Have you found yourself in a situation asking yourself, “what do I do with an inherited house that is paid off?” Every year, a significant number of adult-children inherit their parent’s paid off, debt-free home.
Since there is no mortgage on the property, the adult-children or beneficiaries often have more options available to them. Or, at the very least, the options are more simple to execute on.
In this article, we’re going to explore the different options you (and your siblings, if any) have when it comes to inheriting a paid off house.
First, we will explore what you CAN do (legally) with the house. Once that is established, we’ll run through the various options you have.
How You Inherited The Home
A home or piece of real estate, like land, is inherited through various methods. Each of them have different requirements, pros, and cons.
For example, some methods for passing down a home limit estate taxes, but it could also put limits on what is done with the home.
More on that below…
Some of the most common ways an adult-child inherits their parent’s home is through probate, a trust, or a quit claim deed.
Probate
Homes are most often inherited after going through the probate process — either with a Will or intestate. Probate is a formal process whereby a Will — if existed — is validated, recognized and an executor is appointed to distribute the estate’s assets according to the Will of the decedent.
When going through probate, the home will either go through intestate probate or probate with a Will. You can read our guide on how to sell a home in probate.
In intestate probate, there was no Will left and therefore, it is up to the courts to determine how to distribute the assets. This is often a long, cumbersome process. In many of these situations, often a home is sold to distribute all of the estate’s proceeds to the beneficiaries.
If a Will exists, the home will still go through probate, however, it is typically a faster process than intestate. The Will is used as a guiding document for how assets are to be distributed. In some cases, this results in beneficiaries holding onto the house or selling it.
As a probate realtor, my probate clients most often inherit a home with their siblings. Each sibling has an equal share of interest in the property. For example, a brother and sister each take 50 percent interest in the property. A sibling group of four takes a 25 percent interest in the property.
In the case of a two party sibling group and on a property worth $300,000 where the mortgage is paid off, each sibling is entitled to $150,000.
Since most properties are inherited together, your solution requires agreement or a buyout. Keep reading and we’re going to dive into the specific options you have for an inherited house that is paid off.
Still in probate? Check out our pre-recorded webinar on mistakes people make that limit the proceeds of the estate.
Trust
A trust is an estate planning tool homeowners use to pass down their assets in an effort to avoid the lengthy and costly probate process. Trust documents can get complicated or they can be fairly simple.
When trying to figure out your options for a home that was inherited through a trust, it is recommended to consult an attorney.
A trust document is a legal document requiring the trustee to care for the assets according to the trust document. This could require a trustee, for example, to keep a property in the family and allow older grandchildren to live there.
For example, I once saw a situation where the home was required to remain in the trust and grandchildren were allowed to live in the home while attending college. Once every grandchild reached the age of 22, the home could be sold and assets distributed.
If your trust document does not specify what is to be done with the home, then you have some more options. Either way, consult with an attorney prior to consulting with a real estate agent to sell the home. You don’t want to violate the trust.
Quit Claim Deed
A quit claim deed is another option homeowners use to bypass probate. It works like this: prior to death, the parent places their children or one of their children on the deed. Upon death, the property is immediately transferred to the adult-children listed on the title.
In this case, you have the most options on what to do with an inherited house that is paid off. The only stipulation — although not a legal one — is making a choice that aligns with the wishes of your parents.
For example, your mom may have verbally stated her wishes. In most states, this is not recognized as a legal requirement. It is considered a moral and ethical one, though.
With all that said, let’s take a look at some of the options you have.
Options For Inherited House That Is Paid Off
To simplify this at the most basic level, your options are similar to the options for any house. You can move into the property, rent it out, or sell the property.
Move Into The Property: First, you can move into the property. Since the home is paid off, you will be able to live there without making a mortgage payment. Keep in mind that you will still have monthly expenses such as property taxes and homeowners insurance.
