Protect Your Interests While Lending a Helping Hand

By Ilyce R. Glink with Samuel J. Tamkin
Saturday, August 30, 2008

Q I inherited a home from a family member, and it has no mortgage. The house is in California, and I am in Georgia. The caretaker, who was instrumental in taking care of my elderly aunt before her death, wants the house but would not qualify for the mortgage based on her income and assets.

I will be happy to hold the mortgage to make this house a viable option for her; she was a godsend during my aunt's illness.

Document preparation is my primary concern, although I could probably get a good real estate lawyer to help me with that. I do not need a middleman to handle the payments as I have a number of rental properties. I want to ensure that I am completely informed of all issues surrounding this transaction.

AYou're trying to reward someone who helped you out in a time of need, and that's a good thing. What you need to focus on is whether you should sell the home to this person or rent it to her.

If you rent the home to the caretaker, you might give her time to get her finances in order until she has enough assets or income to qualify to buy the home from you. You and the caretaker can decide on the rent you would be paid and the responsibilities each of you would have for the maintenance.

If you simply want to sell the home to the caretaker, you and she should agree on a price, the amount that you would finance for the purchase and the interest that you would earn on the loan amount. If the interest is well below the market interest rates for the loan, you could run afoul of the Internal Revenue Service, and some of the terms of the loan could be considered a gift to the caretaker.

In terms of financing the home, you would have two options in most places. One option would be to sell the home outright to the caretaker and take back a mortgage or deed of trust on the amount she would owe you.

The second option would be to sell her the home on an installment basis or contract for deed. In this arrangement, you would remain the legal owner of the home and your caretaker would pay you over time for the title to the home. When the caretaker satisfies the terms of the contract, title to the home would be transferred to her.

Because there is no mortgage on the property, and you don't have to worry about covering expenses beyond real estate taxes, insurance and simple maintenance, the finances of the property should be relatively easy for you. Depending on the circumstances and what your intentions are for the home and your late aunt's caretaker, once you and she agree on the financial details, she can send her monthly payments to you.

But you should draw up a proper lease or sales document that conforms to California law. My suggestion would be to go to the California Department of Real Estate to see if it has a lease form you can buy or use. Or hire a real estate lawyer in California to draw up the sales documentation along with the mortgage documents.

I wish to refinance my rental townhouse. I have been advised that a cash-out refinance isn't possible in today's climate, and that if I want to take cash out of the transaction, I have to use an equity loan. I asked if federal or state law required me to refinance this way, but I've received no definitive explanation. Can I refinance to take money using an equity loan?

The current credit markets have made it difficult to finance rental property, even if you have a large amount of equity. Doing a cash-out refinance may also be difficult now because investors have been burned and don't want to buy these sorts of loans.

In some markets, residential property is doing quite poorly, and residential lenders are looking closely at each deal and making it harder to apply for loans.

Commercial lenders are limiting their investments in residential properties. Small investors like you are finding it hard to obtain financing for these types of deals. In a sense, what you are hearing is that you should be happy with the financing you have and that new lenders are not looking to give you more money. They may, however, be willing to extend additional credit to you as an equity loan on terms that are probably less favorable than your current first mortgage loan.

In any event, I don't know of a conventional lender that would allow you to borrow more than 70 or 75 percent of the equity in the property now. So if you're looking to cash out 90 percent of the equity, the numbers might not work out.

Where might you go to get money? If you're a real estate investor with multiple properties, you might have better luck with a bank willing to look at your portfolio of properties and refinance all of them.

Try some local savings and loans or community banks, and see if they are interested. Local banks are becoming more active in the real estate market as larger banks pull back. Any bank willing to give you a loan will probably have to keep the loan on its books.

As the real estate market improves, it may be easier to refinance your property.

I am the co-executor of an estate of a relative and was left the house in the will. We have been unable to sell the house. I've been paying the mortgage and costs for a couple of years. I recently decided to move into the house.

Will the mortgage companies (original and equity lenders) transfer the home into my name and qualify me for a new mortgage based on my credit? Is it possible to avoid closing costs? What is the best way to approach the mortgage companies? What is the best and easiest way to transfer ownership of the house to me? Is it possible to have more than one principal homestead tax exemption?

I already have a home. Can I deduct interest and taxes on the property that I previously paid?

You have quite a few questions, so let's start with the house you inherited and how to get that home into your name.

Your relative gave you her house under her will when she died. If you are probating the will, your state should have a process to allow you to transfer the ownership of the home from your relative's name to your name.

The lawyer assisting you in probate can help you with the forms necessary to transfer the title. If you don't have anybody helping you, some court clerks can -- but are not obligated to -- help guide you in the transfer of the property.

