Darkman Posted November 5, 2009 Share Posted November 5, 2009 (edited) OK this is an unusual house sale. To cut a long story short the sale was made under duress. My now wife had recently lost her previous husband to cancer. She had zero income, mounting bills, and to top it all she couldn't sell their house because house prices came crashing down. Great timing eh? So she made an agreement with her shady brother in law. He "bought" the house for $235K (a knock down price). And get this, the agreement didn't include any interest on payments of $1K a month until the house is paid off (about 20 years). Now, it doesn't take a genius to work out that over 20 years at no interest, his payments on the house will be worth significantly less. Now due to various hassles, my wife wants to sell her interest in the house, and pass on the deal to someone willing to buy. The problem is how do we create an asking price for such an odd arrangement? I am trying to calculate what he will have paid when the 20 years is up, in todays dollar value. Once we have a figure, we can offer the house for sale (the bonus being he may well default and the buyer ends up with a real bargain). I found an inflation estimate here. using the upper level of the Fed's inflation comfort zone (2%), $1,000 today is worth only $603 in twenty-five years. This translates to nearly a 40% reduction in value. So 40% in 25 years time. But the payments of 1k a month obviously decline in value gradually over the contract duration. How can I estimate the value of the house? Anyone? Edited November 5, 2009 by Darkman Quote Link to comment Share on other sites More sharing options...
scottbeard Posted November 5, 2009 Share Posted November 5, 2009 (edited) I'm not sure I understand this deal. But I do understand how to value 20 payments of $12,000 - the Maths is known as a "geometric progression" and I use them every day at work. Year 1 = 12,000 Year 2 = 12,000 / (1.02) Year 3 = 12,000 / (1.02)^2 etc Total is 12,000 x (1 - (1/1.02)^20) / 0.02 or because he pays monthly more like 12,000 x (1 - (1/1.02)^20) / ln (1.02) = 12,000 x 16.514 i.e.the $240,000 he will pay is worth $198,168 in today's money if inflation is 2%pa. (edit as i just noticed it was monthly) Edited November 5, 2009 by scottbeard Quote Link to comment Share on other sites More sharing options...
thod Posted November 5, 2009 Share Posted November 5, 2009 Your description of the deal is unclear. You say he bought the house, yet he still makes payments, then you say your wife still has an interest. Without a clear description of the problem, it cannot be calculated. Quote Link to comment Share on other sites More sharing options...
Darkman Posted November 5, 2009 Author Share Posted November 5, 2009 The deal is a type of "rent to buy" arrangement. Until he pays the house off, he's considered a tenant renting (it's in America). Instead of obtaining a mortgage to pay off the house, and giving my wife a lump sum, he's using my wife as the bank so to speak. It's a really really bad deal for my wife. But she was desperate at the time. Her brother in law took advantage of that. The no interest angle is the crucial point. It's 1k a month, until the 235K is paid off, so the total won't be 20K or 16K. I hope an inflation rate of 2% isn't too optimistic..... Quote Link to comment Share on other sites More sharing options...
Darkman Posted November 5, 2009 Author Share Posted November 5, 2009 How would I put that formula into a spreadsheet? I'm familiar with Excel and how to add calculations, but little more..... Quote Link to comment Share on other sites More sharing options...
IBlewItLastTime Posted November 5, 2009 Share Posted November 5, 2009 How would I put that formula into a spreadsheet? I'm familiar with Excel and how to add calculations, but little more..... Aren't we just talking about the PV of 1k a month for 235 months? either on a monthly in arrears basis: =PV(1.02^(1/12)-1,235,1) or on a more simple annual in arrears basis: =PV(2%,235/12,12) Quote Link to comment Share on other sites More sharing options...
