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So I'm currently renting from my dad (he does not live at the residence). The plan was for me to buy it after a couple years, however the market has got out of control (Seattle area). When I moved in two years ago we had discussed $400k, and the market is supposedly up to $650k. Being that I can't afford more than $450k and he doesn't want to walk away from that much equity, we've been discussing alternatives.
One alternative we discussed was for him to sell to me at $450k (as in, that's the loan I'd get and that's what he'd pocket immediately), and then to somehow contract that he'd *also* own another $100k in equity, contingent on it maintaining that additional value. My reasoning is that if the market doesn't crash, I'd be able to pay him the extra $100k when I sell the house in 3-4 years, while still securing a home and a bit of equity for myself. I'm sure the bank loan would supersede whatever contract we create, so while it's a bit of a risk for him, I highly doubt the market will crash the home's value below $~550k. As for the other $100k (if anyone is wondering) he's "walking away from," he'd lose 6% on market, would have to invest another $10k+ to fix things, and owes me ~$20k, so I can reasonable write off most of that in comparison.
Is this type of agreement/contract feasible? Has anyone seen something similar? We're looking at discussing with a professional, but seems like I'd need to discuss with a specialized lawyer or something?
at first blush, given that you've made it successfully for 2 years with "nothing in writing" including that $20K you say he owes you, then you may as well stay that way on his end. Promise him $100K when you sell, so long as you sell for a net over $550K.
It's probably best in both of your interests to get a market appraisal before the Bank gets an appraisal as part of your loan application. First, there's a chance it's not worth $650K, so you'd like that "promised equity at sale" to be accurate. Second, plenty of bank appraisals would stop when they knew the value was somewhere between 450 and 500K. There's nothing gained from them overappraising it
at first blush, given that you've made it successfully for 2 years with "nothing in writing" including that $20K you say he owes you, then you may as well stay that way on his end. Promise him $100K when you sell, so long as you sell for a net over $550K.
It's probably best in both of your interests to get a market appraisal before the Bank gets an appraisal as part of your loan application. First, there's a chance it's not worth $650K, so you'd like that "promised equity at sale" to be accurate. Second, plenty of bank appraisals would stop when they knew the value was somewhere between $450K and $500K. There's nothing gained from them over-appraising it
Thanks for the quick response. We've made it 2 years with no issues re: rent payment (we've always had rental agreements), which has been slightly discounted due to the fact that I've been fixing things. I don't have every dollar accounted for, but we do have a promissory note covering most of my $20k investment. If he sold to me at a discount, I think he'd at least like the same guarantee, even if it's only binding re: me actually netting that $100k on sale.
As for the appraisal, I *think* we are going to go through with that soon. The $650k market estimate was based on a realtor and inspector couple we know just coming by and sharing info on other houses that sold in the neighborhood recently. I think it's high based on the current condition, but knowing the market I think it could easily hit $600K with another $10K dropped into curb appeal. The inspector said he didn't see anything major at a cursory glance.
Some type of Shared Equity Financial Agreement (SEFA) might work for you.
You can stipulate what percentage of the house each party "owns" and divide the equity when you sell.
In the meantime, your dad can "rent" his portion back to you, (and even get the tax benefits of a rental if he's eligible) while you get full use of the house and the tax benefits for your portion.
Don't know if this would fit exactly into your situation, but it wouldn't hurt to look into it online as it may give you some other ideas on how to write up a contract.
Thanks again for the thoughts, all. Seems like an attorney would be the next step. And happy to see this idea isn't completely crazy. :-)
Regarding the capital gains tax, I *think* he'd avoid that given recent tax changes? I'd love to be able to use that as additional leverage -- if he'd lose more from a market sale through capital gains tax...
Farmerkd1 I'll look into a SEFA today. One issue is he still owes ~150-200k on the home loan, so paying that off is a necessity that precludes any immediate title changes or personal "loan" situations.
Thanks again for the thoughts, all. Seems like an attorney would be the next step. And happy to see this idea isn't completely crazy. :-)
Regarding the capital gains tax, I *think* he'd avoid that given recent tax changes? I'd love to be able to use that as additional leverage -- if he'd lose more from a market sale through capital gains tax...
Farmerkd1 I'll look into a SEFA today. One issue is he still owes ~150-200k on the home loan, so paying that off is a necessity that precludes any immediate title changes or personal "loan" situations.
You’ll have to differentiate between Estate taxes and Capital Gains.
Since you are planning for the unknown future, and since you're thinking about shared ownership with dad, remember that Washington is a community property state, so in a marriage that ends in divorce for you (or dad), spouses are entitled to 50% of the equity.
You’ll have to differentiate between Estate taxes and Capital Gains.
I didn't think the estate tax came into play here, given the raised limits and fact that I'm paying for most of the property (so any "gift" would be well under $5M or whatever it is now).
For capital gains, I thought that was deferred too now, as long as it's under a certain amount? Could be completely wrong there...
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Sefa
