WWYD-Inheritance question (added $$, post 18)

[Deleted]

Pooks,

There may be another solution to your situation. I agree with Debt Heaven that if you're planning on making a similar acquisition in the near future you should think about the bird in your hand. I was in somewhat of a similar situation when my mom died 3 years ago but her entire estate was upside down by about $400k, mostly due to the drop in value of her house. It took several months but I was able to talk the lender who was holding the 2nd mortgage to short sell her condo to me. The 1st mortgage and the 2nd were related and they knew I would let the property go into foreclosure. The 2nd would be wiped out and the 1st could also lose a lot of money via foreclosure as well as hold it for months, potentially losing another 50k. Since there was other senior debt (Fed taxes) they knew it was highly unlikely they would get anything from the estate. I don't think my situation applies to you directly but you might find my experience helpful.

The first thing I did was to go out and really look at comparable properties on the market as well as the rents. When I made my decision to "rescue" the property it was based on the following information. 1) I couldn't find a property I liked better (my mom had recently remodeled the unit and it is within walking distance to one of San Diego's best beaches) for less than $200k more. I had no illusions that the property was worth that much, just that I couldn't find anything better. 2) I accepted the fact that when I took over the 1st mortgage I was going to have about $150/mth negative cash flow for a few years. 3) The trade off was that legally I could take over the existing loan without putting it in my name (more about that later) and because the property was located in CA I could assume my mother's property tax base. Taking over the tax basis easily saved me the $150/mth increase in taxes that I would have paid for a replacement property. Going back to taking over my mother's mortgage without putting the loan into my name; back in the early 1980s there was a law passed called the Garn St. Germain Act. It was an important decision that has governed the assumabilty of loans. An exception to the "due on transfer" provision in most residential mortgages is if the property is inherited by a relative. So in my case (and possibly yours) I could hedge my bets by transferring the property to me but not put the loan in my name. Therefore if something really bad happened and I couldn't make the payments anymore, I could let the property go into foreclosure but the foreclosure wouldn't affect my credit nor could the lender go after me for a short fall. So far, so good. I've had good renters and the property has bounced back some in value. I wouldn't recommend this strategy until you've had a discussion with a real estate attorney and have determined it's worth the trouble.

[phil5185]

Does anyone know if there is a way to sell the house, use the funds from the life insurance to pay the shortfall, but never take actual ownership of the house? I don't want to have to go through the step of getting a new loan and pay all those fees just to sell.

Even if you take ownership, you don't have to get a new loan to sell a house. You find a buyer - then at the closing table the buyer's new mortgage lender provides that money and you provide cash for the shortfall. The closing officer distributes the funds to each party.

You mentioned that you would need to payoff the loan to keep it and rent it - why? I would keep the mortgage in place, pay the $1600/m, and feed the negative cash flow until the house appreciated to ~$290k and the loan decreased below $290K. I wouldn't put a $65,000 lump sum into it - instead invest the $65k and double it in about 10 yrs. IMO that's a better use of your cash resources.