XswampyX Posted November 5, 2009 Share Posted November 5, 2009 It's worth $86,630 deposit $86,630 over 20 years at 5% = $234,996.03 in the bank or Borrow $150,000 over 20 years at 5% = $237,600 paid back http://www.calculator.net/interest-calculator.html?cstartingprinciple=86630&cannualaddition=0&cmonthlyaddition=0&cadditionat1=beginning&cinterestrate=5&ccompound=monthly&cyears=20&ctaxtrate=0&cinflationrate=0&x=59&y=8 Quote Link to comment Share on other sites More sharing options...
Darkman Posted November 5, 2009 Author Share Posted November 5, 2009 =SUM(1200*(1-(1/1.02)^20)/LN(1.02)) is the formula in the example above.. I put that sum in a cell and it came out as 19817.28962 Not sure what to do with that figure Quote Link to comment Share on other sites More sharing options...
Darkman Posted November 5, 2009 Author Share Posted November 5, 2009 (edited) $86,630? That seems low. Edited November 5, 2009 by Darkman Quote Link to comment Share on other sites More sharing options...
XswampyX Posted November 5, 2009 Share Posted November 5, 2009 I know. If your wife put the $86,630 in the bank with 5% interest over 20 years she would get her $235,000 Your brother in law on the other hand is only paying interest on a mortgage worth $150,000 It really was a bad deal for your wife. Quote Link to comment Share on other sites More sharing options...
XswampyX Posted November 5, 2009 Share Posted November 5, 2009 On the other hand..... If she keeps putting the $1,000 a month into a savings account at 5% over 20 years then it will be worth $412,746.31 That's a bit better! You try :- http://www.calculator.net/interest-calculator.html?cstartingprinciple=0&cannualaddition=0&cmonthlyaddition=1000&cadditionat1=beginning&cinterestrate=5&ccompound=monthly&cyears=20&ctaxtrate=0&cinflationrate=0&x=59&y=10 Quote Link to comment Share on other sites More sharing options...
the wizard Posted November 6, 2009 Share Posted November 6, 2009 OK this is an unusual house sale. To cut a long story short the sale was made under duress. My now wife had recently lost her previous husband to cancer. She had zero income, mounting bills, and to top it all she couldn't sell their house because house prices came crashing down. Great timing eh? So she made an agreement with her shady brother in law. He "bought" the house for $235K (a knock down price). And get this, the agreement didn't include any interest on payments of $1K a month until the house is paid off (about 20 years). Now, it doesn't take a genius to work out that over 20 years at no interest, his payments on the house will be worth significantly less. Now due to various hassles, my wife wants to sell her interest in the house, and pass on the deal to someone willing to buy. The problem is how do we create an asking price for such an odd arrangement? I am trying to calculate what he will have paid when the 20 years is up, in todays dollar value. Once we have a figure, we can offer the house for sale (the bonus being he may well default and the buyer ends up with a real bargain). I found an inflation estimate here. So 40% in 25 years time. But the payments of 1k a month obviously decline in value gradually over the contract duration. How can I estimate the value of the house? Anyone? Inflation doesn't really come into the calculation, at least not directly. If I understand correctly, then what has happened (in financial terms, I don't know the legal details) is that your wife has given away her house in return for a fixed annuity, and now she wants to sell the annuity. It isn't really the house you are selling, its the $1000/month income I think. You should be able to find the cost of an immediate fixed annuity that pays $1000 per month for how ever many months is left on the contract, from various insurance companies or brokers. Normally, the value of her annuity would be much less than these quotes because the risk that your brother in law defaults is higher than the risk that an insurance company defaults. However if the deal is set up so that they get the house in the event of default, then there is less risk and so the quotes should be a pretty good estimate. Of course, it can only ever be an estimate, and the real price is set by your ability to find a willing buyer. Some other points: 1. Why would her brother-in-law default? Unless the value of the house is less than the cost of the annuity, he can sell the house, buy an annuity himself and pocket the difference. He then passes his payments on to you, and never has to default. 2. The formulas provided for calculating the value of the annuity are correct, if you know the interest rate. This will not be the rate of inflation. In fact the only real use for this kind of calculation is to be able to switch between a market price and a market interest rate, which are simply two different ways of talking about the cost of a financial product. 3. I have no idea about taxes, which may affect the price. 4. I am not a lawyer, financial advisor, or doctor. I am not regulated by the FSA. You should speak to someone who is, particularly a lawyer. 5. I may have misunderstood the arrangement, and I may be wrong. See point 4. Quote Link to comment Share on other sites More sharing options...
