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Non-arm's length (Buying a house from my in-law)


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Hello CB family, Long time not posting hoping y'all doing great. My mother in-law is selling one of her houses in Southern California and she asked me if someone I know might be interested and I thought It might be a good investment option to buy her house and rent it out. So assuming this idea is good enough how should I proceed? do we both go thru the same Loan Officer, Lender, Realtor, etc.. The house price based on Zillow/Redfin/Realtor/Opendoor is averaging $440K and I have my own house already that I pay mortgage on it. I appreciate your input everyone.

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The first question you want to ask your mother is how much she wants to sell it for if she sells it to you.  Obviously if it was to someone else I'd assume she'd like to get top dollar, but when selling to family I've often found the selling family member is willing to sell for less because they won't have to use a real estate agent (saves 5-6% of the sales price in realtor commissions) plus they may want to give further discounts out of kindness.  So if she wanted to sell it for market prices of $440k, minus 5% commission, that'd reduce the sales price to $418k.  


As I alluded to above, you don't have to use a real estate agent since it doesn't need to be marketed to anyone and the buyer has already been found (you), but I would still recommend you get a home inspection because you want to make sure you'd be OK/aware of the property condition.  Assuming you aren't buying it with cash, then you'd also need to get a mortgage to purchase the property.  Since you'd be buying it as an investment property, you will need to come up with the down payment from your own funds (gifts aren't permitted for investment/rental properties - only on primary residences or second/vacation homes).  Investment properties can be financed with as little as 15% down, but the interest rates considerably improve with 20% or 25% down.  Your eventual loan officer can run the numbers, and there is only 1 loan officer involved since the buyer only uses a mortgage.  With investment properties the seller can give you a closing cost credit equal to 2% of the sales price, so if your mom wants to help reduce your total amount of money due at closing then that is a direct way to accomplish that (you'd write that in as part of the contract).


When it comes to your debt to income (DTI) ratio, 75% of the rental income that the property can potentially generate can be used to help qualify even if there isn't a current lease.  The way this is done is the appraiser adds an additional part to the appraisal called a "rent survey" which will use other rental properties in the area to determine what the market rent is for the home you are buying.  If 75% of the market rent is less than the housing payment (PITIA), the difference is added as a monthly liability to your debt to income ratio... and if 75% of the market rent is more than the housing payment then that difference is added as monthly income.  

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