Author Topic: Buying Home From Parent. Rent to own?  (Read 2240 times)

1SLOLS1

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Buying Home From Parent. Rent to own?
« on: August 09, 2016, 08:05:34 AM »
I'll try to make this brief and to the point. Thanks for any assistance.

My GF and I combined make north of $160K a year. Both with solid and consistent jobs. We're both in our early 30's and are just starting to focus on retirement. Late I know, but better late than never. I max out my 401k and I have a Roth IRA from a couple years ago that I sprinkle with money when I get some. GF is also starting to pay down her student loans ($20kish) and invest as well. Neither of us has a car payment to worry about. So we're on the right track.

My long term GF and I currently live in a very nice home ($750k) that my mom owns. Coastal California, ocean views, solid living. Dream home really. If I never had to leave, I'd be ok with that. We pay her below market value for rent (thanks mom). We pay her on the 1st each and every month and are never late. We've been living in it for about 9 months. Just your standard month to month rental contract. I would describe the financial and personal relationship between my mom and I as good. Not strained or anything. I have a genuinely giving and loving parent that I'm lucky to have.

The mom owns another home in a neighboring city where she lives and really has no use for the home we occupy. You could say she's comfortable financially (retired, no job, etc.). The "deal" I discussed with my mom when we moved into the house, was that eventually, I would buy it from her. This was her idea and of course I'm all in. We discussed very little in terms of details. The rub is this: The home right now in today's market is worth $750k. I simply cannot afford to buy the place. We have very little cash for a down payment, but we do have 6 months worth of emergency savings, but I don't really want to touch that.

What would a rent to own contract or agreement look like? Would we still pay rent and then a "own it" portion on top of that per month? I guess I'm just struggling with not having a downpayment large enough and not being able to qualify for a loan that large (not sure I want to) and how to overcome that. Not in a rush to do anything, probably a year or 2 out from anything major changing, besides just paying rent. But, I guess if I could get into some sort of a lease to own or rent to own sooner rather than later, I'd prefer that. Do I just wait until I have a big enough down payment and keep paying rent?

I will mention, I have no siblings or cousins. Family is pretty small, so I'm pretty much it.

Any tips or advice or stories from someone who has sold to a child or bought from a parent would help.
 
Thanks!

dpfromva

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Re: Buying Home From Parent. Rent to own?
« Reply #1 on: August 09, 2016, 08:25:04 AM »
If situation is stable, why not just wait to inherit at a stepped-up basis? Just keep stashing your savings to give you future options.
On the other side, if you set up a rent to own contract (deposit and higher monthly rent from you for x term) would you force Mom to comply with the terms if she had, for example, some serious medical issue and needed to sell for the cash? If GF is a party to the rent-to-own contract, what might her reaction to that situation be?
You aren't considering this option, but suggest avoid having Mom deed the house to you. If you then sell, your basis will be her original cost, and you'll have a gains tax hit.

Fishindude

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Re: Buying Home From Parent. Rent to own?
« Reply #2 on: August 09, 2016, 08:55:04 AM »
I'd probably talk to an accountant, but she can sell it to you at below market value (within reason) if she wants.
She can also sell it to you with zero down payment if she wants.

Sounds like a perfect opportunity for a contract sale by owner.   Get an attorney involved to draw up a legal contract, set a selling price, payment duration and terms, and an interest rate and you purchase the house over time from your Mom.   She gets a nice monthly payment and the interest instead of a bank.   If you default, she takes the place back and you forfeit everything you've paid and she can do what she pleases with the place.

Note - Not being married, I'd keep your girlfriend out of the deal.

robartsd

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Re: Buying Home From Parent. Rent to own?
« Reply #3 on: August 09, 2016, 09:34:38 AM »
A typical rent-to-own contract has parties agree on a sale price and term in which the tenant will complete the purchase. Typically a rent-to-own tenant is also made responsible for most or all of the maintenance during the contract term. Usually the tenant will pay a non-refundable option fee up front (in addition to any refundable rental deposit) and rent is higher than it otherwise would be. A portion of the rent and sometimes a portion of the option money is credited towards the purchase if the sale is completed within the term. The contract may allow the tenant to back out of the purchase. If the tenant backs out of the purchase the option fee and all of the rent paid remain the property of the owner. Often the owner retains the right to evict the tenant if rent is not paid or the tenant fails to do the maintenance required by the contract.

You and your mom can come to just about any agreement that is satisfactory to both of you. If you want to be sure that it would hold up to legal scrutiny and be properly recorded, seek the services of a real estate attorney.

1SLOLS1

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Re: Buying Home From Parent. Rent to own?
« Reply #4 on: August 09, 2016, 11:30:14 AM »
If situation is stable, why not just wait to inherit at a stepped-up basis? Just keep stashing your savings to give you future options.
On the other side, if you set up a rent to own contract (deposit and higher monthly rent from you for x term) would you force Mom to comply with the terms if she had, for example, some serious medical issue and needed to sell for the cash? If GF is a party to the rent-to-own contract, what might her reaction to that situation be?
You aren't considering this option, but suggest avoid having Mom deed the house to you. If you then sell, your basis will be her original cost, and you'll have a gains tax hit.
I think as a family if anything were to happen to mom medical wise, I would do everything I could to make her whole, including the sale of the house. I'd probably suggest selling down all the Vanguard funds first, but whatever works. At this point the GF is a partner, but would not be included on anything until we get married. I'd then include her.  Thank you for the response.

1SLOLS1

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Re: Buying Home From Parent. Rent to own?
« Reply #5 on: August 09, 2016, 11:35:04 AM »
I'd probably talk to an accountant, but she can sell it to you at below market value (within reason) if she wants.
She can also sell it to you with zero down payment if she wants.

