Buying a relative's house

I'm sorry to hear of her condition. It has nothing to do with taxes, but I urge you to find a support group. It was invaluable to me when dealing with my mother's decline.

Whoever comprises "we" need to get together and come to agreement on terms. The tax aspects will sort themselves out. Your goal at this stage is to be speaking to each other at the funeral.

When my brother and I sold our parents' house we interviewed realtors who gave us a market assessment. We were just about to list when a relative raised the idea of buying the house. When we talked about it my brother and I independently came up with a suggested sale price, which did include a discount for not paying a sales commission. We both chose exactly the same number.

You can get information on current mortgage rates in the real estate section of the newspaper.

Since it's likely your mother will require increased levels of care, it's important that you pay fair value for the house in case she does run out of money. Once the family has decided on what seems fair, I'd recommend running it past an elder law lawyer to make sure it satisfies any potential Medicaid requirements.

See IRS Publication 502 for information about deducting long-term care expenses. You need some medical documentation, but yes, all or part of the expense qualifies.

You didn't sy who *we* are to respond adequately, but a major consideration is that when she dies the house gets a step up in value and is inherited by you (and who?). Normally you would not sell instead of inheriting. You can suport her instead of making a mortgage/interest situation as you suggest. If there are other heirs they might complicate this suggestion.

ed

We will have to sell the house one way or another. All involved parties agree. It is just a matter to sell it to an outsider or if we can keep it in the family. The savings she has right now will only cover her for about one year or less with the sale of the house we can stretch it to almost 4 to 5 years. Right now the market is in our favor, I am not sure if we can afford it in a year from now if the market goes up. Thanks for your answers and kind words. Please keep posting if you have any other information pertaining this subject. I make a bet there are many people out there that are in the same position. As heart breaking as it is it has to be dealt with.

But when the kids run out of money, what happens when mom is forced to sell the house? There are those who would have suggested sometime back to put the house in trust and do whatever it takes to get assets out of mom's name so medicaid would kick in. This is nearly the opposite, no one looking to put the bill back on others, but if they pay out of their pocket it opens a can of worms, if not a Pandora's box. Talking to an elder law attorney is still the best advice given here. OP should take Phil's advice and seek that professional. JOE

Talk to an attorney before doing anything. You'll likely need a power of attorney to handle any sales if your Mother is not of sound mind. Real estate transactions usually require a separate, limited POA.

And be careful with your thought process regarding the market being "in your favor". That means its not in your mother's favor, which some party involved could construe as taking advantage of a disabled individual. Situations like this lend themselves to lawsuits from outside family members.

I know nothing of your family and its intertwined relationships, nor am I accusing you of swindling your mother, but these are definitely issues for an attorney. My sympathies to your mother and good luck,

Who is paying for the assisted living? If its Medicaid, the state will take the house for payment if Mom owned within five years of getting state aid. Some states are extremely aggressive about this, but usually wait until the spouse has died.

Let's say the lady sells her house now to a relative, at its current market value. To do that would take at least one appraisal and at least one inspection, both by licensed professionals. I don't see that a real estate agent needs to be involved but depending on which state you are in a real estate attorney would be a good investment or even necessary. Sell the house with "owner financing", where the lady gives the buyer a mortgage, using a standard ("uniform instrument") mortgage contract and note. They are separate legal documents. Both ducuments can be purchased from an old-style full service stationery store, or online.

The lady will need to revise her will to designate what happens with the mortgage upon her death. It can come due or be sold (both choices liquidate the asset), be forgiven (this involves simply returning the note to the buyer), or be passed to one or more inheritors other than the buyer.

Definitely consult an attorney. An estate attorney should be familiar with situations like this.

Una

Given rick++'s remarks about states going after the house if the person is covered under medicaid, how will they handle an illiquid asset such as this mortgage? Since the OP originally stated a 50% down, with Mom taking back a note on the balance, wouldn't bank financing be preferred? I don't know, myself, just adding this question back. JOE

Joe, you got me thinking (that's dangerous, I'll admit):-) There is a realistic possibility that nursing care costs could eventually drain all of her assets.