Generally, the costs of transferring title this way are not the same as in the sale of a home to a purchaser. You should be able to transfer the home by using an "executor's deed" (perhaps even a deed issued by the court) and signing the various transfer tax and other forms required in the jurisdiction the home is in. Frequently, you would not have to pay any transfer taxes on the transfer of title to your name as you are not paying any money for the home.

In general, the current lenders would not be involved in transferring the home into your name. In some instances, the transfer to your name of the title to the home would not even trigger what is known as the "due on sale" clause. That provision in most mortgages says that a lender has the right to call the loan due when the property is sold or title to the property is transferred. When a person dies and title is transferred to a spouse or a child, the due-on-sale clause would not apply.

If the due-on-sale clause did apply to your situation, it would be at the lender's discretion to exercise it. It's unlikely that the lender would call your loan if you have been prompt in making your loan payments.

Once title is in your name, you will have the choice to refinance the loan using your own credit and pay off the prior lenders.

When you own more than one home, you have to declare one of the homes your principal residence, and you generally can have only one. That primary residence would receive a break from the local taxing authorities, often known as a homestead exemption.

You can inquire at your local real estate tax collector's office to determine what the requirements and limitations are on homestead properties where you live. But you'll probably find that you will need to choose one home or the other. Federal tax laws also give special treatment to principal residences.

When it comes to the deductibility of real estate taxes and interest payments, the first issue is determining who owned the home and who paid the expenses. If the estate owned the home, the estate should be entitled to deduct the expenses. If you paid those expenses, you might be entitled to reimbursement from the estate.

If the title was transferred to you, or you are deemed the owner of the home, and you paid the interest payments on the home loans along with the real estate taxes, you might be entitled to deduct those expenses if the home was your primary residence or if it was your second home, but only in some circumstances. If you have multiple homes, you may be out of luck.

Other factors can complicate the situation, affecting your ability to deduct these expenses.

I am trying to take care of my son's father's estate in a small north Florida town. He had a handwritten will designating me as the personal representative, but with only one witness signature.

He was never married but had two children, my son and a daughter with another woman. This other woman lives in this small town.

All was going well until the other woman would not agree to a 50-50 division of the estate.

We went to court, and the judge treated me like a city slicker and made the daughter the personal representative for the estate. My lawyer proved in court that she thwarted every effort to settle the estate, and also that this woman was reckless and irresponsible. But her husband's father is hunting buddies with the judge. One year after the death, she still has not even filed an official inventory of the estate with the court.

Is there some way to remove what I consider to be a dishonest judge from a case he has mishandled? Also, is there a way for the children's interest in the property to be protected from anyone living on the property due to liability issues?

You can file a motion to have the judge withdraw from the case if there is a conflict of interest or if there is any other valid reason for a judge to be taken off the case.

If a judge fails to consider the motion, you can bring the motion before another judge in the jurisdiction or move for appellate review of the order of denial. But getting to that point is getting ahead of ourselves and may not be the right way to do things.

While your circumstances are somewhat exceptional, it seems you have a contested estate, and the legal wheels take time to spin in both small towns and large cities.

From what you've written, it is probable that the handwritten will was not valid. You imply that there was only one witness to the will. Some states require two witnesses to sign a will, and still others require three. If the will is not valid, the judge would have discretion in deciding whom to appoint to handle the affairs of the estate.

The person the judge appointed lives in the town where the deceased lived and where most of the assets are. That information alone may be enough to justify naming the other woman to handle the estate. The judge may have determined that you live out of state and may not have the same contacts with the family and estate that she has. The judge probably has wide latitude in deciding how to handle the estate.

If the other woman is in fact reckless and irresponsible, you have the right to have the judge reconsider his order to appoint her and to designate somebody else to take care of the estate. But there's no guarantee that he would appoint you. It could be a local trust officer of the bank, who would then charge the estate for his time and costs.

You may need to work with this other woman to get the estate settled. If she ignores you, the only thing that you can do is make sure that the estate assets do not get misspent and that she reports to the court the assets of the estate and proper disposition of all of the assets.

Sometimes the system doesn't work the way you would like, and sometimes it doesn't produce the results you want. But you'll have to work with the system we have in the best way you can to make sure there is a just result.

As to liability issues with property, you should make sure that the other woman purchases insurance for the real estate just in case someone is injured on the properties. Without insurance, an injury sustained by someone at one of the homes could wipe out any money left in the estate.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is "100 Questions Every First-Time Home Buyer Should Ask." Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink's Web sites,http://www.thinkglink.comandhttp://www.expertrealestatetips.net.

© 2008 Ilyce R. Glink and Samuel J. Tamkin

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