Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

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BusterMcTaco
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Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by BusterMcTaco » Wed Jul 11, 2018 7:19 pm

My friend has what seems to be a "unique investment opportunity" (which is a red flag to me), but seems to be legitimate. I wanted to get your takes on it.

An older lady (~80) listed her home in a VHCOL area at a significant discount. It was listed for somewhere between 33-40% of it's market value. My friend made an offer (at asking price), and the lady has now countered with a slightly higher offer. My friend can make the finances work without too much trouble.

The arrangement would be a Life Tenancy/Life Estate Deed, which I have never heard of. The idea is that the seller would have the right to live in the home, rent free, until she dies. At that point my friend would take over sole ownership, and it seems to come with a step-up in basis (which will be very large because of the discounted sale price).

It seems like a great deal. No contingencies are being waved, and she will of course work out the details with a real estate/estate attorney (she has someone who is both). The seller doesn't want a reverse mortgage because she wants an owner who is interested in preserving the house, and apparently either doesn't have heirs or has no interest in leaving anything to her heirs (this is speculation on the agent's part).

Is there anything else she should be considering? Seems like a too-good-to-be-true opportunity.

These are the details I'm aware of but if there are any further details necessary, I can find them out.

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Pajamas
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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by Pajamas » Wed Jul 11, 2018 7:27 pm

BusterMcTaco wrote:
Wed Jul 11, 2018 7:19 pm
My friend made an offer (at asking price), and the lady has now countered with a slightly higher offer.
I don't play games like that and would simply walk away. That's a red flag warning about all sorts of troubles and hassles to come.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by BusterMcTaco » Wed Jul 11, 2018 7:30 pm

Specifically the counter? I'm wondering about that, too. The counter was only 6% higher

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by motorcyclesarecool » Wed Jul 11, 2018 7:31 pm

Sounds like the plot to a psychological thriller.
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by Whakamole » Wed Jul 11, 2018 7:33 pm

I'm not going to give an answer, but there's a great case of someone setting up a deal like this with a then-90 year old woman. The deal was structured differently, the buyer paid a certain amount per month, and would get the property when she passed.

She ended up living until 122, outliving the buyer of the life estate.

https://en.wikipedia.org/wiki/Jeanne_Calment

Carefreeap
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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by Carefreeap » Wed Jul 11, 2018 7:37 pm

These are pretty common in France but not that common for strangers here in the U.S. They are usually used here to keep a remaining (second) spouse in place.

The biggest problem is it sounds like your friend is speculating that the property will continue to appreciate. It might not.

Anything can be negotiated but the life estates I dealt with had the maintenance, taxes and insurance (re)paid by the occupier not the owner.

What happens to the house if the occupant moves into assisted living? Is the agreement extinguished or can she rent it out as long as she lives?

Ultimately the one my FIL created for his third wife failed. She couldn't afford to make the payments on the existing mortgage which was financed via a family trust. Although it destroyed the relationship between DH and her I figure we dodged a bullet. She's still alive 17 years later. I cannot imagine the demands she would have made of us over those years. She had very high expectations.

Your friend better work with an attorney who had done a few of these life estate agreements. There are so many ways it can go wrong.

ETA: I just saw the above post. That's a loooooong time to wait for your investment to mature!

BusterMcTaco
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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by BusterMcTaco » Wed Jul 11, 2018 7:46 pm

Carefreeap wrote:
Wed Jul 11, 2018 7:37 pm
The biggest problem is it sounds like your friend is speculating that the property will continue to appreciate. It might not.
This is SF Bay Area, and she's getting it for 60% off, so I don't think this is a huge concern. Even in 2008 SF dipped only 20-30%? Check me on that, because I'm going by memory.
Anything can be negotiated but the life estates I dealt with had the maintenance, taxes and insurance (re)paid by the occupier not the owner.
Indeed, that's a big question. If she ends up paying insurance and property taxes on this place for 30 years, then that could certainly compound the issue of a drop in value in a market crash.
What happens to the house if the occupant moves into assisted living? Is the agreement extinguished or can she rent it out as long as she lives?
An excellent point to cover in the agreement, but the intention has been expressed that my friend would get ownership at that point, although it should be checked how that will affect the step-up in basis on the seller's death.
Ultimately the one my FIL created for his third wife failed. She couldn't afford to make the payments on the existing mortgage which was financed via a family trust. Although it destroyed the relationship between DH and her I figure we dodged a bullet. She's still alive 17 years later. I cannot imagine the demands she would have made of us over those years. She had very high expectations.
What were the specifics of that arrangement if you don't mind sharing?

