Totally crazy house/money scheme

[theintended]

So, humor me for a minute with a very hypothetical situation.*

We want to put an addition on our house. It's expensive, and the loan that would work for us is kind of a PITA. It's frustrating because we could afford buying a house that costs what we'd spend on the addition + our home's value, but we don't quite have enough equity to do a simple HEL right now.

This made me think tonight, "I wish someone else would do the addition, and then sell us the house back." (With a regular 3.something 30 yr loan.)

What if a family member had the funds and was willing to do just that: buy the house, rent it to us while the addition was being done, then sell it back at fair market value. If the appraisal weren't 100% of funds spent (it would be close), we'd have a deal to make tax-free gifts to the couple over a year or two until the full expense were satisfied.

Is there any reason (besides general good advice about doing business with family and warnings about the house not appraising for the full value) that this would not work? It's not illegal, right?

*The likelihood of this happening is about 0.5%. I'm just curious in a nerdy way.

[steph96]

I would be worried about something happening to that family member. Too much risk.

My grandma could have done that. After she died, it would be up to my uncles if I got to buy my house back if if they wanted to sell it out from under me.

My mom could it it, but what if she gets sued or something similar and they seize her assets? What if she suddenly needed all that money for some life saving procedure and I couldn't pay it back or get another loan to cover it?

Isn't there also a lot of paperwork when selling to a relative? I know when buying a house they ask if you are related to the seller. I'm not sure what sort of impact that would have.

[limey]

Assuming your caveats, I don't think this is crazy.

I actually bought my parents second home off of them in 2002. It worked out really well for both them and me.

We were thinking of moving back in 2008 and my mom immediately offered to buy the house back. It turns out, she had wanted to do this for a while, but didn't want to pressure me.

ETA - My parents were divorced by the time my mom bought the house back and she wanted to stay in that part of the country.

[MadamePresident]

I kind of think if you can't really afford it, you probably shouldn't do it.

[jenjen]

Would it be easier for the family member to loan you the money to do the addition and then you could refinance and cash out some equity. Use the equity to pay back the family member.

[momof2boys]

Could you refinance and take out extra money to do the renovation? Thats what we did when we wanted to add on. An added bonus was rates had dropped so we got a better rate and an addition

[chickens987]

We're doing something similar. Our house was listed majorly under market but is also unmortgageable - too much wrong with it. My parents bought it for cash and are funding the renovations (also with cash) and we are renting it from them while the work is being done. Once it's mortgageable (not necessarily done), we will buy it from them at the market rate.

It works for us because my parents have tons of experience rehabbing properties and they love the house as much as we do - also my dad is an architect so it's a fun project for him. One significant factor was also that we have very similar ideas - since they have so much decision-making power (although they definitely consider it our house), we need to be ok with that.

[theintended]

There just isn't quite enough money to do either of those options. There is a loan that lends money based on the value of the house post-renovation which would get us there (and since we'd be adding a bed and a bath, the value will increase quite a bit). But there are a lot of extra hoops to jump through for that loan, and I'm not positive I want to deal with them.

Yes, a loan to make up the difference (using a cash-out refinance could work), but the family member would be out the money for a longer period of time (years instead of about six months). Still, if we were paying 4% interest, it wouldn't be a bad deal for them -- currently they have this money sitting in a checking account : /

We will probably keep on saving and hold off at this point. It's just frustrating to a) love your house and not want to sell b) be able to afford a $280,000 mortgage, yet c) not quite have enough equity and cash to make a HEL work.

[FishChicks]

I think you've answered this already, but just to check, can you use cash to pay down the mortgage so you'd qualify for the HEL? Also, I'd be pretty amazed if you can complete such a major addition in only six months. Between plans, permits, and construction, I would expect something closer to a year. My hat's off to you if you can get done in six months!

[theintended]

Our house is currently worth 270K. We owe 195K. We have 25K in cash saved for the project. The addition will be about 100K. Keeping 80% or 90% LTV after the HEL means not making it to 100.

[theintended]

We have plans already, and the construction will take three months. So I left three months for permitting and loan closing. Maybe it would take a bit longer -- still less time than paying back a 50K loan.

[theintended]

Jan 8, 2013 3:49:33 GMT -5 jenjen said:

Would it be easier for the family member to loan you the money to do the addition and then you could refinance and cash out some equity. Use the equity to pay back the family member.

I just re-read this and realized I didn't quite get what you were saying before. Interesting idea that might work. Thanks!

[jenjen]

Jan 8, 2013 11:01:22 GMT -5 theintended said:

Jan 8, 2013 3:49:33 GMT -5 jenjen said:

Would it be easier for the family member to loan you the money to do the addition and then you could refinance and cash out some equity. Use the equity to pay back the family member.

I just re-read this and realized I didn't quite get what you were saying before. Interesting idea that might work. Thanks!

Yeah I see how that wasn't worded the best (I was feeding DS in the middle of the night!). Get $ from relatives, complete addition, then start the process to refi and get cash out after all the work is done. Then use your refi cash out to repay the family member. Seems easier for both you and your family member.

[theintended]

You're right. Way more straightforward than my convoluted plan. : )

And potentially beneficial for everyone. Iiiinteresting.

[chickens987]

Jan 8, 2013 11:10:57 GMT -5 jenjen said:

Yeah I see how that wasn't worded the best (I was feeding DS in the middle of the night!). Get $ from relatives, complete addition, then start the process to refi and get cash out after all the work is done. Then use your refi cash out to repay the family member. Seems easier for both you and your family member.

This is what we would have done if we had been able to get a mortgage on the house in the first place!

[sugarbear]

Jan 8, 2013 7:29:13 GMT -5 chickens987 said:

We're doing something similar. Our house was listed majorly under market but is also unmortgageable - too much wrong with it. My parents bought it for cash and are funding the renovations (also with cash) and we are renting it from them while the work is being done. Once it's mortgageable (not necessarily done), we will buy it from them at the market rate.

It works for us because my parents have tons of experience rehabbing properties and they love the house as much as we do - also my dad is an architect so it's a fun project for him. One significant factor was also that we have very similar ideas - since they have so much decision-making power (although they definitely consider it our house), we need to be ok with that.

We did this, exactly. It worked well for us.