Darkman Posted November 6, 2009 Author Share Posted November 6, 2009 I know. If your wife put the $86,630 in the bank with 5% interest over 20 years she would get her $235,000 Your brother in law on the other hand is only paying interest on a mortgage worth $150,000 It really was a bad deal for your wife. Using that site, I got $109,532.87, based on 1k a month over 20 years no interest and minus inflation at a pessimistic 4%. http://www.calculator.net/interest-calculator.html?cstartingprinciple=0&cannualaddition=0&cmonthlyaddition=1000&cadditionat1=beginning&cinterestrate=0&ccompound=monthly&cyears=20&ctaxtrate=0&cinflationrate=4&x=96&y=13 And $132,882.18 based on 3% inflation. These figures sound right to me. I guess your figure of 86K came about from the 5%. I chose lower figures. The kicker is that of course inflation is impossible to predict. And that makes it virtually impossible to sell on. The nightmare scenario is inflation really taking off in the USA. That's not something I want to consider Quote Link to comment Share on other sites More sharing options...
Darkman Posted November 6, 2009 Author Share Posted November 6, 2009 If I understand correctly, then what has happened (in financial terms, I don't know the legal details) is that your wife has given away her house in return for a fixed annuity, and now she wants to sell the annuity. It isn't really the house you are selling, its the $1000/month income I think. Yes that sounds right. You should be able to find the cost of an immediate fixed annuity that pays $1000 per month for how ever many months is left on the contract, from various insurance companies or brokers. Not sure I understand this. Normally, the value of her annuity would be much less than these quotes because the risk that your brother in law defaults is higher than the risk that an insurance company defaults. However if the deal is set up so that they get the house in the event of default, then there is less risk and so the quotes should be a pretty good estimate. Of course, it can only ever be an estimate, and the real price is set by your ability to find a willing buyer. If he defaults, he loses the house. He'd be crazy to default of course, because he's getting a house with no interest payments over 20 years! But I hope to god he does default (which he has a history of doing elsewhere), because then my wife gets the house back and can sell it in the more normal fashion. 1. Why would her brother-in-law default? Unless the value of the house is less than the cost of the annuity, he can sell the house, buy an annuity himself and pocket the difference. He then passes his payments on to you, and never has to default. I hadn't considered that, and I'm sure he's not intelligent enough to either. I need to educate myself on annuities. Quote Link to comment Share on other sites More sharing options...
the wizard Posted November 6, 2009 Share Posted November 6, 2009 If I understand correctly, then what has happened (in financial terms, I don't know the legal details) is that your wife has given away her house in return for a fixed annuity, and now she wants to sell the annuity. It isn't really the house you are selling, its the $1000/month income I think. Yes that sounds right. You should be able to find the cost of an immediate fixed annuity that pays $1000 per month for how ever many months is left on the contract, from various insurance companies or brokers. Not sure I understand this. Normally, the value of her annuity would be much less than these quotes because the risk that your brother in law defaults is higher than the risk that an insurance company defaults. However if the deal is set up so that they get the house in the event of default, then there is less risk and so the quotes should be a pretty good estimate. Of course, it can only ever be an estimate, and the real price is set by your ability to find a willing buyer. If he defaults, he loses the house. He'd be crazy to default of course, because he's getting a house with no interest payments over 20 years! But I hope to god he does default (which he has a history of doing elsewhere), because then my wife gets the house back and can sell it in the more normal fashion. 1. Why would her brother-in-law default? Unless the value of the house is less than the cost of the annuity, he can sell the house, buy an annuity himself and pocket the difference. He then passes his payments on to you, and never has to default. I hadn't considered that, and I'm sure he's not intelligent enough to either. I need to educate myself on annuities. There are many kinds of annuity, but the kind I'm talking about means you pay a lump sum now, in return for a fixed dollar amount each month over a period of time. This is pretty much what your wife got in return for the house, so you need to find out what insurance companies usually charge for that sort of thing. The trouble with trying to calculate it yourself, is that you don't know the correct interest rate to use. It isn't the inflation rate. Quote Link to comment Share on other sites More sharing options...
