Remember the Five P's When Changing Homes

Dear Monty: My grandmother owns a home and wants to downsize and live in another property she has. My husband and I want to buy it for a rental property. My grandmother's idea is to sell to an outsider and gift us her equity to fix up an apartment in a building that we already own for us to live in. We currently do have a mortgage and will be selling this house. Is this allowed? We talked to someone, and despite him jumping to many conclusions and not listening to the entire situation, he mentioned it was borderline illegal. We are confused.

Monty's Answer: The situation you describe from your grandma's point of view is that she wants to sell the property she currently occupies to an outside buyer and gift you and your husband that property's equity. She would downsize into her other property. You would sell your current home. You would use grandma's gift and the equity from your recent home sale to remodel an apartment in your property and move into it. You and your grandma will each own one property when the dust settles.

From your desired outcome, the result would be different. You would buy your grandma's property as a source of rental income and sell your current property. Assuming you would use the equity from the sale of your existing home and grandma's equity from her recent home sale to you to renovate and occupy the apartment in your current building, you would own two houses. You would own three properties if you rented the apartment instead of living there and bought another home.

SEEK COMPETENT COUNSEL

The individual that wondered about the legality may have more information than you shared here. Based on your comments, nothing on the surface appears illegal. The transactions are relatively simple, no matter which option you choose. The only wild card is whether you would move into the apartment or rent it out and buy a different home. Still, it would be wise to seek a certified public accountant (CPA), a real estate attorney or both to learn if there are tax ramifications for either party. Having accurate information from knowledgeable specialists will eliminate some of the confusion you are experiencing.

FINANCING

The financial circumstances of both parties need to be clarified. There are many reasons grandma may be resisting your plan. Could grandma be skeptical of your idea because she is concerned you are going into too much debt? Have you secured financing for your idea? If you have not, receiving a preapproval letter from a mortgage lender may assure grandma you have done your homework and relieve her concern.

DEVELOP A PLAN

Another helpful step would be to develop a plan. When families move, it can be challenging to coordinate logistics. When two parties are trying to carry out an agreement, it will be much easier if there is a workable plan. For example, suppose you used grandma's equity to fix the apartment. In that case, she must have sold her home for the money to be available. When you work together with grandma and have your counselor helping with the planning, this further reduces confusion. "Prior planning prevents poor performance" -- the five P's.

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Richard Montgomery is the author of "House Money: An Insider's Secrets to Saving Thousands When You Buy or Sell a Home." He advocates industry reform and offers readers unbiased real estate advice. Follow him on Twitter at @dearmonty, or at DearMonty.com.

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