Expert: Dick Dennis - 1/14/2009

Question
Hello, I had some general questions about options available to me specifically in terms of purchasing a home, or a percentage of a home from one of my family members. I am drawing something of a proposal up to approach a relative of mine with, who is also my employer, about purchasing a home he owns. This home sits on a few acres of property, and my end goal is to eventually own the property and the house that is located on it. He is fully aware of my financial situation, as my job is my family’s sole source of income.

The house is situated on what I expect would be about five acres; it has a large shed out back, and a decently sized barn in front. A long drive and a detached garage/pump house next to it. The entire property is fenced and well kept.

The thought that I had, but do not know enough information about to discuss knowledgably, is that I might be able to take on a share of the mortgage, or perhaps purchase a percentage of interest into the property. It is a small, older, two story, ranch style house. I am a veteran and qualify for a VA loan. From the research I have done up to this point I have found I can afford a loan for around $180,000.00. That is only an estimate that is based on a sit down with one mortgage broker and a lot of different online mortgage calculators. I am curious to know what my options and my relatives options are in terms of my purchasing percentage of ownership into the home. I have heard of Joint Tenancy, Tenants in Common, land leases, and other such options. But I do not know what would be the best for both me and my relative. I don’t want anything gifted to me, but I want to be able to pay off a portion of the mortgage and eventually set myself up with the option to buy him out once I am more financially situated for it.

My goal is to get my foot in the door, and provide a long term investment towards where I want to end up raising my family with my wife. While at the same time offering a substantial amount of security to my relative if, for some reason, things don’t work out. He needs to feel like his tail is covered no matter which way the events go. From my understanding of things he does not want to own this house and the surrounding property forever. And I would like to purchase everything, but cannot afford it right now. He is currently renting the property out to a family on what I believe to be a three month lease.

If all I can afford is a percentage of that value of the property, would I be able to buy into an existing mortgage to take some of the burden off him and begin building equity? What are the options available to both him and me?

My thinking is that we may be able to write contract specifications out which would state that, if the type of purchase I am looking at goes forward, I would have first right of purchase to the rest of the property, when I could afford to do so. Subsequently, if I choose to back out of the property for any reason, he would retain control over it and should he choose to sell to another interested party I would recoup only the percentage of interest I held in the home, providing him peace of mind should things go either direction. All these specifications can be altered or adjusted as necessary, but I hope I have expressed my idea clearly.

I need some input on this, to know what the available options are for both of us. I am 22 years old, married with two daughters. I have never dealt with any type of real estate before, and do not know what is possible. If you are unable to provide me with the advisement or information I am looking for, I would be very grateful if you can direct me towards someone who could. Thank you very much for you time and help.

Answer
What you describe is virtually a lease/option or a land contract, sometimes called a contract for deed, depending in what state the property is located.

With a lease/option you would give your relative a deposit. You only say what you can afford, but you do not say what THAT property is worth. But, let's say you agree on $150,000. You would give him a non-refundable deposit of at least $3,000. Then you would rent the property for, say, $1,000 per month, with, say, $250 credited to you in the ultimate purchase of the property. After three years, say, you would have $9,000 as additional credit to buying the property, giving you $12,000 as a total down payment. If you wait for five years, you would have $18,000 credit.

But if you fail to buy the property as agreed you would lose any and all moneys you put into the property. You would be also credited with any amount you used to modernize or add, not necessarily repair. The property remains in your relative's name until you actually do buy the property and have the title in your name.

You may or may not be credited with paying the property taxes, too. It depends on your agreement. I STRONGLY suggest you sit down with a REAL ESTATE attorney to put the transaction together. This way, there will be no confusion as to what you both had agreed on. If you do this transaction WITHOUT an attorney or highly knowledgeable REAL ESTATE BROKER, then you are asking for eventual problems.

The risk you take in doing it this way is that if by some chance your relative should have a judgment recorded against his name, that judgment would be placed on that property. Now you see why it is very important to do with with an attorney. I wish you well.

Dick Dennis
dixiedee13@aol.com