Q: My wife and I recently moved, and my son would like to buy our previous home (at a discount from the current market price). Home price and gains are modest, and the property qualifies for tax-exempt status.
My son qualified for a conventional mortgage. We were set to close, when my son suffered a severe financial setback (he was the victim of wire fraud, which robbed him of his entire down payment). We would still like to make the sale of the home happen. What options do we have? FHA mortgage? Seller-financing? Lease with an option to buy?
A: We’re sorry your son was caught up in a wire fraud scheme. We have written about wire fraud in the past, and will continue to alert home buyers and sellers to this serious and growing problem.
In essence, when you plan to wire funds to a closing agent or when you plan to receive funds from a closing agent, you should take several security steps to avoid wire fraud.
If you are sending money, you need to make sure the wire instructions you received are accurate. If you did not receive the instructions in person from the closing agent, you should take the following steps:
1. Go to the settlement agent’s or title company’s website and verify that the wire instructions you received match what is listed on their website. If there are any differences at all, especially a phone number, call the company immediately.
2. In any case, you should also call your settlement agent or title company and verify the wire instruction. But you need to make sure that you know the person who you’re calling at the settlement agent’s or title company’s office or know that the number you’re calling is correct.
3. You should also look over the wire instructions to see if there are any typos, grammatical errors, or suspicious names of banks or anything out of the ordinary. If you are closing on a home in Virginia, you would expect that the wire instructions should be with a bank that is local or has a local branch. If you see that the wire instructions are to a foreign bank, you should not wire the money. If the wire instructions have typos or grammatical errors, you should be cautions and not use those instructions. Instead, call the closing agent directly.
If you are giving wire instructions for your sale, make sure that you have confirmed that the wire instructions are accurate for your bank and your account. You should call your attorney, settlement agent or title company and confirm the information that you sent them.
You can’t be too careful or suspicious when it comes to wiring out funds for your purchase of a home or receiving wired funds from the sale of your home.
Now, if your son was unable to recover the funds and still wants to close, you should talk to the mortgage lender with whom he was working and see what other options the lender has for the two of you. The lender may allow a gift of funds to your son for the down payment. The lender may have other mortgage products that may allow for a small down payment.
And, yes, you could finance the home for your son. You could sell the home to him and take back a mortgage from him to you. Or, you could set up the sale as an installment sale where he pays for the home over time; and when he is able to refinance the home, he could pay it off and he would get title to the home.
If you go the route of seller financing or an installment sale, we suggest that you have an attorney help you out with the documentation. You want to make sure that you paper the documentation properly for various purposes: one of them being that the IRS may require the documentation for your son to deduct his interest payments he makes to you and to ensure that the interest you are charging him does not create a gift situation from you to him. For estate planning purposes, you would also want to make sure the paperwork is done properly so that the money owed to you goes back to you should something happen to your son or to you.
Finally, you could lease the home to your son and give him an option to buy the home. Not unlike the seller financing and the installment sale for deed situation, you should have an attorney help you through the transaction.
One item you should consider is whether any of these options will be less expensive for you and your son. Some of the documentation that would need to be prepared and recorded or filed could cost you and your son some money. That money could otherwise go toward the down payment of the home — depending on how much money you find out it will cost, that money could otherwise go toward financing with a mortgage lender now.
We don’t know what will work best for you, but we suggest you start with your mortgage lender. If the mortgage lender or a mortgage broker doesn’t yield good results, then you can talk to an attorney in your area to find out what is involved in either the lease with an option to buy, seller financing and an installment contract for deed and how much each of those might set you back financially. You might also want to find out what would happen in each instance with your real estate taxes (whether they will go up or stay the same) and what impact the seller financing or installment sale for deed will have on your federal income taxes. Good luck.
Ilyce Glink is the creator of an 18-part webinar and e-book series called “The Intentional Investor: How to Be Wildly Successful in Real Estate,” as well as the author of many books on real estate. She also hosts the “Real Estate Minute” on her YouTube channel. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them at ThinkGlink.com.