Inherited half a house - how best to proceed?

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gjgarcia41
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Inherited half a house - how best to proceed?

Post by gjgarcia41 » Sat Aug 06, 2016 12:46 am

Hello all,

I just inherited half of a house in socal. The plan is to buyout the other half from the other party once it is distributed out of the trust. The house was appraised at 470k. We have agreed on a sale price of 235k. I now need to obtain financing but don't know how best to proceed. Here is my current financial situation:

100k liquid in savings
1st mortgage: 38k balance; 5/5 Penfed ARM at 2.5% (currently in year 2 of 5)
Vanguard accounts: 60k between taxable and IRAs
401k: 30k in various funds

So far the only loan i've been qualified for is a Penfed 15 yr for 188k at 2.5%. Estimated cash to close is 55k. Now some other lenders I've been consulting with say that since I already own 50% equity in the home, I could technically refinance for the full 235k. What do you guys think I should do? Go the traditional route with 20% down, or maybe refi the full 235k and payoff my first mortgage? Any suggestions, or referrals for lenders in socal? Next I'm thinking of is BoA because I bank with them.

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Epsilon Delta
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Re: Inherited half a house - how best to proceed?

Post by Epsilon Delta » Sat Aug 06, 2016 1:02 am

Was the 188k your idea or the banks?

I think if you own half the house that's 50% down. A 235k mortgage would be 50% down and should get you at least the same terms as an 20% down mortgage. You might even get 243k (no money to closing) at the same terms. Of course that's just the loan to value. Your income and credit would still have to qualify.

gjgarcia41
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Re: Inherited half a house - how best to proceed?

Post by gjgarcia41 » Sat Aug 06, 2016 1:10 am

Yeah the 188k was my idea. I assumed that I'd have to pay something down and selected that one. But now that I preapproved, Penfed is telling me I can't a loan on those terms because it is for the full amount of the sales price. Doesn;t make too much sense to me but that is why I'm exploring elsewhere.

Leemiller
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Re: Inherited half a house - how best to proceed?

Post by Leemiller » Sat Aug 06, 2016 9:29 am

Why are you paying half appraised value without a discount? Houses generally sell for below appraised value and becuase you are purchasing it the other party saves on realtor and other fees.

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dm200
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Re: Inherited half a house - how best to proceed?

Post by dm200 » Sat Aug 06, 2016 9:33 am

Why are you paying half appraised value without a discount? Houses generally sell for below appraised value and becuase you are purchasing it the other party saves on realtor and other fees.


This makes sense to me as well.

What about a 30 year mortgage? You may qualify for a higher loan amount because the monthly payments (primary indication of affordability) wlll be less on a 30 year loan than on 15.

cherijoh
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Re: Inherited half a house - how best to proceed?

Post by cherijoh » Sat Aug 06, 2016 9:55 am

Leemiller wrote:Why are you paying half appraised value without a discount? Houses generally sell for below appraised value and because you are purchasing it the other party saves on realtor and other fees.


Very likely because the OP has a personal relationship with the person who currently owns the other half of the house! Would you really suggest trying to bargain it down below appraised value if it were a say a sibling that owned the other half? :oops: That would make for some interesting holiday get togethers.

In any case, if the OP and the other heir sold the property then he/she would have half the fees taken out of his/her share of the proceeds.
Last edited by cherijoh on Sat Aug 06, 2016 12:29 pm, edited 1 time in total.

orca91
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Re: Inherited half a house - how best to proceed?

Post by orca91 » Sat Aug 06, 2016 11:14 am

Yes, don't forget the fees.

My sister and I are going through this now. Our parents left the house to us and she is buying me out, so it will be all hers. I/we agreed to take the appraisal amount, deduct 10% off that as if we sold it together now, and then split what's left. That seemed fair to me.

She is in the process of getting a mortgage for part of her buy out. I don't know what terms she's looking at that way though.

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Re: Inherited half a house - how best to proceed?

