Dear Bob: I am a widow, age 69. I listed my large house for sale at $125,000 with a realty broker. My reasons for selling are my small income and the rising costs of upkeep. But I'm in good health and really don't want to move. After three months of no offers, the broker brought me a purchase offer from a young doctor who wants to buy my house as an investment and for "tax shelter" (whatever that is).
But he doesn't have much cash as he is just starting out in medical practice. His purchase offer is $125,000, but with no down payment. He wants me to carry the $125,000 mortgage at 12 percent interst. Each month I would receive $1285.79 on a 30-year mortgage. He will lease the house to me at $600 per month plus the property taxes for as long as I want. This sounds like a very good deal to me. Is it? -- Mavis A., Alexandria
Dear Mavis: It's good for you and for the buyer. You'll get cost-free living. The doctor will get tax shelter plus probably future appreciation in value. He can probably easily afford the negative cash flow. If he doesn't make the mortgage payments, you foreclose and get ownership back.
But there are several safeguards you should consider. (1) Provide in the mortgage for adjustment of the interest rate to protect you against hyper-inflation. A fair standard is to make this rate adjustable every five years to the national mortgage index rate on new loans. In other words, you would be creating a renegotiable interest rate mortgage.
(2) Your lifetime lease should provide safeguards for both you and the doctor. For example, if your lease starts out at $600 per month rent, 5 percent maximum annual rent increase would not be unreasonable.
The only disadvantage of selling is you lose your inflation hedge protection. Since your ownership costs have become unaffordable, this plan will solve your problem and you won't have to move. Although you are unlikely to live 30 years to see the mortgage paid off, when you die your heirs will then receive the remaining monthly payments rather than a lump sum inheritance to squander. Your tax adviser or attorney may have further suggestions.