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Message
Borrowing from Friends to Buy a House
Posted on 5/12/14 at 4:22 pm
Posted on 5/12/14 at 4:22 pm
edit: Thanks to everyone who replied.
My wife are looking for houses in Memphis. We've been pre-approved and have been looking for 2 months.
A family friend on my wife's side bought a home for his daughters in 2001. His oldest daughter (his youngest daughter is my wife's best friend) moved out and he is looking to sale. He heard we were in the market and made us an offer. He would give us a private loan for the appraised value of the home (~230k). We would have 5 years to make payments interest free; then at the end of five years its our responsibility to get a mortgage from a bank to pay the remainder.
We can pay $60k over five years, the remaining balance would be $170k.
The only way i can see this deal hurting our family is if the value of the home drops below $170k. The home is in a great location (High Point Neighborhood) and home values have held in this area.
The house does not need any major work and is move in ready. It is 1800 sqft 3 bd/2ba.
It sounds like the deal is too good to be true.
What does the MB think?
My wife are looking for houses in Memphis. We've been pre-approved and have been looking for 2 months.
A family friend on my wife's side bought a home for his daughters in 2001. His oldest daughter (his youngest daughter is my wife's best friend) moved out and he is looking to sale. He heard we were in the market and made us an offer. He would give us a private loan for the appraised value of the home (~230k). We would have 5 years to make payments interest free; then at the end of five years its our responsibility to get a mortgage from a bank to pay the remainder.
We can pay $60k over five years, the remaining balance would be $170k.
The only way i can see this deal hurting our family is if the value of the home drops below $170k. The home is in a great location (High Point Neighborhood) and home values have held in this area.
The house does not need any major work and is move in ready. It is 1800 sqft 3 bd/2ba.
It sounds like the deal is too good to be true.
What does the MB think?
This post was edited on 5/13/14 at 11:07 am
8
Posted on 5/12/14 at 4:23 pm to ColKilgore
sounds like a normal lease to own with owner financing. just dont do anything to piss the guy off or he could evict you and frick you over
This post was edited on 5/12/14 at 4:24 pm
Posted on 5/12/14 at 4:30 pm to ColKilgore
quote:
It sounds like the deal is too good to be true
if he is in a position to have 230K earn no interest for 5 years who am i to judge. take the deal
Posted on 5/12/14 at 4:52 pm to ColKilgore
sounds like a sweet deal. How exactly are you going to finance it in 5 years though?
I am a very competitive market where cash offers are often winning. I can come up with enough cash to cover the price of a home, and I asked my finance guy if I could pay cash, then refinance the house to pay myself back. He said it wasn't possible. This was going to be in a 90-120 day timeframe, so maybe its different over 5 years.
I am a very competitive market where cash offers are often winning. I can come up with enough cash to cover the price of a home, and I asked my finance guy if I could pay cash, then refinance the house to pay myself back. He said it wasn't possible. This was going to be in a 90-120 day timeframe, so maybe its different over 5 years.
Posted on 5/12/14 at 6:05 pm to ColKilgore
quote:What are the odds you'd buy a similar home at that "appraised" value. i.e., Who did the "appraising"? Who hired the appraiser? Run the total numbers of a 3%-3.5% loan now vs a 5%-5.5% loan in 5 yrs at 60K less principle. At that point would you expect to be looking to sell?
A family friend on my wife's side bought a home for his daughters in 2001. His oldest daughter (his youngest daughter is my wife's best friend) moved out and he is looking to sale. He heard we were in the market and made us an offer. He would give us a private loan for the appraised value of the home (~230k). We would have 5 years to make payments interest free; then at the end of five years its our responsibility to get a mortgage from a bank to pay the remainder.
We can pay $60k over five years, the remaining balance would be $170k.
Multifactorial issue.
The numbers are straightforward given a particular scenario.
Those scenarios are yours alone though.
Posted on 5/12/14 at 6:26 pm to ColKilgore
$230,000 for 1800 sq ft is 127 a sq ft.
From every client I've had from Memphis the last two years, that is quite higher per sq. ft than they sold their home.
Ask him if he will make same offer contingent on inspection and appraisal, both of which you will gladly pay for. (400-500 appraisal, 250-300 home inspection, 50-100 termite inspection)
If it checks out, sounds like a good deal.
If I'm being honest, sounds like he knows won't appraise for traditional mortgage and he's getting creative to get from
under the house. This is purely speculative, I do not know Memphis' market
Edit: is it 1055 Tanglewood by any chance?