Post by orca91 » Sat Aug 06, 2016 11:19 am

Side note, but...

gjgarcia41 wrote:100k liquid in savings
1st mortgage: 38k balance; 5/5 Penfed ARM at 2.5% (currently in year 2 of 5).


Why are you holding onto this mortgage? Unless there's a number missing in there, I don't see a point of holding $100k in cash with a little mortgage debt that could be paid off easily.

SuzBanyan
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Re: Inherited half a house - how best to proceed?

Post by SuzBanyan » Sat Aug 06, 2016 12:15 pm

If the other half owner is willing, you may have better luck in dealing with third party lenders if you do this in 2 steps:

1. Buy the other half with money down and a short term balloon note from your half owner

2. Refinance the entire property with a third party.

This may not make sense if the transaction costs of the short loan are high or if there would be downsides to the re-fi.

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celia
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Re: Inherited half a house - how best to proceed?

Post by celia » Sat Aug 06, 2016 12:39 pm

If you are closely related to the deceased, in California, you want to be careful about buying the "whole" house or "half" of it as it will impact your property taxes, which will last longer than any mortgage. If you are the son/daughter or grandchild of the deceased, you can "inherit" the prop 13 basis.

I'm not up-to-date on how all this works. You might want to call the county assessor and ask. It you are inheriting other assets from the estate, you might want to disclaim some of them so that you can "inherit" more than 50% of the house instead. For example, if you will be getting more than $235k in other assets, even IRAs, you might consider disclaiming them in exchange for the other heir disclaiming 1/2 the house.

I am not a lawyer, so if this is a possibility, you should consult a real one. My main point is that you should try to get the property tax rate to carry over to you instead of having it be (partially?) "stepped up" to the current value of the house.
Last edited by celia on Sat Aug 06, 2016 12:40 pm, edited 1 time in total.
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cherijoh
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Re: Inherited half a house - how best to proceed?

Post by cherijoh » Sat Aug 06, 2016 12:40 pm

orca91 wrote:Yes, don't forget the fees.

My sister and I are going through this now. Our parents left the house to us and she is buying me out, so it will be all hers. I/we agreed to take the appraisal amount, deduct 10% off that as if we sold it together now, and then split what's left. That seemed fair to me.

She is in the process of getting a mortgage for part of her buy out. I don't know what terms she's looking at that way though.


Your sister is getting the better half of the deal. You are netting 45% of the home's value (50% of 90 percent of the appraised value), while your sister is getting 100% of the house and only paying you for 45% of the appraised value. So in effect you have shifted the 10% the two of you would have lost to a sale over to her. If you are okay with that that is fine, but it doesn't sound like you thought about the asymmetrical penalty.
Last edited by cherijoh on Sat Aug 06, 2016 12:49 pm, edited 1 time in total.

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celia
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Re: Inherited half a house - how best to proceed?

Post by celia » Sat Aug 06, 2016 12:46 pm

cherijoh wrote:Your sister is getting the better half of the deal. You are netting 45% of the home's value (50% of 90 percent of the appraised value), while your sister is getting 100% of the house and only paying you for 45% of the appraised value. So in effect you have shifted the 10% the two of you would have lost to a sale over to her. If you are okay with that that is fine, but it doesn't sound like you thought about the asymmetrical penalty.

They both realized that if they sold it to another party, they EACH would be out 5% of the value of the house. So I think their deal was fair (and saved the time and toil of cleaning/ fixing up/ listing the house) and possibly having a deal fall through and have to start over. The time and emotional toll has a value too.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

Mike Scott
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Re: Inherited half a house - how best to proceed?

Post by Mike Scott » Sat Aug 06, 2016 12:56 pm

Will the other party / co owner sell it to you on a payment plan without a bank?

CppCoder
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Re: Inherited half a house - how best to proceed?

Post by CppCoder » Sat Aug 06, 2016 2:37 pm

Will the other party / co owner sell it to you on a payment plan without a bank?


