We’ll it’s bound to happen sooner or later. Now that the kids are all grown up, they are thinking of getting into their first property. The only problem is they don’t have the cash available for a down payment or maybe they don’t have strong enough credit to finance a home by themselves. Follow these 5 steps:
- Get it in writing and sign and date it. Is this a loan or a gift? Are you partners? What happens if the house sells? What if there’s a profit? What if there’s a loss? What happens if one of you loses your income- who’s responsible now?
- Know whose credit is on the line. When buying the home, you both can be on the mortgage, but who’s on the note? Whoever is on the note is responsible to repay the loan. It’s fine if everything is going well, but what happens if it all goes south? What if the market takes a nosedive like the last few years? Who is going to be on the hook for all the debt?
- Who gets the tax break? Tax deductions are a huge advantage to owning property. Do you split the savings? Does one person get it all? Who files the tax return?
- What if no one can afford the property any longer? Say it ends up as a foreclosure or short sale. Whose credit will be affected? What’s the cost of ruined credit? What if the bank files a deficiency judgment for the remaining amount- who’s going to pay that?
- Have an exit strategy for selling. Is it 2 years, 5 years, 10 years or more? If money is owed, when and how will it be repaid? You must know when and how you’re going to get out, before you get in! This is one of the most important points to remember.
Whatever you think will not go wrong, most likely will. When tensions get high, it’s much easier to honor agreements than to play the “he said, she said” game. That’s why things get uncomfortable and relationships can easily get ruined. Make things fair and transparent. This could be one of your greatest moments – to help your child get their first home!
Your kids will appreciate all you’re doing for them and you’ll both appreciate the fact that you took the time to lay out an agreement out and have something to refer to throughout ownership. I’ve seen too many situations where it just didn’t end well. Mom and Dad and the kids could not remember the deal they agreed to 5 years ago, and it just gets ugly from there. Nobody ends up happy. Don’t let that happen to you. Best of luck and happy hunting!