Rent And Keep The Profits: If you want to keep the money in the home, have an interest in being a landlord, or feel the real estate market isn’t great, then you can rent out the property. Renting out a home without a mortgage is a great way to get into real estate investing without extra risk.
No mortgage means the property is more likely to be cash flow positive. You can pocket the profit left over after maintenance, insurance, and property management costs.
Sell The Property: The most simple option is to sell the home, distribute the proceeds after real estate commissions and selling expenses. This way, you can take the money and use it to pay off personal debt, like credit cards, student loans, or your personal mortgage.
Siblings Or Other Stakeholders?
Your options are easier to execute on if you inherited a paid off house alone. However, most of my clients find themselves inheriting a paid off home with their siblings or other stakeholders. Read our article on what to do when inheriting a property with siblings.
For example, on a $600,000 home and three siblings, each family member owns an equal share in the property (unless otherwise stated in a Will). That means each adult-child has a $200,000 interest in the property.
In this case, there has to be an agreement on what happens to the property. The options remain the same, however, often all parties do not fully agree.
As an example, one adult-child may wish to rent out the property and divide up the profits. The other two may wish to sell the property and use the proceeds for their personal finances.
So, what can you do when you have siblings involved and you don’t all agree?
Buyout Your Siblings
If you want to keep the property to live or rent, but your siblings don’t, you need to buy out those siblings. There are various ways to do this, such as getting a new mortgage on the property or using some of the cash assets in the estate if there are enough.
Let’s say you have two other siblings — one wants to sell and the other wants to rent the home. You’re most interested in renting the property. So, you and your sibling use the extra cash in the estate to buy out your sibling.
Here are some numbers to make this more concrete. The home is worth $300,000. Each of you own an equal share, or $100,000. You and your sibling decide to own the property 50-50. In order to buy out your other sibling, you both take $50,000 from your share of estate proceeds and pay your other sibling.
Alternatively, you could do this by taking out a mortgage on the property as long as you have supporting income.
At the end of the day, the specific deal structure is going to depend on your goals and desired outcomes. For example, maybe your other sibling wants to rent the home, but they are unwilling to contribute $50,000 to buy out the other sibling.
In this case, you decide to put forward $100,000 and buy out the entire share from your sibling. You then own 66.6 percent interest in the property.
Use Promissory Notes
Buying out your siblings requires you to either have sufficient cash — either personally or from the estate — or the ability to take out a mortgage.
What happens if you want to keep the property and don’t have access to a mortgage or cash? You could use a promissory note.
Essentially, your siblings would “finance” the property. A promissory note or seller’s financing would detail what you will pay, how often you will pay and the terms of payment to your sibling. This works like a mortgage and includes monthly installments plus interest.
So, let’s say you want to move into a $200,000 property you equally own with your only sister. Your sister agrees to a promissory note of her share in the property, or $100,000.
You both agree to terms that are similar to a mortgage, amortized over 30 years with a seven percent interest rate with a balloon payment after 10 years.
Based on a mortgage calculator, you would pay your sibling $665 every single month for the next 10 years. After year 10, you would be required to pay the total balance due to your sibling. At this point, you would ideally have access to a mortgage.
Special note: The terms of the promissory note are up to you and your sibling. Depending on the state you live in, there are limits to how much interest that can be charged.
Suit for Partition
This is the most costly method and involves the courts. If you and your siblings can’t reach an agreement and there are no options for buying out siblings, you may need to file a lawsuit for partition.
In this case, you’re asking a judge to order the sale of the home. This process will reduce proceeds from the estate and ruin family relationships.
If this is something you’re thinking, consult with an attorney. They can help you file a suit.
Conclusion
If you inherited a house that is paid off, you can move into it, rent it, or sell it. Just like any house. However, you do have to consider if there are any legal requirements for the property. Second, if you have siblings involved, you all need to agree on what to do with the property. If you can’t, you may need to buy them out, use a promissory note, or as a last ditch effort, file a suit for partition.