From every client I've had from Memphis the last two years, that is quite higher per sq. ft than they sold their home.
Ask him if he will make same offer contingent on inspection and appraisal, both of which you will gladly pay for. (400-500 appraisal, 250-300 home inspection, 50-100 termite inspection)
If it checks out, sounds like a good deal.
If I'm being honest, sounds like he knows won't appraise for traditional mortgage and he's getting creative to get from
under the house. This is purely speculative, I do not know Memphis' market
Edit: is it 1055 Tanglewood by any chance?
This post was edited on 5/12/14 at 6:33 pm
Posted on 5/12/14 at 7:51 pm to ColKilgore
I'm pretty sure your friend would have taxable "imputed income" on the interest free loan to you.
It's his problem not yours but.....
It's his problem not yours but.....
Posted on 5/12/14 at 10:38 pm to LSURussian
Sounds like land contract or bond for deed.
You make payments at a agreed upon interest rate, in your case 0%. Then at a predetermined time you owe a balloon payment which is obtained by taking out a conventional mortgage on the unpaid balance.
Real estate investors do these deals every so often.
Absolutely get an appraisal. If house appraises for less than what is left on remaining balance at balloon payment time you may not get finance in which case you lose all equity and he retains the house.
You make payments at a agreed upon interest rate, in your case 0%. Then at a predetermined time you owe a balloon payment which is obtained by taking out a conventional mortgage on the unpaid balance.
Real estate investors do these deals every so often.
Absolutely get an appraisal. If house appraises for less than what is left on remaining balance at balloon payment time you may not get finance in which case you lose all equity and he retains the house.
This post was edited on 5/12/14 at 10:41 pm
Posted on 5/12/14 at 11:25 pm to ColKilgore
quote:
The only way i can see this deal hurting our family is if the value of the home drops below $170k. The home is in a great location (High Point Neighborhood) and home values have held in this area.
The house does not need any major work and is move in ready. It is 1800 sqft 3 bd/2ba.
None of this has anything to do with how you finance the property. True, they're important to consider when deciding whether to buy at all, but all this would be true if you borrowed from a bank too.
Generally I'm not a fan of borrowing significant sums from friends or family, mostly because if something doesn't work out quite right and there isn't a legally binding contract, things can get pretty tense. Ben Franklin famously said that the best way to turn a friend into an enemy or an enemy into a friend was to lend money to either.
That said, the terms seem pretty good but the real question is whether you can refi in five years. I strongly recommend that you get everything legally recognized and include wording on what happens if you can't get financing five years later. Or if you can get financing, but not on good terms. Always have an exit clause.
Posted on 5/13/14 at 10:49 am to Hawkeye95
quote:
How exactly are you going to finance it in 5 years though?
Refinance the mortgage through a different lender.
Posted on 5/13/14 at 10:59 am to NC_Tigah
quote:
What are the odds you'd buy a similar home at that "appraised" value. i.e., Who did the "appraising"? Who hired the appraiser? Run the total numbers of a 3%-3.5% loan now vs a 5%-5.5% loan in 5 yrs at 60K less principle. At that point would you expect to be looking to sell?
Smaller houses (1400-1600 sqft) in the neighborhood have sold in the 230k-240k range. He said that the city appraised it at 230k. mostly because of the size and location. i think our appraisal will come back lower because the kitchen and one bathroom has not been updated. most of the homes that have sold in the 230-240 range have been renovated.
230k w 3.5% down @4.4% over 30 years, p&i payments are 1106.
170k w 3.5% down @5.5% over 30 year, p&i payments are 927.
We would be looking to sale between the 5 & 10 year period. Best case scenario is that we put as much as we can into the house monthly with no interest then at the end of five years, take a loan for 200k, make improvements and sell the house.
Posted on 5/13/14 at 11:03 am to ItNeverRains
quote:our insurance guy has told us that this is the most expensive in the city.
$230,000 for 1800 sq ft is 127 a sq ft.
quote:that's the only way i would take the deal. my brother in law is licensed contractor, electrician, & plumber and will inspect the house before we move forward.
