Should I look a gift house in the mouth?
July 10, 2012 12:33 PM   Subscribe

My parents want to put the down payment on a (small) house, and have me live in it and pay the mortgage. Are there any downsides to this that I'm missing?

This sounds like a pretty amazing opportunity to me. Still, in the past, my parents have made... questionable financial decisions, and I'm fairly financially naive. Am I missing some huge risk here?

The downsides I can see are:
-Have to pay property taxes and homeowner's insurance
-Have to pay for my own repairs
-More expensive to cool/heat an entire house than an apartment
-Feeling 'tied down' to the area if I want to move
-Getting a house where there's something Horribly Wrong that is super expensive to fix
-Possibly not being able to make the investment back at some point if/when we sell the house

Assuming that I can afford mortgage+insurance+taxes (a big assumption, but let's make it for the moment), it seems like the upsides balance them out.

Still, I'm a little burned due to their advice on student loans (namely, take out as many as you can. THANKS GUYS) and I'm wondering if there's something super obvious I'm overlooking.
posted by insufficient data to Work & Money (36 answers total) 3 users marked this as a favorite
I'm wondering if there's something super obvious I'm overlooking.

Nope. You pretty much have all of the risks covered. Do you want to buy a house in the price range of that one? If so, then your parents are presenting you with a great opportunity. If you don't, then you are getting burdened with something you don't want.

Another issue: are YOU buying the house, just with your parents' money for the down payment, or are your parents buying the house, with their name on the deed, and a vague promise of letting you take official ownership of it at some time in the indefinite future? Because if it's the latter case, that could turn into a complicating issue sometime down the line in the future.
posted by deanc at 12:37 PM on July 10, 2012 [9 favorites]

The thing that would be a major downside to me is that if you take this money from your parents, you're beholden to them--and you'll rope your partner into this (you said "we") too. This would be a dealbreaker for me but YMMV.
posted by MoonOrb at 12:38 PM on July 10, 2012 [3 favorites]

Who owns the house, the equity, etc in the property?

What is the expected return, if any, for your parents?

Who is securing the mortgage?
posted by iamabot at 12:40 PM on July 10, 2012 [12 favorites]

From a financial perspective, this is pretty common and not very risky. From a relationship perspective, hopefully your parents aren't the sort of people to hold things over your head for years to come.

If this is essentially a gift from your parents to you for the amount of the down payment, you should be fine.
posted by tylerkaraszewski at 12:45 PM on July 10, 2012

You may not realize this until later, but the student loan thing isn't such bad advice unless you wasted the money away. It builds credit for you and it would have given you a cushion instead of making school expenses a stress.

Your parents may be buying the house so that you are putting money into something rather than "throwing money away" on rent. You can still sell the house if you move. Nothing says you have to stay there until the end of the mortgage.

My mother and I put a down payment (and essentially bought) a condo for my sister to pay the mortgage on and live in. She lived there for two-three years and decided she wanted to move. She sold the property and put all of the equity into another condo and has no mortgage. She is in her thirties and doesn't have rent or mortgage to pay. She has a maintenance to pay which includes her property taxes and water usage equalling to $90 a month. Can you imagine paying $90 a month for a posh apartment?

Have the conversation with your parents about their expectations in this. If you can live up to those expectations, it isn't such a bad deal, right?
posted by Yellow at 12:45 PM on July 10, 2012 [1 favorite]

My parents almost did something like this for me a few years back. It is SO. GOOD. that they didn't. Here's why: 1) they were thinking of doing it right when the housing market was completely insane, and they would now be seriously in the red had they bought the place; 2) my parents got a divorce about two years after they were thinking about buying the house, and it would have been seriously difficult for EVERYONE if they had.

Now, your situation doesn't match my #1. And, I'm hoping that your situation also doesn't match my #2. But, all the same, you may be able to gain a lesson from mine. If your parents' situation is in any way shaky (relationship-wise or money-wise), then this situation will likely end up putting you in the middle of a really painful, sticky situation that you really shouldn't and don't want to be in.

So, this is the psychological risk. Think carefully about what your parents are like and what your relationship to them is like.
posted by meese at 12:45 PM on July 10, 2012

What iamabot said.

From what you wrote it sounds like the loan and the title will be in your parents' names. So you will be living there, making repairs, paying the mortgage. Your parents will be building equity. The year end statement for the loan interest would be in there name too, so they'd be the obvious ones to claim the significant tax exemption for the interest paid (though I'm not sure exactly how it would work with you actually paying the interest). If this is how it is indeed going to work it doesn't sound like a good deal to me.
posted by rocketpup at 12:49 PM on July 10, 2012 [4 favorites]

I'm a bit confused; can you whether you'd be splitting the equity in the house?
posted by lalex at 12:51 PM on July 10, 2012 [1 favorite]

Who owns the house, the equity, etc in the property?

