Here’s the situation: My husband and I currently have a primary residence in North Dakota which we have a mortgage on (monthly payment is $823). We plan to retire in 15 years. For the past year we have been looking at property for sale with or without a residence on it to have set up as our primary residence in retirement. This last week we found it. Its perfect, everything we want for our family, upstate New York, 5 acres, stream, surrounded by apple & peach orchards, 1/4 from Lake Ontario, across the street from a state park, 15 minutes from Amish Country, huge barn, etc. Currently there are renters in the property and it is For Sale By Owner. The property is selling for $155k and the current owners bought it for $145k 3 years ago. We believe it is reasonably priced. Our credit score is between 760-770 and have a low debt ratio (no car payments, no credit debt, one small 3 year loan under 7k that we got for our parents to consolidate their loans and they pay on time.) I think we have formed a good repore with the sellers. This is their second home as well, they live out of state.
I have talked to a handful of banks and we are definitely preapproved. The down fall is that they are considering this an investment property because there are currently renters in the home whom we have agreed that they will stay for no longer than a year, then becoming our vacation home until we can retire there. Is there anyway around this “investment” classification that the lenders are calling it. For 14 out of the 15 years it will be a vacation home until we can make it our primary residence. With the lenders classification the lending falls under more strict rules. For example we will have to have 20% down, plus closing costs, totaling about 42k due at closing. That’s a lot of money! But we want to get in now because I know as we speak mortgage lending practices are tightening and new rules are being put into place. With this and inflation we want to get in now before it will cost us even more money. Our plan would be to have it paid off by the time we retire.
Please anyone with any ideas/advice would be helpful. We are open to non-traditional ideas like “assuming a loan” or the like.
Here is what we have been given by the banks thus far:
30 year fixed
pay 2 points
6.625 interest rate
20 % down
Payment around $1070 a month
Thanks in advance.
I would like to add a few more details and thank you to all who have helped in answering my question thus far.
The current owners own the house in full, so there is no mortgage. Also, I know they want to sell this house so they can use the money from equity for their new house. We haven’t put in an offer yet but they have already told us they are firm on the price, 155k and that they have already reduced it by 15k. I do believe it is a great deal at 155k.
Hope these minor details help. Keep coming with the good advice.
Landlord
March 27, 2010 at 7:19 am
There is absolutely no way. You can not rent out a “second home”, it has to be vacant when you are not there.
You can buy it now as an investment, and refinance it later when you no have tenants.
I Buy And Sell Houses
March 27, 2010 at 7:53 am
There are lots of ways.
It’s true that, given what you’re trying to do, the banks would consider it an investment property. Frankly, you’ve been given a very reasonable rate for investment property. I realize that $42,000 is a lot of money, but for a traditional purchase, that’s about what you’d need.
Before I get into the different ways, are you really sure the price is good. If they bought 3 years ago, it’s more likely that the price has gone down than that it’s gone up. Contact a Realtor in the area to give you a CMA. (Yes, they’ll do it, even if you’re considering buying FSBO.) See if the price you’re being quoted is reasonable. Sounds as if the sellers are just trying to get out without losing money, and there isn’t much downside negotiation potential. My guess is that the property’s overencumbered. So: Get a CMA before doing anything else.
OK. Now for the different ways to buy.
Option. Pay an amount of money to obtain an option to purchase the property. Once the renters move, you exercise your option and purchase the property.
Purchase “subject to” the existing mortgage. This is similar to your “assuming a loan” idea except–as I’m sure others will point out–the seller’s loan undoubtedly is not assumable. When you purchase “subject to,” the sellers deed the property to you. You make their mortgage payments. In a year, you refinance the property (as a second home), cashing the sellers out. Note: This will violate the lender’s “due on sale” clause. That’s not illegal, but technically the lender could call the loan due and payable immediately. They seldom do, but it could happen.
Land Trust. The sellers move the property into a land trust. You’re named a beneficiary of the trust. The trust documents provide that within a certain period of time the property will be brought out of the trust and sold for fair market value to you. However, although it must be sold at fair market value, there are ways to construct the documents (using a predefined “seller contribution”) to ensure that the sellers receive the equity they’re seeking. One advantage to a land trust is that it doesn’t trigger the due on sale clause. And it protects you against any liens, suits, or judgments against the sellers. For more information on that, go to http://www.landtrust.net.
There are a lot of other ways as well, but you probably can find a satisfactory solution in one of those three.
Hope that helps.
Valuation Expert
March 27, 2010 at 8:46 am
The lenders are mainly concerned that it is not your primary residence. Many loan programs aren’t so much concerned with it being rented, just that it is not your primary residence.
As far as the numbers go, you are seemingly getting a good deal. I grew up in ND and appraise real estate in AZ. That dollar amount might seem high in comparison to ND real estate, but in AZ the price you stated wouldn’t even get you half of that land, let alone the structures and that would be in some what of a desert area with no water features.
Depending on their intentions, you can possibly do an owner carry back and pay them what the mortgage company wants. This can be deposited into any number of accounts for the seller to gain income the same way a mortgage company does. This is ideal if they want to invest the money and given the market, it might be in their best interest to cut costs. On the other hand they may want to have a lump sum to buy another house, etc.
Suppose the first step would be to try and find out the sellers intentions. In your situation, you should not have to worry about inflation of the real estate market price, especially right now. If anything the market value of the home will be less in the near future. The interest rates are also looking at a possible drop, per the FED, very soon as well.
As an appraiser, I would recommend removing the emotion from your decision making. Your motivations need to be based on your retirement goals. Many investors are scared today, withdrawing their money in droves, and this is why we see this crazy train ride in the different markets. Be sure about your goals and you can be sure about your decision to meet that goal.
AllCourt
March 27, 2010 at 8:58 am
Do you have a retirement account with enough funds? You can roll a 401(k) or IRA into a self-directed IRA with a custodian that handles making “non-traditional” investments like real estate, mortgages, and many others.
One scenario is that you use your IRA(s) to purchase the property and rent it out. You fix it up along the way (all income & expenses MUST be paid through the IRA) and when you are retirement age you take the property as a distribution. If you do this with a Roth IRA, there is NO TAX PENALTY. You can even partner with your IRA (as it is an entity separate from you) to buy investment property if funding is an issue, but that may trigger some tax consequences.
There are other scenarios, but that is one example. I am not a CPA or an attorney, so I am not giving tax or legal advice, but it’s worth a bit of homework on your part if you know now you want to own property in 15 years that you can retire in. Find a good estate planner or just start doing some reading for more info….
GOod luck!
Jay S
March 27, 2010 at 9:52 am
There is another option that has not been mentioned.
If you have enough equity in your primary home you could do a cash out refinance to buy your vacation home and should get a little bit better terms.
Ed Atun
March 27, 2010 at 10:26 am
Borrow against your life insurance policy for the down payment. My brother did that today..