Should I try to buy my elderly relative's home?

[qoheleth]

Hello all

I have a dilemma, and wanted to get the advice of people on the internet with knowledge about personal finance.

I have a very elderly relative who has been living in her family home in what has become a very expensive part of the San Francisco Bay Area. She needs constant care, and will soon be moving into a nursing home.  My parents (who have power of attorney) had previously paid for her care by taking out a couple of reverse mortgages on the house. I don't have all the details in front of me, but my understanding is that about $620k would be necessary to pay off the mortgages. The house is in a neighborhood where homes routinely go for more than 1 million dollars because Bay Area real estate is crazy.

My parents were originally planning on selling the home and using the proceeds to pay off the reverse mortgage. However, I make a decent Bay Area salary, and according to my bank's real estate loan calculator I could carry a loan of that size myself, which would allow me to help keep the property in the family. I am trying to figure out if this is a wise thing for me to try to do, since I don't know much about buying real estate, and didn't have any previous plans to buy a house in the Bay Area.

The rough numbers are these: My salary is $145k/year. I have no debt, and about $250k worth of assets in cash savings, stock, 401k proceeds, etc. I'm unmarried and have no dependents. I would not want to live in the house myself, but rather rent it out. I don't have any experience being a landlord, and I live in the Bay Area myself but not particularly close to the property. Cursory searching suggests that single-family houses in the neighborhood rent for somewhere between $3.6k/month and $5k/month. Cursory bank-website-checking suggests that I could get a 30 year mortgage on the 620k that needs to be repaid with payments of about $3200/month (a few hundred less if I was willing to accept an adjustable-rate mortage).

Is this a reasonable avenue for me to try to pursue? My original thought was that it would be a huge shame to let a family property worth more than a million dollars be sold for the sake of $620k worth of mortgage money, but I don't really know how to calculate the long-term expected value of holding onto the house. What are people's thoughts about this?

[former player]

1.  The market price is somewhere north of a million dollars.  You can't buy the whole interest in the house with just a $620k mortgage.  There is still up to half a million dollars in equity to deal with.

2.  The only ways to deal with that equity are a) for it to be gifted to you, b) for you to extend your mortgage to cover it, c) for you to own the house jointly with someone else, either your elderly relative or someone else.  There are significant problems with each of these options.

3.  The rental returns make the house a bad investment from an income point of view.  Whether or not it would be a good investment from a capital appreciation point of view no-one knows.  If you are banking on its potential capital appreciation I strongly suggest earthquake (and flood if this is a possibility) insurance.

4.  If you wanted to live in it I might be tempted to tell you to find ways to finance the whole value or share it with someone else.  As you don't, it looks as though this proposal is not about family feeling or history but about financial gain - it's basically a property speculation where you are hoping to buy something from a family member for about half its worth in order to have the satisfaction of owning an expensive property.   That's not mustachian, it's just cheap.

[Linea_Norway]

I cannot run the numbers for you. If it is a financially attractive deal (including not having tenants all the time), then do it.

But I think keeping the house in the family should not be an argument if you don't have a future family plan for it. Why should it be kept in the family?

Owning a house is cumbersome, you'll need to maintain it. Maybe upgrade it before the first rental, after an old relative lived in it.

Being a landlord is a way of living that you should be attracted to. Do you have time and energy for this? Or you should hire a property manager, but this is an extra cost.

There is also always the chance that the current property prices are in a bubble that is going to burst. Why not cash out when prices are high? You know what you have now and you cannot know what the future will bring.

[Playing with Fire UK]

... according to my bank's real estate loan calculator I could carry a loan of that size myself, which would allow me to help keep the property in the family. I am trying to figure out if this is a wise thing for me to try to do, since I don't know much about buying real estate, and didn't have any previous plans to buy a house in the Bay Area.
...

The first two points are a terrible reason to buy a house, the third suggests you shouldn't be buying one.

Don't do it to keep a house in a family. If the house is sold then elderly relative / family will still get whatever equity is left after the mortgages have been paid off, so you aren't selling a million dollar house for $620k. If there is a single heir to the relative (who I get is very much alive, but in many families these things are not a secret), then he or she may wish to do something to avoid selling the house. This is their and the relative's business, not yours.

I understand that this is likely to be a hard time for everyone involved, and I hope that your relative does well in the nursing home. Don't embroil yourself in family and finances. It will make everything harder.

If the house is in a poor state of repair, it might make sense to brighten it up before selling it? This would increase the funds available for the relative's care or for the estate; but it doesn't need you to take on this giant mortgage.

[MayDay]

Does she have the assets to pay full price for the nursing home?

If she runs out of money, Medicaid will claw back the house of she gifted you 500k in equity.

[Laura33]

I want to double down on "don't expect to get the house for $620K." 

Your relative probably needs the remaining @$500K equity in the home to help cover her costs for her remaining years.  Or, if the plan is to sell the house cheap, leave her with no assets, and then have Medicaid cover her LTC costs, that is Medicaid fraud, and they will claw it back.

If you had a sentimental attachment to the home and planned to live in it, then it might be worth considering, assuming you could afford it.  But it does not appear to be a very cost-effective rental -- your costs also need to include property taxes and insurance, along with ongoing maintenance and periodic capital upgrades (and the distance means that you likely can't save with a lot of DIY); and you also need to consider that you will have periodic vacancies that cut into your income.

This is a hard transition for everyone.  Just let the house go and support your family emotionally however you can.

[Catbert]

I want to double down on "don't expect to get the house for $620K." 

Your relative probably needs the remaining @$500K equity in the home to help cover her costs for her remaining years.  Or, if the plan is to sell the house cheap, leave her with no assets, and then have Medicaid cover her LTC costs, that is Medicaid fraud, and they will claw it back.

If you had a sentimental attachment to the home and planned to live in it, then it might be worth considering, assuming you could afford it.  But it does not appear to be a very cost-effective rental -- your costs also need to include property taxes and insurance, along with ongoing maintenance and periodic capital upgrades (and the distance means that you likely can't save with a lot of DIY); and you also need to consider that you will have periodic vacancies that cut into your income.

This is a hard transition for everyone.  Just let the house go and support your family emotionally however you can.

If your parents with power of attorney sells you a million dollar house for 600K then they will have breached their responsibility to the elderly relative (and possibly to other heirs if there are any).

[GizmoTX]

The big gotcha in a reverse mortgage is that the contract requires that the property MUST be sold or surrendered within a relatively short amount of time when the mortgage holder vacates it for any reason.

The only dilemma is if the house doesn't sell promptly for $1M+ for some reason. I don't think you have enough resources to qualify for a $1M+ purchase. NOT $620K.