Sounds like a perfect opportunity for a contract sale by owner.   Get an attorney involved to draw up a legal contract, set a selling price, payment duration and terms, and an interest rate and you purchase the house over time from your Mom.   She gets a nice monthly payment and the interest instead of a bank.   If you default, she takes the place back and you forfeit everything you've paid and she can do what she pleases with the place.

Note - Not being married, I'd keep your girlfriend out of the deal.
This is good. This is good stuff. Contract sale by owner... It's always been the Bank of Mom, where she'd rather loan me money and I pay her the interest instead of a bank, like you mentioned. I guess my ultimate goal would be to have the place in my name. The idea of defaulting and having nothing to show for it, would be a tough pill to swallow. Although, I suppose that's the risk I take by not traditionally buying the house. Thanks for your thoughts.

1SLOLS1

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Re: Buying Home From Parent. Rent to own?
« Reply #6 on: August 09, 2016, 11:37:17 AM »
A typical rent-to-own contract has parties agree on a sale price and term in which the tenant will complete the purchase. Typically a rent-to-own tenant is also made responsible for most or all of the maintenance during the contract term. Usually the tenant will pay a non-refundable option fee up front (in addition to any refundable rental deposit) and rent is higher than it otherwise would be. A portion of the rent and sometimes a portion of the option money is credited towards the purchase if the sale is completed within the term. The contract may allow the tenant to back out of the purchase. If the tenant backs out of the purchase the option fee and all of the rent paid remain the property of the owner. Often the owner retains the right to evict the tenant if rent is not paid or the tenant fails to do the maintenance required by the contract.

You and your mom can come to just about any agreement that is satisfactory to both of you. If you want to be sure that it would hold up to legal scrutiny and be properly recorded, seek the services of a real estate attorney.
THANK YOU! Great info! We would of course want the deal to be on the up and up, so legal counsel would probably be the perfect seal to this.

Miss Piggy

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Re: Buying Home From Parent. Rent to own?
« Reply #7 on: August 09, 2016, 12:22:24 PM »
Good advice above. Just one thought to add...can you afford the property tax on the place?

Fishindude

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Re: Buying Home From Parent. Rent to own?
« Reply #8 on: August 09, 2016, 12:58:01 PM »
The idea of defaulting and having nothing to show for it, would be a tough pill to swallow. Although, I suppose that's the risk I take by not traditionally buying the house.

You take this risk anytime you purchase a home.
Pay your bills as planned and you'll never have a problem.

Good luck !


Good point about property taxes, find out about that beforehand as well as any other routine expenses so you can budget for everything.

1SLOLS1

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Re: Buying Home From Parent. Rent to own?
« Reply #9 on: August 09, 2016, 01:18:33 PM »
Good advice above. Just one thought to add...can you afford the property tax on the place?
Property taxes are definitely in the thought process. I could afford them per se. I would just have to make it happen.

J Boogie

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Re: Buying Home From Parent. Rent to own?
« Reply #10 on: August 09, 2016, 02:49:06 PM »
Speaking of property taxes, I know in SF that property taxes are based on the last sale and can rise no more than 2% per year. 

Not sure if that's the case in the rest of CA, but it might be worth considering.

robartsd

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Re: Buying Home From Parent. Rent to own?
« Reply #11 on: August 09, 2016, 04:30:14 PM »
Speaking of property taxes, I know in SF that property taxes are based on the last sale and can rise no more than 2% per year. 

Not sure if that's the case in the rest of CA, but it might be worth considering.
Yes, that applies to all of California. It came about from California's Prop 13 (decades ago). It was designed to protect homeowners from being forced out of their homes due to escalating property values. The assessed value can only be increased by a limited percent each year unless there is construction or a transfer of ownership. However, the assessed value is not necessarily based on the sale price and I'm not sure the law protects against increases in property tax rates. There may be special circumstances for transfers within a family that OP should be aware of - it might influence how the transfer from mom should be structured.

1SLOLS1

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Re: Buying Home From Parent. Rent to own?
« Reply #12 on: August 10, 2016, 07:52:13 AM »
I bought my Mom's house from her in coastal SoCal in 1996. We did it as a standard sale with a large down payment and a 10 year loan with interest that she carried. It was her primary residence that she had owned since the 1970s and had VERY low prop 13 taxes - approx. $300/year. I was able to transfer her tax basis to myself using the Prop 58 Parent-Child Property Tax Exclusion   http://ocgov.com/gov/assessor/programs/parentchild This is something the OP might be able to use as well if he owns the house alone or marries GF before buying. If I would have kept that house then I still would have the approx. same annual prop taxes - maybe $500/year on a house that is now probably worth $600k.

ETA: Calif also has a one time deal where you can transfer your prop tax rate to a new property  if you are 55 or older and the new property is the same price or lower than what you sold your old property for. So if a 55+ person with a low prop tax rate (say $500/year) sells their much appreciated house for $600k, they can buy a new place for $600k or less and keep their $500/year prop taxes. http://ocgov.com/gov/assessor/programs/55plus
Thank you for this!

K-ice

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Re: Buying Home From Parent. Rent to own?
« Reply #13 on: August 10, 2016, 07:19:20 PM »
With your combined salery you can probably afford it according to traditional estimates. Can you afford it alone? The house is a bit expensive for a Mustacian but I understand you will probably get a good deal & there is emotional value in this home.

I also think you should be able to come up with a token 5% down payment to your mom with your income. If she won't accept it be sure it is well stashed for a rainy day.

I think you and your GF might also want a co-habitation agreement.
You pay the mortgage to your mom but split the other expenses.
Maybe charge her rent but not too much, so she can build investment equity while you build home equity.

I know she is your long term GF but, especially since the house is an emotional investment, I would make sure you are protected.