Buying a house from a relative

are they really going to be in the house for 25 years? What happens if they move? They paid 150k, now they have 115k or maybe less if prices have fallen. What happens if any of the parties dies? Or changes their mind? Or is injured and cant pay, will the 'lender' really want to put them on the streets? Or they have an atgument, and the buyer goes bankrupt? Looks like a

*lot* of questions for all these circumstances would need to be answered in advance and some of them would causea real problem (bankruptcy or long term unemployment for example). How legally enforceable would this be? Especilally on the heirs, who might not want to be part of this arranement. Is it in the will(s)? What happens if he defaults after x years in? What proportion of the house sale in returned to the seller? Is that a proportion of the original sale prices? Orthe new one? What happend if it fell in price?

I think the lender is showing a lot of faith in what will or could happen to a person over 25 years, either due to what they do, or due to circumstances beyond their control. Many things can happen, and if its a mortgage co, then thats something they can take in their stride, even down to maybe someone defaulting. Not so your friend who "is happy with the idea of getting a fixed monthly income for the next 25 years" ..are they happy with the *huge* risk they are taking in return? I suspect they dont realise it.

As I said, the seller understands the risks on that side, and they are happy with it. The heirs are not relevant - the sellers opinion is that it is their house, to do with as they wish. The heirs are financially secure themselves, they are not relying on a sudden lump sum in the event of a death.

The buyer is planning on being in the house for a considerable period of time - 10 years as a reasonable minimum. It is the area that they want to have children and bring them up, they have a fiance who also wants to stay in the area. The plan in the event of selling the house is that the original owner gets the remainder of the loan repayed to them (if 50k has been repaid already, then 100k of the sale price is given to the original owner, the remained to be kept by the current buyer). The buyer is happy to take the risk of house prices dropping over that period of time (bearing in mind that renting a similar house would cost a fair bit more than 500 a month - worst case is that the house is worthless, they lose all the money paid in to date, and it is as if they had been renting for that period of time).

As I said in the original post, I'm not looking for advice on the "what happens if they have an arguement" - everyone involved is satisfied regarding that side of things. What they are more interested in is the income tax minimisation side of things. Sugestions on how to do this with paying the absolute minimum tax legally possible, the need to become a credit broker to handle the repayments, that side of things.

In message , Simon Finnigan writes

Eh? ONE side does, (the purchaser) and the vendor loses out dramatically.

But spread over 25 years.

Bully for him! (At the expense of the vendor who loses interest n £115,000.)

But they could probably get more form £115k

This is an unbelievably bad deal for the seller. They need professional advice and they need it now. They seem to think that because they are 'selling' (ahem) the house for more than its worth then they are getting a good deal whilst in effect they are just getting a meansly 2.16% return on their capital fixed for 25 years. For the seller to get a decent return then the loan would need to be repaid in about 8.5 years.

Its a rip off for the seller. What happens if the buyer doesnt pay and the house is re-possessed and sold for less than the outstanding loan? What if the buyer wants to move and the amount owed exceeds the sale price if the house etc.,?

No.

No, but the meansly interest hidden as capital might get picked up, but unlikely.

That if the seller takes proper advice they will pull out of it, which I hope they do. As they are not getting a lump sum I assume the property is not the main home, in which case increasing the sale price to £150k will be possibly increasing their Capital Gains Tax bill on the sale.

If the vendor took £115k in cash they could get an annuity that would pay more that £500 per month (depending on their ages) for the rest of their lives, not just 25 years. A reasonably balanced investment portfolio would likely do much better over the same period .

In message , Simon Finnigan writes

Do you think they may be blinded by the statement "and financially both sides win big time" which is blatantly untrue ?

Ok, if the sale takes place over a period of less than 8.5 years, this is reasonable for the vendors.

The 'buyer' is happy taking the risk? What about the vendor who might not get their £150K?

As far as the seller is concerned, they are happier with the above proposed transaction han selling the house through the normal channels. they have more than enough money invested, pension fund etc to live very comfortably, this would be a little extra. And they would rather help out the buying relative than make a bigger profit on the sale.

As I said, this would be the worst case - not sure how a properly insured house could become worthless - you got any suggestions? The buyer would be bound to pay the 500 a month to the seller regardless of the condition of the house - the contracts would be drawn up to ensure that this would happen. and the buyer and seller are close family, I would bet my own house that there would b no risk of the buyer trying to rip the seller off by not paying up. You can say all you want about family arguments etc, but that is not what I am asking. what I am looking for is suggestions on how to minimise any tax issues etc. As stated in the original post, and numerous times afterwards, advice like yours above is not what these people want. They have decided that something similar to the above would be the best way to proceed with the sale of the house - the figures quoted are rough numbers, the 500 could go up or down depending on other factors (changing the length of the "loan", the buyer wanting a higher income for a shorter period of time) but it is the general idea that they like.

But the seller wants to help out the buyer. They know that they could get more money if they take the full value of the house and invest, but they are very secure financially. The seller knows full well the situation and has decided that they would rather help this relative out than get a better price for the house. This pretty much negates much of your advice. As was stated in the original post, both parties understand the situation, both are happy with the deal (and yes, they have both looked at the alternatives). The seller decided to put kindness ahead of making an excessive profit.

In message , Simon Finnigan writes

# Undeclared subsidence for one.

I beg your pardon. I think I am the only one to have answered the tax question and credit licence question aren't I ?.

I any event, if you ask in this group for advice, you get what you get and it would be wrong for me not to point out that your assertion that this is a good deal for both sides is incorrect.

>

In message , Simon Finnigan writes

So now you accept that this isnt a good deal for the vendor? How does it negate my advice? It reverses your assertion that " financially both sides win big time". In fact

Fine, so how do you explain your assertion that this meant the vendor would 'win big time'?

"Simon Finnigan" wrote

How does that square with the fact that, if the buyer needs to "move-on" (or defaults & repossession/ sale is required) within the next 5 years or more, then the deal is actually very BAD for the buyer?

Imagine he wants/needs to sell up & move on after just one year, and suppose the value of the house has even gone up to 120K. Now, the buyer needs to pay-over the entire 120K *plus* a further

24K (already having paid 6K during the year). Where does he get the extra 24K from?

The point is, if the arrangement ends

*early* (eg within 8.5 years from John's calc), the seller wins and the buyer loses.

But if the arrangement ends *later* (eg after 8.5 years from John's calc), then the buyer wins and the seller loses.

In other words, the seller is only "doing the buyer a favour" IF the arrangement does last for at least around 10 years...

Awww. That's nice.

...regardless of sheer inability to pay, bankruptcy, illness, divorce....?

IIRC divorce rates are around 50% ....and this marriage hasnt even taken place yet!

Simon Finnigan wrote

I would apply the principle I have always used when my children have asked to borrow money. The sums have varied between £10 for my son in law to buy drinks at a free company dinner(!), and two requests from my son for £5000, then £10,000 for various business ventures in Australia.

I use the principle that I will not lend them more than I can afford to GIVE them, and make them a gift of the money instead.

I gave the £10, and they insisted on paying it back.

I refused the 5G and 10G.

When he finally started his own business and was struggling he asked to borrow A$500. I sent him A$600, and told him to keep it, but that he would get no more.

He now has a business in which he is successful enough to employ others, but I will never see the £250 I sent, nor do I care.

I wouldn't touch the deal which the vendor is considering with a barge pole. It is the cause of so many family break-ups. :-(

Simon Finnigan wrote

But he is teaching the relative that there is such a thing as a free lunch! There isn't.