B. Thank you! that's the plan!
@Steve K. Thank you! I literally had no idea what to do, but knew I wanted the house, so your modest post definitely led me in the right direction. None of my original money in it and currently bringing in $2300/month in rent :-)
Congrats Tiffany! Sounds like you should be the one giving advice here! Go get another one!