Yeah, this.

My husband legally owns half a house with his brother that he no longer lives in because it was only big enough for two people and, you know, he wants to live with his wife. And his brother can't afford to buy him out and we're kind of stuck. If he could go back, I don't think he'd get in on what, at the time--when he was in his mid-twenties and mostly unencumbered--seemed like a good deal. Your late 20s and early 30s are often when people start settling down and you're kind of making this decision for your future significant others if your name is going to be on the mortgage/title.

If you're just going to live there as a renter, that's another matter entirely (but why would you be paying taxes and on the hook for repairs then? Weird).
posted by PhoBWanKenobi at 12:52 PM on July 10, 2012 [1 favorite]

iamabot: "Who owns the house, the equity, etc in the property?"

This is key, and not to be overlooked. Say your house goes for $300k, and your parents put down $60k. If/when you want to move, and you sell for $400k, do you keep the profit? Or, more importantly, if you want to sell for $275k, are you expecting them to eat the $25k?
posted by mkultra at 12:53 PM on July 10, 2012 [3 favorites]

Living in a house takes more time and costs more money than living in an apartment, no matter who lays out the downpayment. If you want to live in a house, and if you and your parents can agree on a place that you can (both) afford, this is a nice form of family support.

Be sure you know what they expect about the equity. Lines to think along:
Say you buy a house worth $100,000, and they put down $20,000. (and you pay $3000 in closing costs, and there's extra PMI if they don't pay at least $20k)
Over the next few years, you have to replace the roof, $4000. You decide to do something that adds value to the house, as well as making you happy, like remodeling a bathroom, $5000. All this time, you're making mortgage payments and pay off some of the loan principle, call it $5000.
A few years later, you have to move. You sell the house for $110,000. You pay off the remaining $75,000 on the loan, and have $35,000 left. $20k is clearly theirs, and $5k (principle) is clearly yours. But the house went up in value by $10k. Is that all yours? Partly theirs? They take 10% of whatever because the house went up 10% in value?
What if you could only sell the house for $90,000? Do you owe them the full $20,000 down payment back?
posted by aimedwander at 12:55 PM on July 10, 2012

Why do your parents want to do this specific thing? Is it to help you out, or is it to share some potential equity down the road?

Frankly, unless I loved a house and KNEW that I was putting down roots, I'd give it a miss.

Homeownerships is so much more expensive than renting. You have tons more maintenance:

1. Gutter cleaning
2. Lawn and Yard
3. HVAC semi-annual maintenance
4. Drianage
5. Electrical
6. Plumbing
7. Pest Control

Think about what you call the landlord for, and now, you get to do it! Fun!

Then there's the stuff that could go HIDEOUSLY WRONG. The sewer pipe connecting the municipal water system to your house could break. Your A/C and die in the middle of a heatwave. You can find asbestos.

An inspection is good, but they can't see underground or behind walls. (would that they could) We remodeled a bathroom and paid a plumber to do it. The original job was $4,000. Then when the walls were open, ALL SORTS OF PROBLEMS. TEN THOUSAND DOLLAR PROBLEMS! You don't know when this stuff will rear its ugly head.

If I could turn back the hands of time, I'd still be in my garden aparment with the yappy dog upstairs. But I can't.

I can warn you however. Run! Run away!

You do not want to entangle your financial life with your parents.

Do you have a large sum of money as a cushion against all sorts of problems that could occur? No? Then this isn't a good idea.

Do you have a 6 month emergency fund? No? Then this isn't a good idea.

Do you see yourself in that house for the next decade? No? Then this isn't a good idea.

Do you enjoy spending hours per week on chores? No? Then this isn't a good idea.

Are you debt free? No? Then this isn't a good idea.
posted by Ruthless Bunny at 12:58 PM on July 10, 2012 [12 favorites]

There's a serious upside to this. The housing market is just starting to recover. In four years, you could be kicking yourself that you can no longer afford to buy the kind of house you would have bought now.

Bear in mind that you are not tied down to a house you buy. You can sell it later. Assuming you've kept up the house, it should sell for as much or more than you bought for. (That is, assuming a greed of bankers haven't secretly pooched the market. But that was then.)

