Rich Dad, Poor Dad: buying out a family home

June 19, 2007 3:19 PM

Is investing in this house a good deal?

My husband and I are both artists. Typically, our after-tax income is about $15-20K, combined. This is alright with us because we're doing what we want to be doing -- there isn't anything else we want to spend our money on. We have no debts and no children; we are both 34.

We live rent-free in a house co-owned by my husband's father (call him A) and uncle (call him B). A and B inherited this house from their father (C), but didn't need to use it as a residence because they have their own homes. Several years ago, my husband and I had moved in to take care of C in his old age, in exchange for rent-free living. C died last year. The house is currently worth approximately $1 million (4 bedrooms, 3 baths, finished basement, 2-car garage on a small property in an affluent suburb in the Northeast US).

A and B are currently proposing to us this deal: we begin making monthly payments at a reasonable interest rate (TBD) to B in order to purchase his half of the house ($500,000). After that's done (30 years?), we would co-own the house with A. We could then sell it and split the results with A. Or we could do nothing and wait for A to die, in which case we'd inherit half of his portion (my husband's brother would get the other half), thereby owning 3/4 of a house that was worth $1 mil in 2007.

Now, people at our income level don't normally invest in million-dollar houses, which is why I don't know if it's a wise investment for us. Is it? What would make it so? Is it only worth doing if we get an especially favorable interest rate from B? Is it worth sacrificing for (e.g. taking on part-time supplemental jobs that take time away from our arts jobs in order to make the payments) because it'll be such a good investment?

One thing that gives me pause is that when I used a loan-calculator to run the numbers, I discovered that if we pay B back $500,000 at 5% over the course of 30 years, we'll be paying him nearly $500,000 in interest alone! So we'd be paying him $1 mil for a house that he didn't even purchase in the first place? Would it be fair to propose a rate of 3% (like inflation) instead to approximate how much B would have made if he had held onto the house for an additional 30 years? Would it be fair to propose basing our payments on a reduced price?

If we were to move out of the house instead of investing in it, A and B would sell the house and invest the money in their own estates. (A portion of whatever remains would eventually come to my husband after A's death.)

Is this proposal a better deal for A and B or for us? Or neither? Ideally, we don't want to take advantage of A or B, just find a favorable situation for all of us. But if the deal favors A or B, we wouldn't be opposed to making counter-offers that tilt in our favor.

posted by anonymous to work & money (21 answers total)

It doesn't seem like a good deal unless you can sell out your equity before 30 years if you need to. Otherwise, you're not really making an investment -- you're just paying rent. That might not be so bad if you're going to have to pay rent anyway, though.
posted by footnote at 3:30 PM on June 19, 2007

This makes no sense. First of all, even with no interest, I don't know how you could afford payments. One-thirtieth of half a million is $16,667. That's roughly what you make! And it doesn't include property taxes, upkeep, utilities and about fifty other things pertaining to the house itself. And god knows, you won't have money for food, transportation, health insurance or anything. Without knowing where you live, I can only guess that property taxes on a half million dollar house in the affluent NE might be somewhere near $400-500 a month - just for your half. And don't forget about necessary homeowner's insurance too.

On top of that, you're not the sole owners, you share the property rights! No one in their right mind would do such a risky thing, regardless of how well you think you may get along with your partners in the future.

The bottom line is, it's not even remotely a good investment for you. You can't even come close to affording it if you *quadruple* your income! The old rule of thumb for buying property used to be to calculate what you could afford on something like 30% of your income. For you (and going by your MAXIMUM), that's $500 per month. With a 3% mortgage (which in itself would be a miracle), your payments would be over $2100. Assuming you got other jobs, to make this "safe" for you in terms of the percentage of your income you ought to be spending on a house, you've have to make about $7000 per month.

In fact, this idea is so off base that it's a little scary that you'd even think it was doable. Not to be harsh - we all dream. But come on!
posted by Dee Xtrovert at 3:39 PM on June 19, 2007 [1 favorite]

How much do you like the house, and the neighborhood? A 5% fixed interest rate for 30 years would be a pretty sweet deal here in southern California, depending on the location.

