Interesting Situation and in need of Advice

[peter8d9]

I'm a 23 year old married man with the opportunity to purchase my wife's grandmother's house. I have a solid job making approx 40-50k a year. Her grandmother is willing to sell her house to us for 200k which is 50k less than a real estate agent appraised it at and 100k less than zillow.com showed for the property. It is located in Anne Arundel County, MD. She would be leaving almost all the furniture in the house which makes it perfect for someone to rent.

If we purchased it, it would be an investment property because we are moving to WY and would be renting it out to a close friend of ours who recently married and had a baby. I have enough in my retirement to cover the downpayment but am not sure about completely draining my retirement to invest in this house. I would like to sell them the house in about 5-10 years and they know this. I was thinking about working out a deal where the rent would cover the mortgage, taxes and insurance on the house but nothing over that. Also, whatever they give me for the rent would eventually go towards purchasing the property.

Now, I worked the numbers a little bit and realized that the money they would pay me would be taking care of mose of the interest on the loan and not much of the principle. When we go to sell it we will still have a majority of the mortgage left. This worries me because if the value of the house goes down to something like 200k, we will sell him the house for 200k - approx 66.5k for what he has already paid us. That will leave us with 133.5k and a mortgage of 168k, not to mention the original 20k put into the house as a downpayment. However, if it works out it is worth 250k, we break about even and if it is worth anymore at the end of that we start making money.

This leads me to the question, should I instead just have a percentage, say 75% of the rent will transfer to the purchase price of the house?

Also, he does have 20k available to put as a downpayment but in return would like to see the rent drop by several hundred each month. Is there a way this could be viable as well?

Is there any way that I wouldn't need a downpayment? Could we work something where the "purchase price" is ~220k and we would get the loan for 200k to pay what her grandmother's asking price is. Since she is looking to sell the property for a discount is there any other arrangement we could work out to benefit all of us.

Thanks for your time if you can answer even one of my questions.

[teamgreene]

I think your best bet is to contact a Real Estate attorney in your area and have him work on structuring the lease for you. It would be, in my opinion, unwise to offer to lend the entire sum of the collected rent to the purchase of the home because under those circumstances amortization would be working against you. You would almost certainly lose money. I would suggest that the portion of the rent that corresponds with the payment on principle from your monthly mortgage payment should be the most that you offer as an incentive to your friend to buy later. However, it would be quite difficult for you to make money under these circumstances unless you sell your friend the home at market value in 5 years or so.

Of course, this advice is subject to real estate law in your state, so again I would advise you to contact an attorney who handles such issues.

[TJ2007]

Sounds like you have a great opportunity here, but please tread carefully.

Firstly (not trying to be negative) I would tell you to ignore zillow. com - nice site but absolutley not to be relied on for value in my experience, also 'realtors' ideas of listing prices have a habit of either being bumped up to make you happy or make them more money. You need to contact an actual appraiser in your area. Again FYI do not order the appraisal yourself if you are getting a mortgage, as you will either need another one or will have to pay to recert - have the mortgage company order it!

I have a lot of experience in buying and renting property and while renting to these people to own is very attractive there are many pitfalls.
For sure the taxes and annual insurance are likely to increase and unless you have a fixed mortgage that may as well - you NEED to factor this in!
Please do not wipe out all your savings on this deal. And should you go ahead - getting a large deposit like that is a must, however you need your attorney to word it correctly so you do not have to return it if they default and leave you hanging.

Most attorneys will tell you not to enter this type of agreement with a tenant - 90% of the time someone gets burned.

If this is a good property you should have no problem just renting it, you could always give them the option to purchase for a specified price or the market value for a period of time (ie 60 months), I recomend the option money should be non refundable.

Many states give rights to tenants who pay anything towards the principal in rent, and if the move out they may still be entitled to a portion of your equity.

Don't want to write an essay here so will cut it short. Would love to give you some insight on obtaining the mortgage in this situation so please email me....

Good luck, Happy Prosperous New Year!

[OregonLO]

well if the house is worth 250k and you are getting it for 200k then I'd try to go with a "gift equity" route. They are family and you can pull this off. The gift equity would act as a downpayment so you could have an 80% loan and that would get you into better pricing as far as your interest rate and keep your payments down. Do the math on what it is going to appraise for versus what you are going to buy it for and talk to a Loan Officer. They should be able to find a lender that will make that work for you. That would be the ideal route in my opinion.

[peter8d9]

Thanks for the help. I'm exploring my options more now and hopefully will have the main points taken care of in the next week or two. I'm about 95% sure I want to go through with this so we'll see what happens. I'll update when I figure it out.