Question From John. I’m seriously thinking about buying my mother’s house. She has almost paid off her mortgage, doesn’t need the square footage and acreage of this house, and it’s an ideal house for me and my family. She is willing to take monthly payments from us and that will save us having to try to qualify for a loan. But what kinds of things do I not know that could mess me up?
Answer. John, I think you are wise asking this question. It’s the questions we don’t ask that can create nightmares later, and for many people a lot of stress and writing blank checks to lawyers. There are a few things I would say you want to think about before you close the deal.
First, if I understand, your mother would sell you the house and move into her own small place or apartment. If that is not the case, and she is staying in the house, you need to talk about the relationship issues of living with a parent. That can get complicated very fast.
Second, if she is carrying the contract, I recommend that you do everything just as formally as you would as though you were total strangers. In fact, the closer you are, the more important it is that you take care of all the legal issues and the contracts very professionally and above board. Having a dispute later with a family member or a friend can destroy the relationship for the rest of your lives. That would be a disaster.
Third, use a deed of trust and promissory note and a third-party escrow company to collect your money and disburse it to your mother. This will also help alleviate any disputes over how much you’ve paid, how much has been amortized and what portion has been applied to interest and what portion to principal. This is one of the major problem areas, so don’t pass on this idea.
Fourth, be sure you have included all the details of your transaction in your final contract. In other words, if you are paying your mother over 30 years just like a bank loan, great, but if you are going to cash her out in five years, be sure to come to grips with that. Five years goes by so fast, and while most people think a balloon payment is no big deal, I could tell you stories of how many people could not make their balloon payment. As someone once said, “Balloon payments are for clowns.”
Fifth, I recommend you have a provision in your agreement that if you sell your home, your buyer must pay your mother off entirely. Don’t put your mother in the position of being forced to be in a contractual relationship with someone other than you, someone she does not know and doesn’t trust.
Sixth, and lastly, be sure you pay your mother the maket rate of interest, which as of this writing is 4.5% on a fixed 30-year loan. That could increase quickly, but the point is if your mother gets paid less than the fair market interest rate, the IRS will want to tax her on the difference, which is a gift tax. While she also can make an annual gift to her children, the whole thing can get complicated and messy for your mother.
Good luck, and be sure to take care of your mother above your own interests.
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