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Pajamas
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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by Pajamas » Wed Jul 11, 2018 8:08 pm

BusterMcTaco wrote:
Wed Jul 11, 2018 7:30 pm
Specifically the counter? I'm wondering about that, too. The counter was only 6% higher
Yes, exactly.

I would also want to know why she didn't get a reverse mortgage, instead.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by BusterMcTaco » Wed Jul 11, 2018 8:12 pm

Pajamas wrote:
Wed Jul 11, 2018 8:08 pm
I would also want to know why she didn't get a reverse mortgage, instead.
That was covered in the OP. It was a handwavy wanting to make sure the place was taken care of.

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Pajamas
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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by Pajamas » Wed Jul 11, 2018 8:16 pm

BusterMcTaco wrote:
Wed Jul 11, 2018 8:12 pm
Pajamas wrote:
Wed Jul 11, 2018 8:08 pm
I would also want to know why she didn't get a reverse mortgage, instead.
That was covered in the OP. It was a handwavy wanting to make sure the place was taken care of.
Yeah, that's a red flag, too. If she weren't going to be living in it for the rest of her life and were just selling it outright, it might not be. There's still some speculation on the agent's part and I would want to discuss it with the owner herself. If her primary concern were passing the house into loving hands, then she would not be countering at 6% over the asking price. She would also want to meet the potential buyer in person before agreeing to a sale. So I'm not buying all that.
Last edited by Pajamas on Wed Jul 11, 2018 8:19 pm, edited 1 time in total.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by BusterMcTaco » Wed Jul 11, 2018 8:18 pm

I'm advising my friend to find out exactly why. I could venture a guess that she wants to see it sold in her lifetime to someone who will take care of it after she's gone (since she'll have no control once she dies, and maybe some unloved heirs would squabble over and eventually get it). But it's probably better to get it from the seller's mouth than make up the reason for her.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by BusterMcTaco » Wed Jul 11, 2018 9:54 pm

Assuming it's a bogus reason for not taking a reverse mortgage... Where could the scam be? I'm just not seeing it...

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by adamthesmythe » Wed Jul 11, 2018 10:21 pm

Seems to me a better investment opportunity is to just buy a house with a mortgage. You get leverage and you get a place to live.

When I buy a house I do so because I want to move in next month, not an indeterminate number of years in the future.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by BusterMcTaco » Wed Jul 11, 2018 10:25 pm

She owns a home. This is an investment and should be viewed as such, considering risk versus reward.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by bsteiner » Wed Jul 11, 2018 10:39 pm

It's similar to buying a building where there's a tenant with a lease at a rent that's less than what the rent would be for a new tenant, except in this case you don't know how long she'll live. So there's the risk that she could live longer than average (and the possibility that she could die sooner). There should be some price that a buyer who can afford to take this risk would be willing to pay, though it would probably reflect a discount for the uncertainty.

While life estates and remainders are awkward, they've been around for at least hundreds of years. The life tenant owns the property for life, and can sell, lease or mortgage her interest (if she can find a buyer, tenant or lender). The remainderman/woman owns the remainder interest, and can sell or mortgage it (if he/she can find a buyer or lender); and when the life tenant dies, the remainderman/woman gets possession. It's similar to a lease except it's for a person's life instead of a fixed term.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by Carefreeap » Thu Jul 12, 2018 5:12 pm

bsteiner wrote:
Wed Jul 11, 2018 10:39 pm
It's similar to buying a building where there's a tenant with a lease at a rent that's less than what the rent would be for a new tenant, except in this case you don't know how long she'll live. So there's the risk that she could live longer than average (and the possibility that she could die sooner). There should be some price that a buyer who can afford to take this risk would be willing to pay, though it would probably reflect a discount for the uncertainty.