The downside is that home ownership carries risks. You discover that you need a new roof / new plumbing / you have termites. You can't call the landlord.

But that's what you get the house inspected for.

The US tax system works in favor of home ownership -- you get a free ride on the mortgage interest. You'd be clever to take advantage of it.

Also, owning the place you live is pretty awesome. It is your home in a way that a rental can never be. You can paint it any color you like. You can plant a garden anywhere you like. You can plant an apple tree knowing that you get to watch it grow. You have to take care of it, but you're taking care of your home.
posted by musofire at 12:58 PM on July 10, 2012

what ruthless bunny said.

this is like marriage or having kids, one should not do it simply because you CAN.

I like being married I like having kids, I have the finances necessary to buy a house but I don't know if I ever will.
posted by French Fry at 1:11 PM on July 10, 2012

One more suggestion, to support what others have said about deciding who gets what equity/risk/etc: put it in writing. It's going to seem nitpicky to draft up a contract with your parents, but do it anyway. Spell out as clearly what you can all of the "what ifs." What if the house burns down? What if it sells at a huge profit? What if it sells and you break even? What if you can't decide who pays for the realtor? What if big repairs come up, like needing a new roof?

Spelling these things out in advance can save lots of heartache later on. It beats a verbal discussion as well, since your memories may differ 10 years down the road about what you discussed regarding the place needing a new roof.
posted by craven_morhead at 1:14 PM on July 10, 2012 [4 favorites]

The three of us would have our name on the title & mortgage. (The 'we' was referring to me & my 'rents- no partner). Thanks for all the input thus far!
posted by insufficient data at 1:19 PM on July 10, 2012

FWIW, don't let ruthless bunny's "OMG ITS A NIGHTMARE" diatribe get you down. Sure, there are potential risks involved in owning, but there are significant risks in renting as well- just look through the threads here about crappy landlords. And then there's this:

Ruthless Bunny: "We remodeled a bathroom and paid a plumber to do it. The original job was $4,000. Then when the walls were open, ALL SORTS OF PROBLEMS. TEN THOUSAND DOLLAR PROBLEMS!"

Yeah, that does suck, but in a rental you wouldn't even have the option to renovate your bathroom. You'd just be rolling the dice that you're not the unlucky tenant who's there when the rot leads to mold and your landlord doesn't give a crap.
posted by mkultra at 1:20 PM on July 10, 2012

So, this is the psychological risk. Think carefully about what your parents are like and what your relationship to them is like.

QFT! I know a family of three adult siblings where the Ivy-educated multimillionaire sibling bought the factory-worker rural sibling a beautiful 3/2 "executive ranch" house on three acres with a mountain view. The rural sibling is now heard to say "All I have is because of my [sibling]" -- unhealthy and abject, IMO. (This one has a tendency toward abject; hopefully you do not.)

The rich sib and spouse bought the house. It is in their name. The house was selected by the country sib and run by the the purchasing sib and sib-in-law. The stuff that would be escrow is paid as "rent" by the country sib to the rich sib.

The problem here is that there is no homeowner deduction for the country sib, BUT there are all of the costs of maintenance and upkeep. Three acres, house, trees, shed, garage -- upkeep on all of that, plus they needed a new roof and a new deck. All of that was on the country sib, as are the fleet of snow blowers, lawn mowers, et al. (plus repaving the blacktop driveway) that you might not need. There are vague conversations about an eventual sale for $1.00 to the country sib, who will live in that town for life or senior living, whichever comes first.

TL;DR: Bottom line, there can be large costs and family ... issues. It can also be a tremendous opportunity for you if well thought out.
posted by jgirl at 1:23 PM on July 10, 2012

Sorry, I did not see your response regarding names on the title, since I was typing my post.
posted by jgirl at 1:25 PM on July 10, 2012

Other downsides, sort of implied in what you mentioned and referred to by others:

-your house needs a new roof. Who pays? You're living there, so you want the decent roof that will last two decades; your parents are tight on cash/don't feel it's worth it and want the 10 year roof (apply to every serious repair you can imagine).

-your parents decide they want to realize the equity gains to finance their retirement. Are you going to write them a check? Or will you have to sell the house?

-the upside may not be as great as you think because you have to split gains 2 (or possibly 3) ways, cutting at least in half what you may perceive to be a valuable eventual rise in equity.

-complications will arise in determining who much equitable gain is attributable to you if you're the one doing all of the work on the house (ie, have you improved the house or just done repairs? If you redo the kitchen, how will you know how much of the gain in equity is yours to keep--or even measure that gain in equity--which is something you only need to worry about with co-owners)?

