We have just stated the Medicaid application process and Medicaid has told my sister that our mother's house is an exempt asset but if/when she is accepted they will only give her a max of 200 dollars for the house. The mortgage is four times that amount and we cannot afford to cover that extra cost so the house would have to go into foreclosure. I have a out of state friend (does not know my mother personally) who is interested in buying the house as an investment but the sale would be under market value. Can we do this?
If you really could sell it at so-called market value, then I suppose the difference would be considered a gift to the buyer. For example, if market value is $100,000 and it is sold for $80,000, then $20,000 might be considered a gift.
But that is theoretical. An attorney specializing in Elder Law and very familiar with Medicaid requirements should be consulted.
This is going to be sticky with Medicaid. In the stack of Medicaid application paperwork there is an acknowledgement of MERP. MERP is Medicaid Estate Recovery Program - which is what Medicaid is required to participate in for the state to get Medicaid funds. All states do MERP & how it runs depends on state law for death & probate. If they have a home and go on Medicaid, MERP is required to try to recoup some of the $ spent on their NH from the proceeds of the sale of their home after death (via a claim or lein on the property in probate). You cannot sell their home after death with a clear title until the MERP claim or lein has be released. If it is sold while they are alive, then the proceeds of the sale is an asset for them and they are disqualfied from Medicaid due to the increase of assets. There will be a transfer penalty issued that will have to be worked through to establish there is a zero sum asset gain. As others have said you need to see an elder care attorney and I'd go with one who is certified for elder law speciality in your state.
You can't try to get cute with this. For real property - like home or car - it's all recorded by the local assessors and then dovetailed into the state's system, so there will be a match up & that will trigger a transfer penalty inquiry.
About the selling below value, why? Medicaid will ask this.
If the house is worth less than assessor value, then you can support that by either having an appraisal done (which you may have to do for the sale anyway) or by having a Realtor run comps on the house that show that similar property is selling for less than assessor value. Dealing with a transfer penalty, imho, is all about providing plausible documentation so that they can approve her application. The more detailed the data and the more pages the better.
Would the $$ from sale would have to be enough to cover everything to pay off the mortgage, pay whatever is needed for closing & the settlement statement and then get a release of the deed of trust issued so she can sell it? IF not, do you or other family have the $ to make up the difference to enable the mortgage to be paid so clear title transfer can be done. Probably someone who buys investment property is going to go as cheap as possible and push all the closing costs onto the seller, so you need to be prepared to pay for those costs. You want to really think about all this and it's alot to deal with in addition to moving mom and the issues with that. That's why a good elder attorney can be an invaluable person for you all. Good luck and try to keep yourself organized.