Darkman Posted November 6, 2009 Author Share Posted November 6, 2009 There are many kinds of annuity, but the kind I'm talking about means you pay a lump sum now, in return for a fixed dollar amount each month over a period of time. This is pretty much what your wife got in return for the house, so you need to find out what insurance companies usually charge for that sort of thing. The trouble with trying to calculate it yourself, is that you don't know the correct interest rate to use. It isn't the inflation rate. Do you mean an insurance company might pay out a lump sum, in return for the monthly payments from her brother in law, and their protection would be claiming the house if he defaults? Am I understanding correctly? Quote Link to comment Share on other sites More sharing options...
the wizard Posted November 6, 2009 Share Posted November 6, 2009 There are many kinds of annuity, but the kind I'm talking about means you pay a lump sum now, in return for a fixed dollar amount each month over a period of time. This is pretty much what your wife got in return for the house, so you need to find out what insurance companies usually charge for that sort of thing. The trouble with trying to calculate it yourself, is that you don't know the correct interest rate to use. It isn't the inflation rate. Some googling found this, which suggests $161,000 for a 20 year immediate annuity (scroll down the page, you want "Guaranteed Income for a 20-Year Period Certain Only ("20PC")" close to the bottom of the list. I think the number sounds about right, it suggests a rate of a bit over 4%/year. Again caveats: I don't know who runs that website, I'm not recommending it, I am recommending proper financial advice. They sell their annuities for $161,000 that doesn't mean you can. Quote Link to comment Share on other sites More sharing options...
the wizard Posted November 6, 2009 Share Posted November 6, 2009 (edited) Do you mean an insurance company might pay out a lump sum, in return for the monthly payments from her brother in law, and their protection would be claiming the house if he defaults? Am I understanding correctly? No, sorry that isn't what I meant. The deal she has pays her $1000 a month for 20 years. Insurance companies sell exactly this product, its called an annuity. To work out roughly how much she can sell her contract for, she can look at how much they sell their contracts for. It is only a guide though. EDIT: Just to be clear, insurance companies are selling this product, and so are you. They might also buy this kind of thing, but I suspect not. I don't know how you would go about finding a buyer. Edited November 6, 2009 by the wizard Quote Link to comment Share on other sites More sharing options...
the wizard Posted November 6, 2009 Share Posted November 6, 2009 No, sorry that isn't what I meant. The deal she has pays her $1000 a month for 20 years. Insurance companies sell exactly this product, its called an annuity. To work out roughly how much she can sell her contract for, she can look at how much they sell their contracts for. It is only a guide though. Another possibility is to remortgage the house, and use his payments to you as your payments to the bank. You get a lump sum, and if he defaults the bank gets the house. That depends upon the exact legal situation though, and I'm assuming there's no existing mortgage. Basically you'd be his landlord. Quote Link to comment Share on other sites More sharing options...