-what happens if your parents divorce?
posted by MoonOrb at 1:32 PM on July 10, 2012

The three of us would have our name on the title & mortgage. (The 'we' was referring to me & my 'rents- no partner). Thanks for all the input thus far!

As a person who has parents (really, a dad) who has made questionable financial decisions as well, I would never ever ever do this. Run!
posted by peep at 1:33 PM on July 10, 2012

If all 3 names are on the title, what is to stop them from moving in later?
posted by CathyG at 1:58 PM on July 10, 2012

Are your parents the kind of people who would just walk in the house anytime they want, "because we paid for it", or would they be the kind who respect your privacy?
posted by easily confused at 2:00 PM on July 10, 2012 [1 favorite]

Why do your parents want to do this specific thing? Is it to help you out, or is it to share some potential equity down the road?

Just to address this- partially to help me out, partially because where they live, they often get evacuated due to fires & floods. They're supposed to have a second residence anyway. And while yes, this means that I would have to be host to my parents in the event they get evacuated, that's *already* the case, and has happened. (Two weeks on the couch in my apartment while they and their angry, angry cat took my bedroom. Fun for the whole family! I feel like it would be a little easier in a house.)

I'm a little more interested in the financial risks than the psychological ones- not because I'm not taking those into account- believe me, I am!- but because I feel like I'm already aware of those risks. I have a reasonably good relationship with my parents, and I *think* I can work it out if the money is there. (Although the caution is appreciated, and if you think there's something I might not have thought of, feel free to mention it. I doubt, for instance, my parents are going to get divorced, but it's definitely something to take into consideration, for sure.)

For me, it would be *nice* if I made money in an eventual sale, but really, what I want is a decent place to live where I have some control. And no roommates. I'm so, so tired of living with roommates, and a half-way decent single where I live is $1000 a month. If I can put that money into a house, rather than a landlord's pocket, that seems like it might be worth it. But on the other hand, I *don't* think I'm going to want to stay for 10 years. Maybe 5.

It seems like the biggest monetary risk is in the need for home repair... maybe if (it's still a BIG if) I do this, I'd work out that I'd pay for repairs under a certain amount, and they'd cover ones above them?

Also, what financial risks am I opening myself up to if the three of us are on a title?
posted by insufficient data at 2:01 PM on July 10, 2012

Also, what financial risks am I opening myself up to if the three of us are on a title?

Disputes over who's responsible for repairs and maintenance and how to divide those responsibilities. Your parents divorce, a parent dies and the other needs the money from the house, you and your parents have a falling out, you get married and want your spouse to move in and put your spouse's name on the title. You have a spouse, the spouse moves in, and you get a divorce, and then the spouse has a claim to some of the equity in the house. You get married, the spouse moves in, and then you have a falling out with your parents, but it's in your financial interest to recover as much of the equity in the house as possible, and your parents feel the same way.

This would be easier if your parents bought the house, kept it in their name, and you paid rent to your parents, who used the rent to cover the mortgage (leaving them on the hook for repairs and maintenance).
posted by deanc at 2:14 PM on July 10, 2012 [3 favorites]

Also, what financial risks am I opening myself up to if the three of us are on a title?

The house is (partly) their property that could be subject to a judgment against your parents (maybe; I personally wouldn't consider this a serious reason not to do it as it's probably not a very likely occurrence and there could be homestead laws that make this a non-issue in any event).

The main financial risk is that circumstances change for some reason and your parents decide they need the money NOW (illness, divorce, you have a falling out, parent loses a job/business fails, other stuff you just don't see coming). This is the type of arrangement that works great until it doesn't. When it stops working, you can mitigate the pain by having an actual contract in place that explains what everyone's rights and obligations are if stuff hits the fan. Basically, you agree with your parents that this is a business transaction, and you're all going to treat it like a business transaction, and you're not going to get a bunch of hurt feelings while you negotiate the contract like you would if you were making this arrangement with two strangers.

My wish for you is that you build in some way to buy their share the house from them over time, so that in ten years or so you will own the house from them free and clear and will limit the amount of time you need to worry about these things.
posted by MoonOrb at 2:17 PM on July 10, 2012 [1 favorite]

deanc has good 'what ifs'. I'll add what if your parents declare bankruptcy; what will happen to 'your' house? Perhaps you should see a real estate lawyer before you sign any contracts.
posted by Cranberry at 2:20 PM on July 10, 2012 [1 favorite]

For some reason the rent vs. buy debate has a lot of fervent zealots on both sides when it should really be a mostly financial decision. The difficult part is that you have to assign financial weights to emotional considerations, like how much you value having a nicer, larger place. How much you value autonomy. I think a lot of people just vehemently don't like paying rent, as they see it as paying someone else's mortgage. A lot of people vehemently don't like owning, because it comes with a huge raft of other responsibilities.

