Expert: Dick Dennis - 9/22/2006

Question
Through family friends, my husband and I have found a house that we are interested in buying.  The homeowners are interested in selling....but don't want to move for about a year when they complete the new home they are building.  We are fine in the home we currently own until that time.  They are interested in working with us to find a compromise that benefits both parties.  Here are some options we've discussed:

1. We buy the house from them now, and they rent it from us until their house is ready.  The problem is that we were depending on the money from the sale of our current home to make a down payment on the new house.  We are exploring mortgages (i.e. balloon mortgage) that might allow us to delay the down payment for a year and then refinance.  We are concerned about rising interest rates.  

2. Enter a sales contract now at an agreed upon price, and set closing for one year from now.  If we do this, they would want an appreciation clause in case the house appreciates in the upcoming year.  We are a little weary of this.  What if we can't agree on the appreciation in a year and we've lost a year of looking for houses?

3. Sign a option to purchase contract, giving us the first right to purchase in a year.  Again, what if they ask WAY TOO MUCH in a year and we've lost a year looking?

Can you offer any advice?  I can't find anyone who has ever been in this situation, although I'm sure we're not the first.

Thanks
Through family friends, my husband and I have found a house that we are interested in buying.  The homeowners are interested in selling....but don't want to move for about a year when they complete the new home they are building.  We are fine in the home we currently own until that time.  They are interested in working with us to find a compromise that benefits both parties.  Here are some options we've discussed:

1. We buy the house from them now, and they rent it from us until their house is ready.  The problem is that we were depending on the money from the sale of our current home to make a down payment on the new house.  We are exploring mortgages (i.e. balloon mortgage) that might allow us to delay the down payment for a year and then refinance.  We are concerned about rising interest rates.  

2. Enter a sales contract now at an agreed upon price, and set closing for one year from now.  If we do this, they would want an appreciation clause in case the house appreciates in the upcoming year.  We are a little weary of this.  What if we can't agree on the appreciation in a year and we've lost a year of looking for houses?

3. Sign a option to purchase contract, giving us the first right to purchase in a year.  Again, what if they ask WAY TOO MUCH in a year and we've lost a year looking?

Can you offer any advice?  I can't find anyone who has ever been in this situation, although I'm sure we're not the first.

Thanks


Answer
YOu definitely need someone like a real estate attorney or very knowledgeable Realtor working to negotiate on your side. First of all, if they want an "appreciation clause" then you should have a "depreciation clause." That means if the market continues to sink, you should have the right to buy the property at a lower price. You therefore should settle on an appraiser who will define the purchase price at that time. Or you can call in three Realtors to give you an estimate of value and then take the average of those three figures.

If it was me, I would not allow an appreciation clause. Why? Because they get to live in the house and they would not be as careful about maintaining the house like most any tenant. You should go through the house together now and then with cameras to show proof of any damage that was done between the two times.

In lieu of a deposit or down payment now, you give them a promissory note secured by a mortgage or trust deed against your house(depending on your state)for an agreed amount. That promissory note is to be turned into cash at the time you close on the sale of your house and they move out.

Be sure the rent you charge is absolutely market. A lender now is going to charge you a higher interest rate if you do not live in the house. So, it probably won't be much difference between now or a year from now.

Now you see why you should have a real estate attorney operating from your side of the fence. Or you should use a very knowledgeable Realtor. Expect to pay a fee in either case.

I do wish you well.

Dick Dennis            dixiedee13@aol.com