Home Buying in Santa Rosa>Question Details

Kathyvhall, Home Buyer in Santa Rosa, CA

My daughter wants to buy a house and rent it to me. She will not be living there. Is there any legalities we should be aware of.?

Asked by Kathyvhall, Santa Rosa, CA Tue Jul 31, 2012

She doesn't own a house yet.

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The first "legality" your daughter will run into is that this purchase will be classed as an investment for her, instead of as an owner occupied purchase. This will limit her in making offers on homes to buy, as owner occupant offers are often given priority over investor offers.

The next issue will be that financing for an investment home purchase is not as "friendly" as financing for owner occupied homes. She needs to be prepared to make a higher down payment and pay a higher interest rate for any loan she may need for the purchase.

During the escrow period of the purchase, your daughter would be very well advised to invest in a home inspection and a pest inspection. As much as possible, it would make sense for her to negotiate for the seller of the property to do as many repairs as possible. Once she becomes a landlord, making property repairs will be her responsibility and expense.

She will need to purchase an insurance policy as the owner of the property, including appropriate liability insurance. You, as the tenant, should consider purchasing a renter's policy to cover your possessions.

It is highly advised, particularly as you will be paying rent, that you both approach this professionally and in writing. Write up a rental agreement, including an addendum if necessary of who pays what expense - for example, who pays for water, sewer, electricity, gas, HOA dues, etc. Be sure to include a security deposit amount as typical for renters. This formality will protect and ensure her legal ability to deduct property expenses and depreciation on her tax returns, and will help protect you both from any misunderstandings or disagreements that may arise.

You would both be well advised to discuss and put in writing what will happen should you not be able to pay the rent, or as much rent as you will start out paying, or if she should happen to need to sell the house. Discussing these unpleasant issues in advance of need can be extremely helpful if either of these issues arise and you are both under stress.

It is highly advised that your daughter understand that even though she is related to you, she is liable in the State of California for all the expectations and requirements as a landlord in landlord-tenant law. There are specific habitability, rental increase, and notification requirements that she must follow, and that protect you, the tenant.

I applaud your daughter and am pleased she cares for you. My mom is renting from me, so I do know all about this! Please don't hesitate to ask any questions anytime. Thanks, cj cjholmes@cjholmes.com.
Web Reference: http://www.cjholmes.com
1 vote Thank Flag Link Wed Aug 1, 2012
If it is not going to be her primary residence then she needs to let her lender and the property's insurance company know this in advance, which will make her loan rate and insurance premium a bit higher than if it were going to be owner occupied. And her property insurance will likely not cover your personal property, so if you want coverage for that you will need a renters policy.

I am real estate agent and not as well versed in this as an insurance agent would be. If you'd like a referral I know a good one -- very easy to talk to and good at explaning your options -- let me know.

Also, if your daughter would like to consult with and be represented by a Buyers Agent I'd be happy to talk with her and see if she and I might be a good match to work together.

Sharon Hawthorne
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1 vote Thank Flag Link Tue Jul 31, 2012
If you or your daughter have a tax accountant or advisor, you might ask them first. There are a variety of issues that can come up now and in the future, especially if she wants to buy a house for herself in the future. She also will be tying up her credit, so that she may limit what large purchases such as cars she will be eligible for. You must be very proud of the success of your daughter, and her generosity to want to help you, but you are the "adult" and should make sure that this will not cause future problems in your relationship, and I think the best way to avoid those problems is to seek good advice from lenders, tax accountants and estate consultants. But if you are ready to move forward, would love to show you some! Best,
Terry Bell, CPS Real Estate, Santa Rosa
cell: 707-292-5712
0 votes Thank Flag Link Thu Feb 7, 2013
As the lender here...

Your daughter can put you on the loan with her.The loan will be subject to the lower of the credit scores between you and your daughter.

This would be considered a non occupant coborrower or in FHA speak 'family condo'. These programs are considered owner occupied because you would be on the loan first.

This way she can obtain owner occupied financing.

If she wants to keep it 'clean' and just rent to you, then she would need to purchase the property as a non owner occupied. Rates and fees are higher on the nonowner loans. cg
0 votes Thank Flag Link Mon Aug 6, 2012

You have already read some thorough and comprehensive answers. Allow me to offer a simple one: A written lease, an accurately written offer to purchase, and full disclosure to your daughters lender and home owners insurance company are all that is required for you and your daughter to be in complete compliance.
0 votes Thank Flag Link Sun Aug 5, 2012
I would suggest that she talk to a loan broker who handles loans for both first time homeowner and for investment buyers, they can best sit down with her and go over all the pros and cons of your situation. She should also talk with her tax accountant, and there are many tax benefits to rental homes that might offset the negatives of missing out on some first time homeowner benefits. In any event, owning any home now is a smart move to get into the market while it is still at the lowest it's been for a long time. Please feel free to contact me for any help or information about buying here in Sonoma county! Best, Terry Bell, CPS Real Estate 707-292-5712
0 votes Thank Flag Link Wed Aug 1, 2012
Hi Kathy,

Of course, all legal questions should go to your attorney.

However, this one, at face value seems simple.

Your daughter may purchase any home she chooses, if she has the capacity to do so.

And, of course, she may rent that home to anyone she chooses, including her mother.

If there are any circumstances of which I am not aware, this may preclude such an arrangement, but, at first blush, I see no roadblocks.

Nevertheless, always consult your attorney.

Always in your service,

Michelle Renée Mozell
PO Box 897
Bodega Bay, California 94923
602 292-0753 Cell
480 452-0640 eFax

Sonoma Coast Living, Realtor®
DRE License 01879859
575 Highway One
Bodega Bay, California 94923
707 875-2500 SCL Office
707 875-3242 SCL Fax

HomeSmart, Associate Broker
20860 North Tatum Blvd.
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Phoenix, Arizona 85050
480 443-7400 HS Office
480 664-4357 HS Fax
0 votes Thank Flag Link Tue Jul 31, 2012
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