housepricecrash Posted November 6, 2009 Share Posted November 6, 2009 OK this is an unusual house sale. To cut a long story short the sale was made under duress. My now wife had recently lost her previous husband to cancer. She had zero income, mounting bills, and to top it all she couldn't sell their house because house prices came crashing down. Great timing eh? So she made an agreement with her shady brother in law. He "bought" the house for $235K (a knock down price). And get this, the agreement didn't include any interest on payments of $1K a month until the house is paid off (about 20 years). Now, it doesn't take a genius to work out that over 20 years at no interest, his payments on the house will be worth significantly less. Now due to various hassles, my wife wants to sell her interest in the house, and pass on the deal to someone willing to buy. The problem is how do we create an asking price for such an odd arrangement? I am trying to calculate what he will have paid when the 20 years is up, in todays dollar value. Once we have a figure, we can offer the house for sale (the bonus being he may well default and the buyer ends up with a real bargain). I found an inflation estimate here. So 40% in 25 years time. But the payments of 1k a month obviously decline in value gradually over the contract duration. How can I estimate the value of the house? Anyone? the deal is absurd. your wife must have instructed a solicitor at some point, even if at the last minute to draft the contract for your wife and her then brother-in-law to sign. my point is that no solicitor who sees such a deal would fail to advise your wife that she ought to include interest payments over the 20 year period. in the most unlikely event that the solicitor failed to advise, he was negligent and your wife has a claim againt the solicitor for negligence. if no solicitor was involved and the paperwork was drawn up by the brother-in-law, your wife may still be able to unravel the deal but it would be an uphill struggle. Quote Link to comment Share on other sites More sharing options...
the wizard Posted November 6, 2009 Share Posted November 6, 2009 the deal is absurd. your wife must have instructed a solicitor at some point, even if at the last minute to draft the contract for your wife and her then brother-in-law to sign. my point is that no solicitor who sees such a deal would fail to advise your wife that she ought to include interest payments over the 20 year period. in the most unlikely event that the solicitor failed to advise, he was negligent and your wife has a claim againt the solicitor for negligence. if no solicitor was involved and the paperwork was drawn up by the brother-in-law, your wife may still be able to unravel the deal but it would be an uphill struggle. I agree, you need to speak to a lawyer. Quote Link to comment Share on other sites More sharing options...
JimSkank Posted November 6, 2009 Share Posted November 6, 2009 Darkman, This may not be as simple as it sounds (and be wary of the advice you have recieved, some good some bad). When is ownership transferred to your brother-in-law? (at the start/end of the 20 years or sliding scale?) If ownership, at least in part, is transferred prior to the end of the 20 year period then is any rent charged and who picks it up? Who lives in the house?! The reason I ask is I suspect that the title deeds will only be passed over in 20 years time, whilst you will have had 20 years living in the house. This makes the deal a lot better as if you PV your payments then you should also include effective rent foregone. J Quote Link to comment Share on other sites More sharing options...
Darkman Posted November 6, 2009 Author Share Posted November 6, 2009 Another possibility is to remortgage the house, and use his payments to you as your payments to the bank. You get a lump sum, and if he defaults the bank gets the house. That depends upon the exact legal situation though, and I'm assuming there's no existing mortgage. Basically you'd be his landlord. That's an interesting idea. But for his payments to cover the eventual total (inc. inflation erosion) the mortgage would have to be a low valuation i.e. the $109K I mentioned. Otherwise we'd have to cover the extra. We'd get a lump sum out of this though. Or we could get a mortgage for the full value (whatever that is these days) and invest the resulting payout somehow. I'm not sure how we could twist that to benefit...... And yes, if he defaulted, the bank would take the house back. Btw, obviously the deal is absurd. Basically my wife got ripped off for her lack of knowledge and desperate state. Her lawyer advised her against doing the deal, but she went ahead to find closure. She couldn't sell the house to anyone else in the house crash climate at the time etc. It's not a deal I would ever have agreed to, but there you go. Quote Link to comment Share on other sites More sharing options...
Three Pint Princess 2 Posted November 6, 2009 Share Posted November 6, 2009 25 years could cover government debt, that would then be a base level the buyer could not attain. Quote Link to comment Share on other sites More sharing options...
winkie Posted November 6, 2009 Share Posted November 6, 2009 This might help: http://www.thisismoney.co.uk/historic-inflation-calculator Rental yield is also a good indication of value. Quote Link to comment Share on other sites More sharing options...
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