Personally, I did do this scenario with my parents, but my financial situation was different than yours, and I don't know what your relationship is with your parents. But I did end up regretting doing it- purely because the market went down. It was a purely financial decision and I only regret it financially.

I think you've done a good job of enumerating the risks to the homeowner's scenario, but you should also enumerate the risks of renting, even if some of those are opportunity costs and emotional drain from living in crappy singles. Think of them in dollar numbers- for example- if I were to live in a crappy single for $800 rent, how much more would I pay to rent this house I'm considering buying? In that sense, you'll get a much more concrete scenario in your head.

And of course, do a rent vs. buy calculator to get some sort of dollar number to start from. When it's all said and done, you should be able to make a somewhat informed decision.
posted by thewumpusisdead at 2:39 PM on July 10, 2012

Here's my experience:

My parents gave us a sizeable chunk of money for our down payment, otherwise we wouldn't have been able to get our house. Things went great for a couple of years, but then the housing market crashed, we had more kids, our finances went south, and eventually things ended up in foreclosure.

So now I don't have the house anymore and I feel like I wasted my parents' money. Like I just burned it. It sucks.

That probably won't happen to you, but it *did* happen to me.
posted by tacodave at 3:08 PM on July 10, 2012

Something that I haven't seen anyone post yet -

If all three of you are going to be on title and mortgage, but it will not be the primary residence of your parents, that might limit your mortgage options.
posted by Lucinda at 3:27 PM on July 10, 2012 [2 favorites]

Two quick things I'd add in addition to what's already been said:

* A financial planner told me once only to buy a house if I was pretty sure I'd live in it for at least seven years. He said that is pretty much the break-even point in a normal market, once you factor in closing costs, maintenance, risk of catastrophic whatever, financial opportunity cost and so forth. I don't know exactly what he was basing his calculations on, but it strikes me as a seemingly-reasonable rule of thumb.

* I know you say you have a reasonably good relationship with your parents, but the idea they'd be entitled to use your primary residence as their second residence would give me pause. That's different from them crashing with you as guests. I have a friend whose parents bought her a house: she came back from holiday one summer to find they had gone in while she was away and repainted her kitchen an entirely new colour. She didn't mind at all, whereas I would have been furious. Some families are enmeshed and some are independent. The only way this could work, I think, is if you and your parents are both happy to be enmeshed.
posted by Susan PG at 3:36 PM on July 10, 2012 [1 favorite]

I see a lot of negative messages ... if it were me, I'd go for it (assuming you can pay the mortgage). But I would definitely want to have things put in writing and possibly have, as a condition, that, once the house is paid off, it becomes entirely yours.
posted by aroberge at 4:00 PM on July 10, 2012

The biggest risk: you and your parents may be "jointly and severally liable" for the mortgage. That means you don't get to split it in thirds; you are each liable for the WHOLE thing. So if they decide to stop paying? Bank doesn't care. You have to pay. They die? Again, bank doesn't care. You pay.

Another factor is taxes. If your parents are letting you live in their portion of the house, the IRS may consider the foregone rent as their income.

This kind of arrangement can work, but you MUST consult a real estate attorney & a tax professional to understand the ramifications in your jurisdiction.
posted by yarly at 6:43 PM on July 10, 2012

Yes, TAXES. Get this all in writing with a good lawyer. There is a lot of tax law based on how you handle these things and you don't want to get bitten next April cause it wasn't done correctly.
posted by johngumbo at 6:47 PM on July 10, 2012

I assume you will, but please do go with your parents to look at places/get an inspector in/etc. Obviously you can't 100% predict things like future repairs, but if you thoroughly investigate the prospective house, that will help you determine if it's a good and safe fit for you.
posted by mlle valentine at 8:03 PM on July 10, 2012

For a strictly financial perspective, you should put some numbers into this NY Times Calculator. This takes into account many factors that most people don't think about. Five years is usually not enough time to make make up for the transaction cost.

You don't say how old you are and how settled you are geographically. Are you just starting out and likely to move relatively soon? What happens if the house doesn't sell right away and you get a career-making opportunity somewhere else? Would the mortgage on an empty place be a financial disaster?
posted by gimletbiggles at 9:34 AM on August 14, 2012

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