I would suggest checking out the real estate prices in your area before making the offer; you wouldn't want to lowball A + B too much, if they are sitting on a "goldmine" house.
posted by shino-boy at 3:40 PM on June 19, 2007

Time to move.

The only thing I can think of is to leverage the deal. Tell B you'll pay $350-400k cash today, see if A will take the same deal. Sell for $1 million and take the $200k to the next shanty.
posted by thilmony at 3:46 PM on June 19, 2007

It would be an okay investment, but you can't afford to purchase even half this house. Not even close.

(By the way, if you were going to do this, you'd have to research the current real estate market to determine what the house is actually worth before you signed on to buy half of it.)

A and B are just trying to figure out a reasonable way to charge you for the privilege of living in that house. But frankly, you can't afford to even rent it. Even at family discount rates. So either A and B are going to completely eat the cost of the house on your behalf and let you stay there forever rent-free (which is unreasonable to ask B certainly, and probably unreasonable to ask A), or the two of you should move out and find some less-swanky digs.
posted by jellicle at 3:48 PM on June 19, 2007

I agree with Dee Xtrovert above, it seems impossible for you to make the numbers come out in your favor without drastically increasing your income.

You mentioned that you would inherit part of A's portion of the house eventually. I think you just need to be grateful for that and move on.

The only way for you to make it work financially is for you to offer C a deal that is clearly not in his best interests. Family deals sometimes work this way, but you would have to knowingly make a deal where you get the most out of it (similar to what thilmony is suggesting). If C is comfortable giving you a sweet deal, and you are OK with asking for a deal that is extremely favorable for yourself, then go ahead and ask. My guess is that if C is wealthy, he might be willing to lose a little money to help you out. If C is not wealthy, he will refuse.

On preview: jellicle is saying essentially the same thing.
posted by bove at 3:53 PM on June 19, 2007

Sorry, used C when I should have been using B in my comment above to indicate the uncle.
posted by bove at 3:53 PM on June 19, 2007

You and your husband got hosed in the inheritance. A and B should suck it up and just give you a share of the house. You looked after their father (C) in his old age, for christ's sake. Look at it this way: if they had stuck C in a retirement home for 5 years instead, they would easily be out $200k.

I would not invest in the house. In fact, if I were you, I would propose that you should continue to live in the house rent-free indefinitely. And you should probably get a 20% stake in the house, for free. If either A or B die, then you can deal with the consequences then. If they don't give you that deal, walk away. You can't afford it.
posted by crazycanuck at 4:09 PM on June 19, 2007

And by the way, I would totally guilt A and B into smiling and liking the deal you're proposing because it is HARD FUCKING WORK to look after the old folks and get shit in return.
posted by crazycanuck at 4:11 PM on June 19, 2007 [1 favorite]

This isn't a deal at all. I think A and B are being very greedy and took advantage of the care you provided for C, but at least you were able to live rent-free for a while. Now, you are going to have to move. I agree with crazycanuck. You took care of their father, so you shouldn't have to pay them for half the house. However, you have been living there for several years rent-free. When you lived rent-free, did you pay for food, utilities, etc.? Did you paint the house, take care of maintenance? Then you definitely didn't get a free ride, and I would suggest that your husband try to negotiate with his A and B.
posted by misha at 4:52 PM on June 19, 2007

If I was in your shoes, I would just offer the idea of contracting you two as caretakers of the property. You could live there without the burden of ownership. But even that's a long shot.

There is really no way that you two could afford the upkeep on that kind of property anyway. Disputes will ensue. A or B will be like, "Well, you were living there when the toilet exploded and caused 30 Gs in damage."

But wait someone has homeowners insurance, right? Or do they? Are you going to pay half of that, half of the property tax?

