Has some of the in-laws over for supper last night, wife’s sister and her husband. Their daughter, Abby,(our niece) is in the process of buying a house.
Older lady (friend of my B-I-L’s mom) who owns the house and moving to a senior living complex. Wants to sell it on contact (15 years) due to tax reasons, yearly income limits, other reasons, has a “handshake” agreement for Abby not to pay it off early and offering a vary favorable interest rate because of this. We all agree it is a very good price and terms and Abby can afford it.
The question was bought up what would happen if the lady passes away before the contract is fulfilled? Our niece is budgeting for a 15 year contract and the favorable interest rate the lady is offering.
If the lady passes away 5 years into the contract, what happens? A balloon payment of the 10 years left on the contact? The lady’s heirs continue the contract, even though the estate would/should be settled? Abby can afford the house with the current terms but a tradition bank loan and current interest rates would be pushing it for her financially.
I sure the details will be laid out in the fine print, just more of a curiosity and a “what if” question on the weekend and if there is a standard answer.
You mentioned a “handshake” agreement. Anything not written down can be, practically speaking, ignored by the estate’s executor and the heirs. Which outcome will almost certainly be to their advantage, not Abby’s.
Separately to the above:
If Abby takes title immediately the loan is an asset of the estate. If this is some flavor of “rent to own” contract Abby has her ass hanging out a mile.
A separate issue not considered is what if the old lady becomes mentally infirm instead of dead. And now her family gets involved and becomes concerned that this sweetheart below-market deal was foisted off on the dear old innocent Mom by that scheming Abby chick? Of course by now Mom’s too out of it to offer an opinion worth listening to.
My late first wife was an estate attorney, although not a real estate specialist. In my second order self-proclaimed-expert-by-osmosis opinon, all of this has
Danger Will Robinson!! Danger!!
written all over it. Not because the old lady means ill, just that this is not an area amenable to amateur homebrew solutions. A disastrous end is far more likely than a happy one unless experts get involved now before anything is signed or any money changes hands.
I think the handshake agreement is for for Abby to not pay it off early , presumably because the seller want to spread out the money for tax or benefit reasons ( $10K a year for 15years will affect those differently than $150K all in one year. ) That not being written down will bite the seller, not Abby so I expect that it actually will end up in the written contract.
I just find the ideas of “handshake” and “real estate” to be such a horrifyingly bad combo that it all but guarantees there are other horrors in the deal that the OP doesn’t know about or isn’t sharing. Not out of malice or shame, just unawareness.
I do know that informal intrafamily intergenerational real estate “deals” and non-market loans were a common feature of some communities a hundred years ago. So might sound pretty ordinary to the old lady based on stuff she knew her aunts, uncles, and grandparents were doing when she was a child.
Today is not that world. And the strong family and local ties that made those sorts of deals less than universally dangerous in the olden days are pretty much gone.
I have a slightly different experience than you - in mine, the “handshake agreements” don’t have to do with the actual money. The seller sells the house for $X and gets $X - but the seller dropped the price from $X plus $Y because the buyer ( a family member or friend) agreed not to sell the house for some period of time or to keep the front yard planted with tulips. And those tend to burn the seller when the buyer sells the house for $X plus $Y ( or more ) or digs up the tulips six months later.
Definitely a bad idea - but it isn’t always the buyer who gets burned.
There could (and should) be a contingency written into the contract that specifies what happens in case of the death of either party to the contract. It wouldn’t hurt for the owner to put it into her will as well.
My mom periodically lent money to me and to my brother for home repairs. The idea was that we could pay her higher interest on the amount than she’d get from a bank (the money was from retirement accounts that she’d have otherwise put in money market or CD accounts) and it would be less than we’d pay on a commercial loan. We had our agreements in writing, but not notarized or drawn up by a lawyer, and her will specified that any outstanding amounts at her death would come out of that heir’s share of her estate. In this case, I’d want a lawyer involved in drawing up a written contract.
I guess my biggest concern would be… whose name is on the deed during the fifteen year payoff period? Not that it would necessarily change the outcome of a lawsuit, but it would perhaps change which side is going to have to initiate the lawsuit to get relief (and so will have the higher bar to entry in any dispute).
Yes, lawyer(s) are involved so I know everything will be okay for both parties. Just wondering what the standard practice is in this situation.
In doing property searches for owners and tax information I see both “contract holder” and “deed holder” listed for the same property. I would assume the contract holder becomes the deed holder once the contract is fulfilled or paid off.
It looks to me as if “Older lady” is essentially lending Abbey the money to buy the house at some favourable interest rate.
As said above, it is essential to have a legal framework covering all possible eventualities. This would work both ways: Older Lady could die or become legally incompetent, or Abbey could default on the payments. What will happen if Abbey is run over by a bus?
One thing to keep in mind is it can be costly and difficult to settle any disputes. Even if she’s on solid legal footing, it will cost a lot for lawyers and take a lot of time to get things worked out. If it comes to that, it would probably be better for her to get financing of her own and pay off the loan rather than fight in court to keep the existing deal.
In most jurisdictions, contracts for the sale of real property must be in writing and encumbrances (mortgages) must be recorded with the state or they’re unenforceable.
Is the deed being put in Abby’s name? Or is this like a “rent-to-own” situation where the deed stays in the current owner’s name and will be transferred to her after 15 years of payments?
With a traditional house sale, the house is put into the new owner’s name and the mortgage company has a lien on the house. Once the mortgage is paid off, the lien is removed. If Abby’s house situation is like this, then the heirs could possibly ask for the loan to be paid off immediately. That’s a typical clause in mortgage agreements, but usually there are some conditions about when that demand can be made.
If the house stays in the original owner’s name while Abby is paying it off, that would be riskier. If the heirs backed out of the agreement, she would have to sue to get the house put in her name. It sounds like she would have the upper hand legally, but things are never certain when the courts get involved. It could take years and tens of thousands of dollars to get resolved.
The estate being settled, doesn’t mean the contract ends. The contract would be an asset of the estate that could be distributed to the heirs, the contract wouldn’t necessarily be cancelled, unless there was a change of control provision or other such term that contemplated that the contract would end upon the death of the financing party.
A> All contracts involving real estate MUST be in writing. B> If everyone enters into a 15 year contract, the executor must honor the 15 year contract unless there is a clause to the contrary. It’s not your fault if the other person dies.
She does have a lawyer. I have no questions about the contract itself as I think it needs/will be filed at the courthouse.
I understand if Abby dies her estate will need to pay off the contract or forfeit the house due to nonpayment.
My question was, what if the contract holder dies? As mentioned in the previous post to yours is that the executor must honor the contract. But what if there are 10 years left? That would mean the estate would be open for 10 more years and I would assume that they would want it settled the estate long before then.