Buying Property from Family WAY Below Market Value

13 Replies

So I have a situation I don't know how to handle or who to speak to about it, but since it has to do with real estate, I thought BP would be a good place to start!

Here's the situation:

My sister-in-law is in serious debt and can no longer afford the payments on her house. Her house is on 10 acres of land that were gifted to her from my father and mother-in-law. The land has been in the family a long time, so they don't want to lose the land to someone outside the family. This is more important to them than making a profit on the sale of the house. Especially since they believe creditors will immediately take whatever profit is made. So the family has asked me to buy it because I'm the only one that might be able to.

Here are some rough numbers:

Sister-in-law owes on mortgage: $95k

Market value: $160k to $200k

How would this sale work? I won't be moving into the property, so is a loan just like a loan on any other investment property where I will have to make a down payment of 20%? If so, I can only do it around $100k because of the cash I have available right now. Or is there a way for me to buy it with no money down since I will have instant equity?

I also don't want to finance it for too high because I still need to be able to rent it out and make positive cash flow. It should rent for $1,200.

My sister-in-law is concerned that their creditors will take them to court for selling below market value. Is that possible? Or is it fine as long as they sell the house for enough to pay off their current mortgage? Would the selling price be considered $100k? Or would it be considered $200k with a gifted down payment? Is it legal for them to sell that far below market value? What tax implications would there be for both of us if the down payment is considered gifted?

Thanks for any help or referrals you all can provide!

First thing, verify if there any judgments from any of her creditors. If so, they have a lien on the property, in most jurisdictions, and they will have to be paid from the sale proceeds. Without any judgments, it doesn't matter, unless she files BK in the near future, then they could try to unwind it. There are no gift issues here, if you buy at a below FMV price.

This is like textbook subject to. Have them sign over the property to you for you agreeing to make the payments on the property. Check and see if they are behind on any mortgage payments and that taxes are up to date, if not you will have to pay those off up front.

Thanks so much for your replies!

So, sorry for my ignorance, but I'm new to Subject To. How does a subject-to contract work? Do I need an RE attorney to write the contract? I understand that I take over the payments and get the title to the property and her name stays on the loan. Then what? How do you get their name off the loan later? Do I refinance, or have to buy it at some point? What is the downside of buying Subject To? Is there a problem if they go into bankruptcy down the road? I tried searching BP, but is there a good reference I can read about buying Subject To that gives a simple overview?

Many threads here on sub2. Check title to see what other liens/judgments may be in her name, as it applies either way.

Do you feel like they do? You say "The land has been in the family a long time, so they don't want to lose the land to someone outside the family." Do you agree? That's the only question to answer. Once you answer that, BP Nation can help you... possibly with several options. I assume your sister-in-law is living in the house as her primary residence. Correct? Will she stay? Is that important?

Chris, thanks for your reply. I do agree that the land should stay in the family. So I would not plan to sell the property unless something drastic happens down the road. My wife and I will inherit land connecting to this property some day, so our plan would be to keep it and eventually combine it with our land.

For now, I would rent it out, but not to my s-i-l. It is currently her primary residence, but she will not stay in the house. They want to move out of the area.

Also, if I did purchase it Subject To, how would her debt factor in? The loan is still in her name, so could creditors come after the house? Or is the property exempt once I have the title?

Jacob,

Just wondering where you ended up with this issue.  I'm in a similar situation and looking for options.  Mine is slightly different as there is no mortgage to pay, but a wish for payment of some of the equity. 

Thanks,

Nick

@Jacob Elbe  

I disagree with Wayne Brooks. Since you are talking about a below market purchase from a family member, I believe the difference between your purchase price and the FMV of the property will be considered a gift of equity. The seller might be required to file a gift tax return depending upon the amount of the gift. The amount of any downpayment required is determined by the lender's underwriting rules, and they may vary from lender to lender.

@Nicholas Reece 

Sorry they ended up selling to anon family member closer to market value. Apparently keeping the land in the family want as important as they originally said! If there is no loan on the property then you should be fine to buy it at whatever price they want. I don't know the legal ramifications but this is how wholesalers are able to get good deals on properties. So if you and the seller come to an agreed price it doesn't matter what market value is.sorry I couldn't be more help

Sounds like somebody talked them into the sell.  Sorry to hear and thanks for the reply.  

@Jacob Elbe  

"So if you and the seller come to an agreed price it doesn't matter what market value is.sorry I couldn't be more help"

In a situation where unrelated parties are involved, you would be correct, FMV might not be the primary factor. However, the situation you described did involve related parties, so, gift tax issues came into play. Perhaps that also swayed the decision, although I agree with you that more money most likely took priority over keeping the property in the family.

Did you at least get a chance to match the offer?

Dave NA 

That's a good point about the gift taxes. In my case they were most concerned about the money and didn't even let us know they had decided to go ahead and try to sell. So I never had a chance to match and wouldn't have anyways. I hate seeing the land go to someone else, but I couldn't afford to pay their price and lose money renting it every year. So I guess they got what they needed from it.  

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here