My thoughts exactly:

http://realestate.findlaw.com/mortgages-equity-loans/home-loans-from-family-and-friends.html

Of course, it may not be feasible; the other party may want the lump sum now.

orca91
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Re: Inherited half a house - how best to proceed?

Post by orca91 » Sat Aug 06, 2016 3:50 pm

cherijoh wrote:
orca91 wrote:Yes, don't forget the fees.

My sister and I are going through this now. Our parents left the house to us and she is buying me out, so it will be all hers. I/we agreed to take the appraisal amount, deduct 10% off that as if we sold it together now, and then split what's left. That seemed fair to me.

She is in the process of getting a mortgage for part of her buy out. I don't know what terms she's looking at that way though.


Your sister is getting the better half of the deal. You are netting 45% of the home's value (50% of 90 percent of the appraised value), while your sister is getting 100% of the house and only paying you for 45% of the appraised value. So in effect you have shifted the 10% the two of you would have lost to a sale over to her. If you are okay with that that is fine, but it doesn't sound like you thought about the asymmetrical penalty.


Don't you mean she will hold 55% of the home's value while she has and pays a mortgage which paid me the 45%? I don't think some random person is going to pay her back the part she buys me out of. :wink:

She also lives there and wanted to decide whether to sell it or keep it as a rental. I just wanted my part. She buys me out and it's hers to choose what she pleases after that.

Like celia said, I looked at as if we sold now what would we each walk away with. That was fine with me. I wasn't looking to nickle and dime my own sister.

Carefreeap
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Re: Inherited half a house - how best to proceed?

Post by Carefreeap » Sat Aug 06, 2016 3:55 pm

celia wrote:If you are closely related to the deceased, in California, you want to be careful about buying the "whole" house or "half" of it as it will impact your property taxes, which will last longer than any mortgage. If you are the son/daughter or grandchild of the deceased, you can "inherit" the prop 13 basis.

I'm not up-to-date on how all this works. You might want to call the county assessor and ask. It you are inheriting other assets from the estate, you might want to disclaim some of them so that you can "inherit" more than 50% of the house instead. For example, if you will be getting more than $235k in other assets, even IRAs, you might consider disclaiming them in exchange for the other heir disclaiming 1/2 the house.

I am not a lawyer, so if this is a possibility, you should consult a real one. My main point is that you should try to get the property tax rate to carry over to you instead of having it be (partially?) "stepped up" to the current value of the house.


Good tip about Prop 13 status.

Buy the house while it is still titled in the Trust's name. Then the Trustee can quitclaim the property directly to you. Fill out the exemption from reassessment form with your local tax assessor. I did this with my mom's condo. Very easy process.

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celia
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Re: Inherited half a house - how best to proceed?

Post by celia » Sat Aug 06, 2016 4:15 pm

Carefreeap wrote:Good tip about Prop 13 status.

Buy the house while it is still titled in the Trust's name.

You might need to be careful about "buying" it. You want to "inherit" the house for this to work.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

gjgarcia41
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Re: Inherited half a house - how best to proceed?

Post by gjgarcia41 » Sat Aug 06, 2016 11:21 pm

I couldn't buy the house while it was still in the trust. I called numerous lenders and they wouldn't loan me the money because the house was in an irrevocable trust. They all said the house would need to be distributed out of the trust before they would take on the risk.

So the house belonged to my grandfather, who left it to my dad and his brother. But my dad is deceased so half of it went to me, and the other half to my uncle and his wife. I qualify for the grandparent for grandchild exemption. My uncle and his wife qualify for the parent to child exemption. So when it was distributed to all three of us, property taxes were not reassessed. However, a sale from my uncle and his wife to me, will trigger a reassessment of that one half. So it will be reassessed at 50% according to our tax attorney. Still not bad.

