Caretaker's a lifesaver: How do I sell her my house?

Avoid IRS trouble with reasonable financing rate

Q: I inherited a home from a family member, and there is no mortgage. The house is in California, and I am in Georgia. The caretaker who was instrumental in taking care of my elderly aunt prior to her death wants the house but would not qualify for the mortgage based on her income/assets.

I will be happy to hold the mortgage to make this house a viable option for her; she was a "godsend" during my aunt's illness. I think you mentioned a company on your radio show or in one of your columns that can help with the transaction itself.

Document preparation is my primary concern, although I could probably get a good real estate attorney to help me with that. I do not need a middleman to handle the payments, as I have a number of rental properties. I want to ensure I am completely informed of all issues surrounding this transaction.

A: You're trying to reward someone who helped you out in a time of need, and that's a good thing. What you need to focus on is whether you should sell the home to this person or rent it to her.

If you rent the home to the caretaker, you might give her time to get her finances in order until she has enough assets and/or income to qualify to purchase the home from you. You and the caretaker can decide on the rent you would be paid and the responsibilities each of you would have for the maintenance and care of the home.

If you simply want to sell the home to the caretaker, the two of you could agree on a price for the home, the amount that you would finance for the purchase and the interest that you would earn on the loan amount. If the interest is well below the market interest rates for the loan, you could run afoul of Internal Revenue Service issues, and some of the terms of the loan could be considered a gift to the caretaker.

In terms of financing the home, you would have two options in most places. One option would be to sell the home outright to the caretaker and take back a mortgage or deed of trust on the amount she would owe you from the sale of the home.

The second option would be to sell her the home on an installment basis or contract for deed. In this arrangement, you would remain the legal owner of the home and your caretaker would pay you over time for the title to the home. When the caretaker satisfies the terms of the contract, title to the home would be transferred to her.

Because there is no mortgage on the property, and you don't have to worry about covering expenses above and beyond real estate taxes, insurance and simple maintenance, the finances of the property should be relatively easy for you. Depending on the circumstances and what your intentions are for the home and your late aunt's caretaker, the two of you will have to agree on a price for the home and monthly mortgage/home payments or monthly rental payments she can afford. Thereafter, she can send monthly payments to you.

But you should draw up a proper lease or sales document that conforms to California laws. My suggestion would be to go to the California Department of Real Estate to see if they have the form you need, or you should hire a real estate attorney in California to draw up the sales documentation along with the mortgage documents.

Q: I wish to refinance my rental property (a townhouse). I have been advised that doing a cash-out refinance isn't possible in today's climate, but if I want to take cash out of the transaction, I have to refinance using an equity loan.

I asked if federal or state law required me to refinance this way, but I've received no definitive explanation. Can I refinance to take money using an equity loan?

A: The current credit markets have made it difficult to finance rental property -- even if you have a large amount of equity in the deal. Doing a cash-out refinance may also be very difficult at the moment because investors have been burned and aren't looking to buy these sorts of loans.

You probably fall into a classification of commercial and investment loans that are currently hurting more than other loans. Your property is classified as residential, but its use to you is as an investment property. In some markets the residential market is doing quite badly, and residential lenders are looking closely at each deal and making it harder to apply for residential loans.

You don't qualify for a residential loan, and commercial lenders are limiting their investments in residential properties. Small investors like you are finding it hard to obtain financing for these types of deals. In a sense, what you are hearing is that you should be happy to have the financing you currently have and that new lenders are not looking to give you more money. They're willing to extend additional credit to you as an equity loan on terms that are probably less favorable than your current first mortgage loan.

In any event, I don't know of a conventional lender that would allow you to borrow more than 70 percent or 75 percent of the equity in the property at the moment. So if you're looking to cash out 90 percent of the equity, the numbers might not work out.

Where might you go to get money? If you're a real estate investor with multiple properties, you might have better luck with a bank that might be willing to look at your portfolio of properties and refinance all of them.

You might want to try some local savings and loans or community banks and see if they have any interest in lending you money. Some local banks are becoming more active in the real estate market as larger banks pull back. But that bank must be willing to give you the loan and will probably have to keep the loan on its books. It won't be able to sell the loan on the secondary market as your townhome is rented and does not qualify as an owner-occupied residence or even as a second home.

As the real estate market improves, it may be easier to refinance your property.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

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