Buying a single family from family member. Mortgage is paid off.

[Mike H.]

Hi All!

This is my first post since, after scouring BP, I haven't found a situation similar to what I'm trying to accomplish and I hope to read some creative ideas! I'm purchasing a single family home from a relative in Massachusetts. The Mortgage is paid off but there is ~$10,000 Credit Card Lien on the title (I don't think I should be too worried about that). The house has good bones and a foundation. It's a 3 BR Cape Style home, and with current comps could be worth something north of $400K at Fair Market Value in the area. In its current state, it's debatable, but probably closer to $350K. I plan on living in the home long term and declaring homestead. (no plans to BRRR,or rent). I have a full range of experience when it comes to electrical/carpentry/framing/ plumbing & HVAC and CAD design, but still plan on using my GC for the big ticket items (ie. garage with master bedroom addition/concrete slab).

Since the seller and I have a good relationship, they are willing to go along with any creative financing ways that would benefit us both in the long run. They would be willing to sell it to me for ~$140K...but it doesn't have to be all at once (I hope?). 

What I don't want to do (but it is the safest) is this: I buy the house for $140K, I then need about $100K to renovate, so I borrow $100K from said relative on a note, and we put the note in an irrevocable trust with an interest only repayment (for legal tax purposes), and myself as the grantor/trustee. The reason is, I would have secure a loan for $140K and pay the bank monthly, and then pay the interest only on the $100K, monthly as well. 

Is there any reason I can't take out a personal loan, say for $50K to pay the lien off and other costs associated, then after 6 months or a year (whichever is legally possibly), appraise the home and refinance with a conventional mortgage? Or, better yet, refinance the home and take out a HELOC to continue renovation and pay off the remaining "original asking price"?

I know there are a few holes in my plan of attack, but I'm curious as to how I can navigate this without backing myself into a corner and having the IRS see an issue with the property. Basically we want to use as much equity in the property as it sits, and use the future ARV equity to pull out cash to satisfy a fair sale and get the property to a point where it's appraised higher than similar caliber houses in the area.

The reason for them selling is just old age, down grading into an apartment, and the inability to keep up the property. The reason for selling so low is that they don't need much and don't want much (simple life), and they want to be able to pass something on to a family member that has the ability to turn it around and host thanksgiving dinners from now on haha.

Any insights would be greatly appreciated!

[John Barrows]

Unless credit is an issue or a need for down payment, why wouldn't you just purchase the home out right and get the lien holder off the loan. If the place is worth what you say it is, a loan would be simple. If the down payment is an issue, fine, raise the price up so it shows you gave the seller XYZ as a downpayment and close the loan.

Every time I hear (family member) I cringe because now if they chose to change their minds or someone says (another family member) WHY SELL TO HIM for $140K when it's worth much more? Nobody can predict the future and if you don't hold CLEAR TITLE "quiet enjoyment" then you may be subject to what ever comes your way. 

Your agreement will need to be concrete.... good luck with the purchase

[Curt Smith]

The ideal scenario, for a creative financing scenario would be:

- Owner gets a new cash out REFI loan.  They pocket this cash

- They sell to you subject to the new financing (that lucky you, you did not have to qualify for).

- You now have to give zero toward their equity.

- Poof thats it.

You did not have to get a new loan, family member got their equity.

All is happy.  Classic subject to deal.  (google subject to).

I doubt theyd do this but just sharing how a creative deal scenario would look like.  :)