Paying half appraised value sounded more than fair to me. I didn't want to do any haggling with my uncle. In fact, we both thought the appraisal was conservative at 470k. It is also fair for him to get his money in one lump sum, as I am living in the property and he is not. So it is a liability for him. And if anything happens to me, he might be screwed. When you think about it, I'm getting the better deal. It is in fine condition, needs about 40-60k in remodeling though, and is located in a nicer neighborhood in the san gabriel valley area.

The reason I still have my 1st mortgage is because I was saving up to buy him out. Figured I'd need at least 50k to close on a 20% downpayment, and I have about 20k in emergency fund. Plus the rate is so low. But now lenders are telling me I don't need to put 20% down, since I own half the house anyway. So I'm kind of kicking myself in the head now.

Carefreeap
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Re: Inherited half a house - how best to proceed?

Post by Carefreeap » Sun Aug 07, 2016 11:40 am

gjgarcia41 wrote:I couldn't buy the house while it was still in the trust. I called numerous lenders and they wouldn't loan me the money because the house was in an irrevocable trust. They all said the house would need to be distributed out of the trust before they would take on the risk.

So the house belonged to my grandfather, who left it to my dad and his brother. But my dad is deceased so half of it went to me, and the other half to my uncle and his wife. I qualify for the grandparent for grandchild exemption. My uncle and his wife qualify for the parent to child exemption. So when it was distributed to all three of us, property taxes were not reassessed. However, a sale from my uncle and his wife to me, will trigger a reassessment of that one half. So it will be reassessed at 50% according to our tax attorney. Still not bad.

Paying half appraised value sounded more than fair to me. I didn't want to do any haggling with my uncle. In fact, we both thought the appraisal was conservative at 470k. It is also fair for him to get his money in one lump sum, as I am living in the property and he is not. So it is a liability for him. And if anything happens to me, he might be screwed. When you think about it, I'm getting the better deal. It is in fine condition, needs about 40-60k in remodeling though, and is located in a nicer neighborhood in the san gabriel valley area.

The reason I still have my 1st mortgage is because I was saving up to buy him out. Figured I'd need at least 50k to close on a 20% downpayment, and I have about 20k in emergency fund. Plus the rate is so low. But now lenders are telling me I don't need to put 20% down, since I own half the house anyway. So I'm kind of kicking myself in the head now.


Meh, these things can get complicated and no transaction is perfect. Inheriting 1/2 your grandparents' Prop 13 sounds like a home run. I'm guessing with a current value of almost $500k you're inheriting a basis of around $80k or about $800/yr + $235k or about $2500 by the time all those bonds and other "extras" for a total tax of around $3,200? Not bad. Keep that appraisal so that if the County over assess you have support for your price. They will generally back down for a formal appraisal.

I'd lock in a nice big 30 year fixed rate loan with some cash back to you to do your remodel. Rates are still really low and I'd take advantage of that.

Congrats on the great opportunity. My husband's family had a nice home in San Marino. Neither of the sons could afford to buy out the rest of the family and there was substantial damage to the house from the Sylmar earthquake back in 1972(?). It got sold to a developer who put in about 40 homes around the old family house. It looks a little weird now but that's still a lovely area with some wonderful open space, parks and cultural attractions.

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Re: Inherited half a house - how best to proceed?

Post by Carefreeap » Sun Aug 07, 2016 11:49 am

celia wrote:
Carefreeap wrote:Good tip about Prop 13 status.

Buy the house while it is still titled in the Trust's name.

You might need to be careful about "buying" it. You want to "inherit" the house for this to work.


You can buy too not just inherit. It's called a parent to child or grandparent to child transfer. Child to parent transfers are also allowed but oddly enough not from grandchild to grandparent.

My brother "bought" my childhood home from my parents who bought the house in 1963. He acquired their prop 13 basis of $700/yr. But being the financial trainwreck he is, he lost the house in foreclosure in 2009. I've written about him before. He promotes himself as a financial planner. :oops:

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