Expert: Dick Dennis - 11/14/2008

Question
QUESTION: my husband and I are negotiating with my mother to buy here house. She still owes $60,000 on the mortgage. We will be giving her $20,000 down and she would pay off the mortgage. We would be paying her $1000 a month. She will be able to stay in the back cottage rent free. She claims to me that the mortgage company, (I guess in this case it would be her carrying the papers) Can tell the buyer what they can and can't do with the property in question,i.e. cut down trees, remove fences and make repairs that would be permanent. I want to make sure that I have the whole picture before we get into this. am I wrong to believe that it would be my property and I could do with it as I see fit? One more thing, does she have to charge interest for the money we would still owe her?

ANSWER: As long as you are getting "fee simple" title, Yvonne, you may do as you please with that property. Period. It means absolute and without limitation ownership. And as you describe, you are indeed getting it as a fee simple title.

However, since she still owes $60,000 on the mortgage, the company that will be handling the closing will need to make sure you and her get what you are contracting for: She will no longer be having title to the property and she cannot tell you what you may do with the property. In your situation, it could be considered a contract of sale (they call it contract for deed in some states), in which she still would be the only name of title. You would have "equitable title" while your name is NOT on title. And you may still do what you want with the property unless you and she have a written agreement otherwise. You could also be contracting for a "lease-option." But a fee-simple purchase is the safest for you.

This is not an easy transaction the way you are setting it up, Yvonne, especially since she gets to stay somewhere on the property at no cost to her. That sounds like a "life estate." A life estate allows her to stay living there for as long as she wants at no cost as long as she maintains the property on which she is living. A life estate limits what you can do with that property.

You really should not be attempting this transaction with all these nuances and limitations without having a REAL ESTATE attorney handling the paper work. Other than that, you are much better off by getting a loan from a bank or mortgage lender, paying her off and for sure doing what you want with that property. Your down payment is certainly acceptable to a bank or mortgage lender. If you allow her to stay there "rent free" then the attorney is probably going to suggest a life estate. Or it is worth a consideration to you to allow that to happen. The consideration might be the fact that she is selling you the house at a very big discount, if that is what it is.

Finally, as for interest rate, the IRS frowns on no-interest situations, especially between kin. It should be some interest rate, preferably at-market. The IRS may approve as low as 4% in a 6.5% market. I hope you understand the seriousness of all this. What I am suggesting here protects your and your mother's interests against future changes of minds, future alterations of conditions, etc.

I do wish you well.

Dick Dennis          you may contact me at dick@dickdennis.com


---------- FOLLOW-UP ----------

QUESTION: The reason that we are not going through a bank is that we do have some outstanding debt. The payments through an institution of lending would be to much for us. We figured that since we could not pay her large payments for the property, that  the $1000. a month and free rent would make it more attractive to her. If she were to pay us rent then she would only be pocketing about $500. a month and this would not work for her. She is talking about 1% interest, would that be acceptable? Thanks for your help with this

Answer
But you didn't say what actual value the property is, Yvonne. At $1,000 per month at 1% interest you will have paid off the property in 41 months (I don't think the IRS would accept that, by the way). At 4% interest you will have paid off the property in 43 months. Just make sure everything is down in writing! You are asking for trouble if you trust to verbal agreements (Like, make sure your mother's rental agreement is in writing, even if you do not charge her rent. Under what conditions, etc.). Now you know why you should have that real estate attorney doing this correctly. I wish you well.

Dick Dennis