First Time Homebuyer Dilemma

[sjlucadou]

Hey guys I have a unique situation in regards to purchasing our first Home and would love to get some input..


My wife and I have been married for 10 months and recently began to start looking for our first home. Our price range is from 140k-180k. As we began to start looking my father-in-law offered us the opportunity to rent out their old house. (They recently moved to another nearby neighborhood) The house is a 2 story 4br 3 1/2 bath 2,800sq ft. house. The house is about 30 years old with an updated kitchen and hardwood floors in the living room. The house is valued at around $190,000-$220,200. The home next store recently sold for $265,000. The home is part of a great community and is one of the lower end homes within the neighborhood. We went ahead and moved in and pay him a very nominal amount for rent.

Here is where it gets tricky.. My Father-in-Law recently offered to sell the home to us for 150K. With the clause of having to pay him an additional 50K upon selling the home. Is this a smart deal?? I know my father-in-law has our best interest in mind by offering the deal. There is no way that my wife and I could afford to get into the neighborhood other than this deal. We aren’t in love with the house but we realize it is a good deal. We would definitely need to redo the bathrooms and paint the interior walls. My thought is that it would take about 30K to really update the house. (Maybe more)

I know it’s not generally wise to get into financial settlements with family, but honestly we are extremely close and I have little fear of any issues developing.

Any advice would be helpful!

Thanks

[phantom]

I'd be very leery of entering a deal with family or with anyone else that puts conditions on what happens when you sell the house. You don't want to find yourself in a situation where you have to move unexpectedly or just really want to move and have trouble because you can't come up with an extra 50k.

I'd also be leery of buying more house than you otherwise would just because of some special financing situation. You're still planning on spending 20k more than the top of your budget on this house (50k if you count the money for the improvements), just not right away. It'd be just like you got a 50k interest free loan to help you out. I wouldn't do this unless you feel fully comfortable with this extra debt. Along these same lines, you might have trouble getting a mortgage if your lender sees the situation this way and you have less than 20% of 200k to put down on the house. Also, remember that your house will still be assessed like the other houses in the area, and you'll have to pay property taxes as though you spent 200k on the house. Of course, if property taxes are low in your area, this might not matter much.

Personally, I would probably only consider this deal if you had a really compelling reason to want a more expensive house. I see it as a significant stretch, and in general, I think it's best to avoid stretching when buying a house without good reason. Would a house in your budget be too small? Would a lesser neighborhood be unsafe?

I would feel a lot better about this whole thing if your father in law were just giving you 20k towards the house with no obligation to repay it and asking 200k for the house, assuming you were willing and able to take your time doing the painting and bathroom upgrades paying for them in cash as you go. I realize that's not the option he presented you with and that it might be rude to ask him to amend his offer, but that is the sort of help I would feel most comfortable accepting.

[Goldy]

What timeframe do you have to make your decision? Is he looking to sell ASAP or could you continue to rent? If time is not a huge factor I would say that you should keep renting for as long as you can so in a few years down the road you will have enough money for a downpayment.

I would be lery of buying the home from a family member unless it was exactly the house that I wanted. I also agree with Phanton that it would be better to just have the 200k sell price with 20k thrown in. I can see a situation down the road where if you did buy it for 150k and your father in law is all of the sudden strapped for cash it could get ugly for everyone.

[snafu]

I have the impression that you're not happy there and moved in to take advantage of nominal rent. Would it be better to repay your DFIL's generosity by painting the place and organizing the bathroom reno project to make the house saleable for top dollar. Once the house sells/closes you're free to move an hopefully have saved the needed 20% downpayment for a house that better serves your needs.

If I were in your shoes, I would talk to a realtor who has been selling homes in your area for at least 10 years and tour houses currently for sale to understand your specific marketplace. Based on that information, I'd put in the sweat equity painting neutral colors for re-sale. Contractor quality paint is cheap for results. I'd use the opportunity to work with a tradesman to learn hands-on how to remodel a bathroom. How did you conclude 30K cost? I'd choose glass tile and eye candy faucets for top sale dollar. Paying DFIL $ 150.K & selling for $230.K or so [less costs] will likely delivers a DP for a house you like. These skills as super helpful for a homeowner

[esb3357]

Whats the house worth today? It sounds like he is offering it at 150k because that is what it will appraise for. Therefore you are going to over pay for a house your not a fan of.

[sjlucadou]

Dilemma

Whats the house worth today? It sounds like he is offering it at 150k because that is what it will appraise for. Therefore you are going to over pay for a house your not a fan of.

The house is currently worth $215,000. The house next to it sold in less than a week for 5,000 more than asking price. I don't think my FIL would have any problems selling the home.

I appreciate the advice and my gut was telling me not to take the offer. My fear would be that the home would depreciate due to age and I wouldnt be able to sell it for 200,000. Thus I could potentially lose money on the deal.

[cooliemae]

I appreciate the advice and my gut was telling me not to take the offer. My fear would be that the home would depreciate due to age and I wouldnt be able to sell it for 200,000. Thus I could potentially lose money on the deal.

I can understand your hesitation with the 50k hanging in the wind. If you like the house/neighborhood and the extra 50k is the only thing holding you back, you might counter your FIL's offer with a percentage deal. You buy it for 150k with a written(and i stress written) agreement that when/if you sell the house then the FIL would get a percentage of equity exceeding the 150k you've invested. This way you're protected from the 50k if the house's value drops below the 150k.

[siggy_freud]

Structure the deal based on the home's value, and not simply a 50k payout. Base the payout as a percentage of profit made. If you buy it for 150k, and sell for 220, your profit (fees and taxes aside for simplicity) is 70k. 50k of 70k is about 71%. So strike a deal to give him 71% of the profit from the sale. If the home value goes up, so does what he makes. If it goes down, so too does your obligation to him. If the house keeps going up, start saving up the 50k and offer it to him as a payout now in lieu of the original deal, ensuring you get more of the profit should you sell.

[bigdaddybus]

Structure the deal based on the home's value, and not simply a 50k payout. Base the payout as a percentage of profit made. If you buy it for 150k, and sell for 220, your profit (fees and taxes aside for simplicity) is 70k. 50k of 70k is about 71%. So strike a deal to give him 71% of the profit from the sale. If the home value goes up, so does what he makes. If it goes down, so too does your obligation to him. If the house keeps going up, start saving up the 50k and offer it to him as a payout now in lieu of the original deal, ensuring you get more of the profit should you sell.

great idea

here are a few things I would consider
1. how big is your family going to be?
2. what do you expect your household income growth to be?

For me at 38 with 4 kids both of these two grew bigger than I could have imagined when I first got married in my 20's. My household income is up 300% and my family grew by 200% so a good deal on a bigger house now is not a bad thing. I have upsized homes 4 times in my married life and the expenses there....well I dont want to think about that.

Currently we are living in a house on the low end of the neighborhood range and couldnt be happier (that we bought from an estate). So far we have spent around 30K in upgrades and we are still finding things to do. Guess that is just part of making a house a home. best wishs for you and your spouse.

[woodie96]

I love Siggy's idea.
I think it would give him the "security" he is looking for in the deal, while at the same time covering you in the event the housing market takes a turn for the worse.