While life estates and remainders are awkward, they've been around for at least hundreds of years. The life tenant owns the property for life, and can sell, lease or mortgage her interest (if she can find a buyer, tenant or lender). The remainderman/woman owns the remainder interest, and can sell or mortgage it (if he/she can find a buyer or lender); and when the life tenant dies, the remainderman/woman gets possession. It's similar to a lease except it's for a person's life instead of a fixed term.
Hmm, I guess I wouldn't use the term "own" but I get the gist that in order to remove the interest a quitclaim or some other doc needs to extinguish the life estate's interest.

I'm trying to wrap my head around a scenario whereby a life estate tenant would/could put up their interest as collateral. Obviously the life estate holder would have to have income to make payments but If s/he defaults then the lender would have the right to assume the interest of the life estate holder. But until when? Until the life estate holder dies? The option would be to rent out the property or re-sell the interest? Have you actually seen something like this in real life?

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by Carefreeap » Thu Jul 12, 2018 5:45 pm

BusterMcTaco wrote:
Wed Jul 11, 2018 7:46 pm
Carefreeap wrote:
Wed Jul 11, 2018 7:37 pm
Ultimately the one my FIL created for his third wife failed. She couldn't afford to make the payments on the existing mortgage which was financed via a family trust. Although it destroyed the relationship between DH and her I figure we dodged a bullet. She's still alive 17 years later. I cannot imagine the demands she would have made of us over those years. She had very high expectations.
What were the specifics of that arrangement if you don't mind sharing?
The idea was that Wife #3 could stay in the house as long as she wanted. But it was clear that she didn't understand (or didn't want to understand) her responsibilities. There was almost no equity in the house since the family loan was interest only and they had completed an expensive remodel (which entailed a second loan from the Family Trust). She couldn't afford the payments and didn't understand why she would have to make payments if she wasn't getting the income from the Family Trust. BTW this situation was THE very reason for having a Trust to protect from subsequent spouses.

FIL further confused matters by stating that Wife #3 could sell the house and invest the proceeds in another house and that DH was to supplement her expenses from his own funds. :oops: Of course that wasn't legally enforceable and it was very hurtful to DH. Wife #3 had two able bodied sons and if she needed help it should have come from them not DH.

Both FIL and Wife #3 were in/approaching 70 and the house is a three story house in the mountains of So. CA a good hour from medical help. It was unsuitable for someone who had bad knees and medical issues. These amendments to FIL's Trust were done while he was getting treatment for cancer which had metastasized. We're not sure if FIL wasn't thinking straight or just did it to shut up Wife #3.

She wasn't left homeless. FIL had been invading the principle of the Trust (comfort clause) for several years and due to mess up with a former Trustee (another long story) invaded the Trust to the tune of $100k and used it to put a down payment on a condo for wife #3 in Palm Desert. Needless to say there were a lot of hurt feelings over the way things were handled.

ETA: my father has a life estate in a house which he and his girlfriend owned (and is now titled in their Trust). It's going to be an interesting situation over the next several months as they sort out their living situation. Dad recently was diagnosed with an aggressive squamous cell carcinoma is going to lose an eye. With his other health issues I think he will be legally blind. This makes their current situation impractical (semi-rural location on 2.5 acres) and medical care an hour plus. He's a Medicaid recipient and I'm just wondering how all of this is going to play out. He can't have more than $1500 in assets or he loses his benefits. Life estates are an exempt asset but if they sell it's going to be a whole new ball game.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by BusterMcTaco » Thu Jul 12, 2018 5:49 pm

That sounds way more complicated than it needed to be. Yikes.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by Carefreeap » Thu Jul 12, 2018 5:57 pm

BusterMcTaco wrote:
Thu Jul 12, 2018 5:49 pm
That sounds way more complicated than it needed to be. Yikes.
Lol, they usually are!

I'm sure B. Steiner has examples of where they worked out. But I don't think that most do. Often people stay in houses longer than they really should and the house falls into ruin because they don't have the ability, money or interest to maintain it. It's hard for the interests to align in that one party would be investing in a property they don't really own nor will their heirs and from the fee owner's point of view it's hard to get interested in investing in capital improvements for a asset that you're not getting any income from.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by dm200 » Thu Jul 12, 2018 5:59 pm

Who is responsible for maintenance, repair, insurance etc,?