I really don't like discouraging anyone from doing something cool, but home ownership is or can be a huge financial liability.
posted by snsranch at 5:02 PM on June 19, 2007

What Dee said. I think it's really uncool they even cooked this up because anyone with a calculator can see you can't pay for that house and survive. I think they're trying to make you think you're voluntarily leaving because you aren't buying the house, when they really want to kick you out and sell. Or maybe they feel you guys need to stop being "starving artists" and they think this would do the trick.

Regardless, neither of them are getting anything from the house sitting there or from you living in it. If you had a $500k investment that was going unused, you'd probably want to sell it too. I don't think them making you leave and selling is so bad, but developing a "payment plan" that is clearly beyond your means instead of just being honest, is not really fair.

To answer your original question, no, this is not a good deal.
posted by ml98tu at 5:17 PM on June 19, 2007

This point is implicit in Dee Xtrovert's sound advice above, but I will underline it: before you think about whether you can afford to buy or invest in this house, you should consider whether you can even afford to own this house. Assuming that at some point you will be a co-owner or outright owner, do you have the income to:

- Pay property taxes, which will likely be fairly high?
- Pay for all the utilities?
- Pay for minor yearly upkeep?
- Have enough savings for a major repair every 5-8 years?

It's hard for me to see that you would be able to afford this on $10-20K per year (I'm assuming negligible savings as well). Sure, you could get creative with re-financing and second mortgages, but you don't sound like the types who would go for that. Throw in the potential legal and emotional hassle of co-ownership, and I'd say its not worth the risk to you.
posted by googly at 5:24 PM on June 19, 2007

Lots of good advice above -- mark me down in the camp that say that this is some kind of scheme between A and B because they don't want you living rent-free anymore. They're trying to figure out a way to charge you rent. The whole idea about buying the house (over 30 years!) is just a gloss to get you to pay rent. Unfortunately, I think it's time to move.
posted by Mid at 6:06 PM on June 19, 2007

Nah, it's not a co-scheme -- B is the one being a jerk. If B offered you the same deal A did, you'd end up owning half the house rather than just 1/3. B wants money now no matter what. A voted to let you keep living there. He doesn't really need the money. If it didn't mean having to kick you out, he wouldn't mind getting a huge sum of money but he mainly wants something for his heirs. Given that, thilmoney might be right, you could potentially buy out A for $250K right now because if he invested it, the value would grow faster than the home would appreciate, so his heirs would come out ahead.

I'm trying to figure out a way to make this work. A is willing to let you occupy the house for free. So, could you... refinish the garage and live there (or add a door into the finished basement, or otherwise create a second unit), rent out the main portion, and use that money to buy out B? But A might then feel like you're profiting at his expense. So, I'd involve him in the decision. Go to A and say "look, we really appreciate your offer, and we really don't want to move, since we love the house, it reminds us of C, and we want to keep it in the family. But there's no way we can afford even B's half of the house. We know B would like to begin getting some income... Do you have any ideas?"
posted by salvia at 6:44 PM on June 19, 2007

One idea might be to compute how much rent you can actually afford (realistically), and then tell B -- forget about the buy-out idea, I'll just pay you this rent.
posted by Mid at 7:27 PM on June 19, 2007

in addition to everyone saying you can't afford this, i would add that anything you get for less than fair market value (discounted interest rate or rent, for example) would be considered either income to you or a gift from father. all of these proposals have pretty complicated estate and income tax consequences. since you are talking about a 1M dollar house, you need to involved professionals. an estate planning attorney might be able to craft something that would make this work for all involved.
posted by probablysteve at 8:33 PM on June 19, 2007

I recommend trying Mid's approach, there is no way you can afford an ownership stake in this house. Your care-giving activity is worth a discount of a few points, to be sure and if they sell they owe you some money - morally if not legally.

While you might be able to scrape by on your proposed arrangement it will probably breakdown when something major happens - and this happens a lot - trees and roots will grow where they shouldn't, woodwork will rot, concrete will crack and heave, plumbing gaskets will leak, walls will need paint, appliances will wear out and its pretty hard to even do-it-yourself these projects for under $100 a shot and its really easy to spend $1000 on a modest household project. Since this is a valuable property you should use good materials/workmanship or you are risking everyone's investment and you would have trouble affording this without skipping lunch for the next year.

