Posted by Eduardo (OR) on April 17, 2000 at 20:16:21:
Mike–
You ask if there are “any pitfalls to watch out for?” Yes, there is a big pitfall to watch out for, and that is, what if your daughter and son-in-law don’t make the payments to you? In my personal opinion, after 30 years as a real estate investor, including 15 years as a real estate broker, and having seen hundreds of transactions including many between relatives, you would be nuts (my personal opinion) to sell the house to these relatives and take back a mortgage with monthly payments when you could be renting to them and collecting the rent each month. First of all, their credit is bad. That means they screwed up sometime in the past (for whatever reason). People that screwed up credit-wise in the past often will screw up in the future (my personal obeservation). What are you going to do when they stop making monthly payments? Foreclose on your own daughter? Second, the amount of the monthly payments on a mortgage isn’t necessarily higher than the rent payments are. In fact, it’s usually lower. So, basically, there is no real significant monetary advantage to selling them the house. The only reason I can think of to sell them the house is so they are responsible for upkeep and repairs instead of you. So why not just give them an option (drawn up by a real estate lawyer) to buy the house at some specified price at some future date when their credit is good and they can get a mortgage loan. Write into the agreement, as part of the deal, that they have to do all maintenance, repair and upkeep at their expense in the meantime in return for the option price.
Or do anything else except put yourself into the position of possibly having to foreclose on them. It’s much easier to evict a tenant, even a relative, for non-payment of rent than it is to foreclose on them. --Eduardo P.S. You can call this the “tough love” real estate approach to dealing with relatives.