Yes - it may be 60% off value - but you cannot have any use or associated benefits for, possibly, many years.

I doubt you could sell it during this period.

"seller" could be disable, have dementia, in assisted living for many years

Could any of her creditors create difficulties?

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by bsteiner » Thu Jul 12, 2018 9:56 pm

Carefreeap wrote:
Thu Jul 12, 2018 5:12 pm
...
I'm trying to wrap my head around a scenario whereby a life estate tenant would/could put up their interest as collateral. ... Have you actually seen something like this in real life?
Life estates are awkward, so we try to avoid them. What happens when the property needs major repairs? If the remainder interest is vested, it's in the remainderman's estate. If it's not vested, there's no set of persons who can collectively sell the property. Instead of leaving a life estate to A and remainder to B, it's generally better to leave the property in trust so there's a trustee who can pay for major repairs or sell the property.

No one will lend against a life estate because the mortgage vanishes when the life tenant dies.

But we've had cases where tenants with long-term leases were able to mortgage their leasehold interests.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by Carefreeap » Fri Jul 13, 2018 12:07 pm

bsteiner wrote:
Thu Jul 12, 2018 9:56 pm
Carefreeap wrote:
Thu Jul 12, 2018 5:12 pm
...
I'm trying to wrap my head around a scenario whereby a life estate tenant would/could put up their interest as collateral. ... Have you actually seen something like this in real life?
Life estates are awkward, so we try to avoid them. What happens when the property needs major repairs? If the remainder interest is vested, it's in the remainderman's estate. If it's not vested, there's no set of persons who can collectively sell the property. Instead of leaving a life estate to A and remainder to B, it's generally better to leave the property in trust so there's a trustee who can pay for major repairs or sell the property.

No one will lend against a life estate because the mortgage vanishes when the life tenant dies.

But we've had cases where tenants with long-term leases were able to mortgage their leasehold interests.
Thanks. I agree they are awkward and don't work out the way they were intended for the same reason(s) you gave.

Another personal life estate story; I suspect that my DH's grandmother had an informal life estate with her relatives. She came from a prominent So. CA family. When her engagement didn't work out she chose to stay with her parents and took care of them in their old age. After they died she remained in residence. Since her brother married into a wealthy East Coast family and spent a lot of time overseas there didn't seem to be any financial pressure to sell the family estate. She never did marry but eventually adopted two children and raised them there. Although her brother died his heirs seemed to have honored the arrangement as they seemed to have plenty of money of their own. After her children left the home, she was disabled with a severe stroke. She lived another 8-10 years. About two years before she died the Sylmar earthquake hit causing extensive damage to the family home. Neither she nor her children had the funds to repair the home. After she died the family estate was sold to a developer. I think DH's father was disappointed as I think he thought he was supposed to inherit the house. I'm not sure if he didn't understand the ownership situation or if the family changed their mind after he had a contentious divorce with his first wife. It also sounds like wife #2 had some expectations about being "Mistress of the Manor". But it's clear that there was no way he could have afforded to buy out his brother and the other relatives and paid for the capital repairs needed for the earthquake damage. So many unrealistic expectations. A real lesson to those who think they are going inherit a fortune!

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by Pajamas » Fri Jul 13, 2018 12:11 pm

Carefreeap wrote:
Fri Jul 13, 2018 12:07 pm
So many unrealistic expectations. A real lesson to those who think they are going inherit a fortune!
Yes, but that story would make a great novel and television miniseries and might be worth more than the house would have been. Unrealistic Expectations might be an appropriate title for it.

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Re: Life Estate Deed/Life Tenancy deal at steep discount--too good to be true?

Post by Carefreeap » Fri Jul 13, 2018 2:44 pm

Pajamas wrote:
Fri Jul 13, 2018 12:11 pm
Carefreeap wrote:
Fri Jul 13, 2018 12:07 pm
So many unrealistic expectations. A real lesson to those who think they are going inherit a fortune!
Yes, but that story would make a great novel and television miniseries and might be worth more than the house would have been. Unrealistic Expectations might be an appropriate title for it.
LOL, I'd have to change the names to protect the guilty! :P

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