Q: A friend wants to purchase my house, on which I still owe an equity loan of $19,000 with last payment due in 2013.
The house needs major repairs. My friend would like to purchase house on a rent-to-buy basis for about $68,000. If house were in good condition, the selling price for it in my neighborhood would be around $95,000 to $100,000.
My friend would like to take the savings and make the repairs. The house has 1,900 square feet, a two-car garage, and a very large front and backyard.
I am divorced and alone, and prefer to rent a smaller house. My friend says if I draw up a “rent-to-own” contract, I would not have to pay taxes, could use the monthly payment to rent my new place, and would have enough to live on with my retirement check ($1,750), social security ($570), and still begin to pay down my debt.
Is he correct? Are there any other options? My situation is a complicated one. I am primarily concerned that I not make any more foolish decisions. I am 65 years old, in pretty good physical condition, and expect a long life. Thank you for your advice.
A: Let’s think this through carefully. You owe $19,000. If your friend closes on the purchase of your home under a normal sale, you’ll have to pay the equity line off. If you sold the home for $68,000, you would end up with about $49,000. In the meantime, he’s offered you about $68,000 on property that would be worth $100,000 if fixed up.
I don’t know what kind of major repairs your 1,900 square foot house needs, but I doubt you need to spend $30,000 to get it into shape. You may be leaving quite a bit of money on the table. If you’re worried about making a foolish decision, leaving money on the table in a deal might qualify.
I’d much rather see you spend $10,000 to fix up your home and then sell it for $100,000. You’ll have earned $20,000 for your troubles and will walk away with $80,000 after you pay off your home equity loan (assuming you sell on your own). You should plan to talk to several real estate agents in your area to give you an assessment of what your home is currently worth and what it could sell for and what improvements they could recommend to the home and what the home might sell for after those improvements were made.
With that information, you will have a better idea of how to proceed.
If you still plan to go through with your friend’s plan, please discuss it first with a qualified real estate attorney. Your “friend” sounds like he either doesn’t know what he is talking about or he is trying to pull the wool over your eyes.
As long as you’ve lived in the house for 2 of the past 5 years before you sell, you will be able to keep profits of up to $250,000 tax free. As far as “renting to own” or “leasing with an option to buy,” you can go this route, but you may have to pay off your home equity loan once you close. Your downside is if your friend is unable to make the payments on your home and you have not paid off the equity loan, you would still have to come up with the money to make the payments.
There are risks involved in selling a home on contract. You might not want to take those risks. Certainly, if the home is worth what your friend claims, you might be able to sell it for that to anybody and get your cash up front.
With the deal your “friend” is proposing, you’ll wind up with about $49,000 versus the $80,000 you could have and be taking risks that you might otherwise not want to take.
Again, the best move you can make is to hire a qualified real estate attorney.
Published: Jul 28, 2007