My mother-in-law moved into our rental home years ago and made $60,000 in upgrades. We now want to sell. Should we repay her?

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Dear Marketwatch,

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My mother-in-law had come to live in our rented house eight years ago. There was a misunderstanding from the beginning about how much the rent was going to be. We thought she would pay the asked amount; He thought he would get a deal. He paid the asking price at that time.

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Fast forward eight years, and two kids later. She is still paying the principal amount quoted by us. He signed from month to month. We pay off the rest of the mortgage – $500 a month – plus anything maintenance-related (lawn, etc.) we want to sell the home for because of the boom.

She also put $60,000 into the house through upgrades—his choice, not ours. While this was happening we covered the house payment as well as put in our own money to fix the stuff. I specifically told him not to do one of the upgrades, and he did it anyway. How do we break into what we want to sell, and do we pay him the total amount he owed?

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Sincerely,

never rent to family

‘The Big Move’ is a Businesshala column looking at the ins and outs of real estate, from navigating a new home search to applying for a mortgage.

Do you have questions about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passi at [email protected]

Dear Family,

You’ve said it yourself – it’s essentially a difficult situation when family and real estate transactions are mixed. It throws the standard landlord-tenant relationship for a loop. After all, most landlords don’t have to worry about inviting their tenants to Thanksgiving dinners and kids’ birthday parties for fear that their latest controversy may turn into that evening’s dinner-party conversation topic.

It seems that your spouse, you and your mother-in-law have managed to find some degree of compromise over the past eight years. From the very beginning, your mother-in-law was willing to pay more than expected in monthly rent. I’m going to imagine that the rent increase proposal was strictly verbatim, because I’m a bit at a loss as to why your mother-in-law didn’t eventually start paying more if she could manage $60,000 in upgrades to the home.

To answer, your first question: You need to tell him about your sales plan as soon as possible. Not only is it a common courtesy that any person should extend to a member of the family – but it can also be the law. In many states, landlords are required to provide month-to-month leasehold tenants with at least 30 days’ notice before selling the home. In some places, such as Seattle, 60 days’ notice is required.

Normally, a lease would take the property to the next owner, and a tenant would have a legal right to live in the home. This is because leases are for the property, not the owner of the property. The agreements may shift from month to month, but obviously this is a less long-term arrangement. This means that your mother-in-law may be asked to vacate the house very soon after the sale.

You should give him enough time to settle his affairs so that he can find another place to live when he needs to – to say nothing of the fact that there is no need to allow potential buyers to visit the home. Essentially you’ll need his approval if he hasn’t already walked out of that point.

,Many states require landlords to give notice to tenants at least 30 days before selling a rental property.,

All of this brings me to your next question: Whatever the circumstances lead to the upgrade she did, I think you and your spouse should plan to pay at least a portion, if any, of the full amount. He didn’t pay to improve the house. The changes it makes may not be to your taste, but a new backsplash in the kitchen or a closet that has been upgraded can appeal to potential buyers and improve the home’s selling price.

You are potentially in a position to benefit from those upgrades, and your mother-in-law is about to get into a rental market where rent costs are rising rapidly and affordable homes are hard to come by. That $60,000 – or any part thereof – will go a long way toward ensuring that he can find a comfortable new home for himself. In addition, she may have chosen to pay for these upgrades under the assumption that she will be in the house longer than him. Had she known you were planning to sell, she could have saved that money for the future. I would argue for all of those reasons, reimbursing him is the morally right thing to do.

You might want to consult with his accountant as well. Upgrades to rental properties are depreciable — and those tax benefits extend to tenants if they’re about to pay for improvements. Because the asset will be sold before the asset is fully depreciated, she may be able to deduct the balance.

With a typical tenant, I wouldn’t necessarily say you should extend such courtesy—though I’ve heard of landlords who deduct checks to previous tenants after selling rental properties as goodwill. A renter’s monthly payment does not necessarily govern an independent lifestyle for small-scale landlords, and instead often covers only the cost of a mortgage and maintenance. That is to say, many landlords would not survive without their tenants.

Keep in mind that there is a difference between a repair and an upgrade. If any of the costs he incurred are due to normal wear and tear – let’s say he repainted a dismantled wall – he should be expected to pay for that himself. And if any repairs are needed to get the home in a position to sell, you’ll want to discuss those costs with him or her.

I hope your conversation with your mother-in-law goes smoothly. If it doesn’t, keep in mind how much stress the housing turmoil can bring. I am sure that once she settles down somewhere comfortably, she will recognize that you all had her best interest at heart during the whole process.

,

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