There is plenty of hidden obligations with this deal that I am only scratching the surface of, but the philisophical point is that if something is worth having it is generally worth paying full price for and since you can't do that you need to stay away from this deal.
posted by Deep Dish at 8:36 PM on June 19, 2007

I'm going to go a little against the grain here, with major caveats. For a payment of 500,000 spread over 30 years, plus a reasonable interest payment, you get to enjoy a $1 million house, yes? And at the end of 30 years, you own half of that $1 million house, yes? That doesn't sound so bad to me. But these are my concerns/caveats:
- will A let you occupy his 50% rent-free for 30 years? And what happens if he doesn't, or he dies?
- when do you own your 50% equity? Imagine that in 10 years time A dies and the house must be sold, and it is then worth $2 million. Do you get $1 million and out of that sum pay B the remainder of his $500,000? Or does B get most of the value of the price uplift? If the latter, this deal seems to me to be of little benefit to you.
The most straightforward way to do this would be to raise a home loan for $500,000 and buy out B. Then you make repayments to the home loan company. In short, I don't think you should necessarily pass up the chance to live in a $1 million house at, effectively, half-price. But a home loan may be out of the question, and the mefite caveats above regarding maintenance etc are important.
posted by londongeezer at 10:43 PM on June 19, 2007

My mom - a real estate broker for 40 years - used to say to me:

"I'll buy any house, for any price you care to name."

The first time she said this, I thought that was silly. So I said, "What about this house we're living in now. Would you buy it for $1 billion?"

"Yes."

7 year old me: "???"

"The catch is, I name the terms. My terms are a dollar a year - for each of the next billion years."

She was trying to teach me something that you've yet to learn.

This deal could be structured in a way where A is essentially giving you a charitable bequest in the most gracious and wholehearted manner imaginable. My guess is that this is what he's trying to do.

Or it could be structured in the most rapacious manner possible, ensuring that you pay for 29 years, including a gobload of interest as you have already pointed out - and then are forced to default and remand the ownership of the property back to him because you violated some little clause in the contract that your cut-rate lawyer (the only one you could afford on your artist's income) didn't catch.

You're so far away from even being able to ask this question. What you need to hear is this: You are not in a place where you can ask this question now.

Have A draw up a written contract. Then you will be able to ask this question with reference to the contract you have in hand. The nebulous possible ideas that are now floating around cannot be evaluated and it is a waste of time to try.
posted by ikkyu2 at 7:40 PM on June 20, 2007

I don't see anyone looking at this from B's perspective. He's probably paying at least $5000 in taxes a year, plus another several thousand in insurance. He's not a jerk if he says that he doesn't want to subsidize you indefinitely to the tune of out-of-pocket costs of several thousand dollars a year (even aside from the opportunity cost of having $500k tied up in property he can't use).

If you can't afford to compensate B for his costs, you have to expect that he's going to want to sell his share of the house, unless he's especially wealthy and sufficiently fond of his nephew. And at your income level, you can't afford to compensate him for even his out-of-pocket costs, much less buy his part of the house. (Also, I second what everyone said about getting all of this in writing, including the contingencies: are you immediately the 50% owner? Who's responsible for taxes and insurance?)

It's unfortunate that C didn't directly account for you in the will--there are some not-good tax implications for A trying to pass that inheritance on to you before he dies--but that's the bed you currently lie in. It sounds like you need to have a frank discussion with the three to find out their real goals and what your options are, and the degree to which A is willing to help you out now by putting your future inheritance in some sort of trust to help you. (For example, A & B could sell the mansion, and A could take your $250,000 share of the inheritance and buy a new place for you to live in, with the understanding that you would eventually inherit it.)
posted by commander_cool at 8:06 PM on June 20, 2007