What then happens to the mortgage note? The income stream would almost assuredly exceed the allowed annual income limits for medicaid but is also unlikely to be enough to support her. Does her possession of the mortgage note back her into a corner or does Medicaid have a solution for this scenario? I've never heard of them handling illiquid mortgages in this manner.

I would think the note's FMV, and surely someone can place a market value on that note, is part of her total resources. If so, as long as her medicaid total resources exceed the threshold allowed in her state, [it is $1,500 in Ohio] she is not medicaid eligible. She could sell the note and spend down the funds from the sale.

Thank you for all your great input. Here is some extra info. We are living in Albuquerque, NM. If my husband and I buy my mom's house, she will be able to pay herself for the assistant living for 4 to 5 years till all the money runs out except her pension and social security. At that point, she will have to go on Medicaid. Should she pass away before we paid the entire sale price of the house to her, the remainder will be devided among the people that are in her will which includes us and one more family member. We are not trying to pull a fast one on my mom. Finacing the sale through my mom will give her more income since she also will receive the interest. The priciapal, interest, social security, and pension might last even more than the 4 to 5 years. My mom is 87 and I believe that this might be all the time she has left. As for the power of attorney and the will, it is all in place. Thank you again for all your great tips, questions, and thoughts. Keep on sending your input, we appreciate it. Marion

Sounds reasonable.

I would hope the will explains what happens to the mortgage she holds.

Does it go to you? Does it effectively get torn up? The lawyers have a term for forgiving a note at deathe passes.

And at that point her assets haven't run out, because she still holds the mortgage, which may affect Medicaid eligibility. I hate to say it, but you also may be too optimistic that she'll be able to stay at that care level for that long. She may require full nursing, which is much more expensive, which would bring her to this point faster.

This is a major part of why I recommend an elder care attorney before you do anything. It's not a fun process, but you need to project this through its various endings to make sure you do the best you can.

That's a good point. At least under California's version of Medicaid, if someone owns a home and intends to return (even if their health makes it a practical impossibility for them to actually return), the value of the home is not included in your assets to determine eligibility. However if the home is sold, the value of the note used to purchase the property probably would be included in her assets, and as a result Medicaid could be denied.

Stu

Your neglecting the time value of money!

Even though you are paying her interest using your plan, she only has the monthly mortgage amount "in her pocket". By using outside financing she would have the full value of the house right away, which even at CD rates would also pay her 5% interest. Depending on the terms of the loan and prevailing interest rates, she could make mroe OR less using your plan and she'd still have the medicaid problems that we've already emntioned. I would still rethink this.

Phil's right, the average nursing home care stay is 2.5 years. You are better in tune with her medical condition than any of us, but keep that in mind.

As someone else notes, that would imply at least a period of time as a possibility of needing Medicaid to take care of expenses while she has no cash assets other than this note and the related interest in the house. That could have implications on your status in the house as well as her eligibility for Medicaid. The best advice given here is "see an elder lawyer" before you do a thing. There are many possible pitfalls for the unwary, even those who are trying their darndest to do the right thing.

While it appears too late for your mother unfortunately, I'll carp on one my pet topics -- "long term care insurance". Having it in place would have resolved or at least greatly mitigated these concerns for her remaining years and lessened the risk and stress on the rest of the family.

It's that last sentence that scares me. I am admittedly unfamilar with mortgage brokerage.

To whom does one sell a single mortgage note? In addition, who is going to give FMV to a dying old lady that is desparate for funds? It sounds like a "fire sale" scenario. It is similar circumstances that the viatical industry was born out of and time has shown how that ended up.

The note represents a first lean on a house presumably (from OP's details) worth twice the note's face value. There's a market, I'm sure, but not a very liquid one. The shorter the term, the better, of course, but the low LTV seems an attractive re-sell feature. JOE