Ask him if he will make same offer contingent on inspection and appraisal, both of which you will gladly pay for. (400-500 appraisal, 250-300 home inspection, 50-100 termite inspection)
quote:its on Mimosa Ave
Edit: is it 1055 Tanglewood by any chance?
quote:i dont think he can get 230k for the house as-is. im thinking between 215-225
If I'm being honest, sounds like he knows won't appraise for traditional mortgage and he's getting creative to get from
Posted on 5/13/14 at 11:04 am to RadTiger
quote:
You make payments at a agreed upon interest rate, in your case 0%. Then at a predetermined time you owe a balloon payment which is obtained by taking out a conventional mortgage on the unpaid balance.
this is exactly how worded his offer
Posted on 5/13/14 at 11:06 am to foshizzle
quote:
Generally I'm not a fan of borrowing significant sums from friends or family, mostly because if something doesn't work out quite right and there isn't a legally binding contract, things can get pretty tense. Ben Franklin famously said that the best way to turn a friend into an enemy or an enemy into a friend was to lend money to either.
i agree completely with this and we will have a lawyer draw up all the necessary paperwork.
quote:
Or if you can get financing, but not on good terms. Always have an exit clause
This is a good question to ask, thanks.
Posted on 5/13/14 at 12:02 pm to ColKilgore
Yep. It's possible, for example, that four years from now you will have some enormous medical bills and that you won't qualify for a traditional mortgage refi at all, or maybe you can borrow but only at 15%, that sort of thing. An insurance policy might be something to consider.
Posted on 5/13/14 at 12:32 pm to foshizzle
what type of insurance are you talking about?
my current health insurance is high deductible plan with an out-of-pocket max. we also have a nest egg saved to cover emergencies.
my current health insurance is high deductible plan with an out-of-pocket max. we also have a nest egg saved to cover emergencies.
This post was edited on 5/13/14 at 12:33 pm
Posted on 5/13/14 at 1:12 pm to ColKilgore
Disability coverage, to replace your income if you cannot work.
Why not just get a mortgage and buy the place now if you like it / if it's a good deal?
There are too many variables over too long a horizon the way the seller is structuring the deal. Good luck predicting interest rates in 5 years too (probably much higher than today).
Why wouldn't the seller want $215,000-$225,000 you mentioned today? It's roughly the same if not more than $230,000 with the time value of money over 5 years anyway.
Also there's no shortage of mortgage options these days so bond for deed is really only for the least credit worthy buyers.
Typing out the post, it's becoming obvious the house wouldn't stand up to a lender's or your own due diligence (appraisal, inspection).
Why not just get a mortgage and buy the place now if you like it / if it's a good deal?
There are too many variables over too long a horizon the way the seller is structuring the deal. Good luck predicting interest rates in 5 years too (probably much higher than today).
Why wouldn't the seller want $215,000-$225,000 you mentioned today? It's roughly the same if not more than $230,000 with the time value of money over 5 years anyway.
Also there's no shortage of mortgage options these days so bond for deed is really only for the least credit worthy buyers.
Typing out the post, it's becoming obvious the house wouldn't stand up to a lender's or your own due diligence (appraisal, inspection).
Posted on 5/13/14 at 1:32 pm to GoIrish02
quote:
Disability coverage
That's what I was thinking about.
But you're also right that I wonder whether this is really worth it. You'd have to run the numbers on a spreadsheet under varying assumptions to figure out where 5 years at no interest is worth up to 25 years at a higher rate starting 5 years from now.
It might be, I don't know. Just saying there has to be more analysis done.
quote:
Why wouldn't the seller want $215,000-$225,000 you mentioned today?
Also this. Get the house appraised, if it's higher than this and the seller wants to give you a discount, then you can get a standard mortgage right now and neither of you has to worry about whether you can refi down the road. Win-win for both of you.
Posted on 5/13/14 at 2:49 pm to foshizzle
quote:
But you're also right that I wonder whether this is really worth it. You'd have to run the numbers on a spreadsheet under varying assumptions to figure out where 5 years at no interest is worth up to 25 years at a higher rate starting 5 years from now.
assuming $1000 monthly payments for first 5 years, it would be worth it if mortgage rates are below 6.85% in 2019, the last time they were that high was 2002.
Posted on 5/13/14 at 3:53 pm to ColKilgore
first let me put out my disclaimer i am a loan officer at a bank so i am not talking out of my arse here. lease to own is a horrible idea. let me tell you why. those interest free payments you are making cannot be used as a downpayment. so after 5 years they would have to sell you the house at 170k and you would have then put a downpayment on the house to qualify for a loan. I have had at least 5 lease to own customer walk into my office in the last year and have to break this news to them. its a changing mortgage world so the rules might be different in 5 years. but as of now i would strongly advise against this type of set up.
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