Can I buy my parents' house in a way that makes financial sense?

December 8, 2013 1:28 PM

My parents have always struggled financially, living under crippling debt and never able to have an income able to match the bills, the biggest of which is their mortgage. I hate to see how difficult this situation is for my dad, and I want to help out for the sake of his stress level, and also because once he retires in a few years the math truly does not work out in their favor. I've been thinking of buying some land anyway, so I'm wondering if there is any feasible way to make this work for both my parents and me.

The house is somewhere near the "upside down" line--I'm not sure exactly, but I believe that it currently has slightly more value than what is owed. I know that if it were purely an economic decision, without any factoring in of my desire to take care of my parents, it would probably be a no-brainer. I will never live in the city where the house is located, I don't have a house myself yet, and I can't afford to pay two full mortgages, and I will eventually inherit a third of the house anyway.

But I can't shake the feeling that there might be some way to make this work. Especially since there is the chance that my dad won't be able to pay the bills once he retires, thus bringing the house back upside down and turning the inheritance of the house into debt (or however that works... can banks pull from an estate upon the death of the debtor?) Furthermore, if things go badly for my parents finances, as I think is likely, it will be very hard for me to say "no" when the inevitable request for money to help out comes (as has happened before). My income is easily three times that of my parents, and I have additional savings and assets and no debt--how could I deny my own parents the money that would make such a big difference to them? At any rate, it may be in my interests economically to do this, as well as the huge gift it would be to my dad to have the burden of the mortgage removed.

The thing is I can't figure out the best way for this to go down. If the house was gifted to me, I would have to pay gift taxes, but the essential cost of the house would be whatever the remaining amount owed would be--right? So it would be like getting a house for half-price. Are there other tax considerations that I'm missing? I have excellent credit, so I wonder if a refinance would be possible in that situation to reduce the mortgage.

I think I could also buy it, but there are taxes there as well, for both me and my parents. And then there is the issue of what price would make sense. Would selling the house to me for $1 be possible, since technically the bank still owns it? Could I somehow buy the house for $1 and acquire the debt of the house as well? Or would it be better to buy the house for [$1 + (the remaining amount owed)]?

My dad would be happy to pay a monthly "rent" to me, if it was a good amount less than the full mortgage, and he would be glad that he is leaving an inheritance--something that doesn't matter much to me but which is very very important to him.

Some figures that may/may not be important: I estimate the house to be worth $400k with about half paid off. I have no debts and about $150k in stocks, which I am not going to mess with except in emergency or retirement. I'm hoping my parents have at the least another 30 years in them (I never knew my grandparents, I want my kids to). And there's no way I'll ever live in this house. But I've been wanting to buy a house as an investment (land value + ability to rent) but have been a little daunted by the process.

posted by anonymous to Work & Money (19 answers total)

Please reconcile this:

The house is somewhere near the "upside down" line--I'm not sure exactly, but I believe that it currently has slightly more value than what is owed.

and this:

I estimate the house to be worth $400k with about half paid off.

Because the financials of this decision are *absolutely* going to depend on how much is owed on the house and how much it's worth. If you can buy a $400k house for $200k in exchange for letting your parents live in it for the rest of their lives, maybe that's worth it to you. If you can buy a $400k house for $400k and let your parents live in it for the rest of their lives, maybe it doesn't.
posted by tylerkaraszewski at 1:34 PM on December 8, 2013 [4 favorites]

What is your income and what are you other expenses? The first thing to do is to figure out what you can afford.
posted by shihchiun at 1:35 PM on December 8, 2013

I can't afford to pay two full mortgages

There's your answer. You can't cripple yourself to help your parents.

Taking on a 200k mortgage for a house you aren't living in will cripple you, since you state that you can't afford two mortgages. It's not going to ease your parents' stress to see you struggling financially alongside them. Helping them out with some cash here and there is one thing, but put on your own oxygen mask first, etc.
posted by randomnity at 1:36 PM on December 8, 2013 [6 favorites]

I came in here to say what tylerkaraszewski said. How much is left on the mortgage? Is it under water or is half the current value paid off? And if the house is worth 400k with 200k paid off, maybe your parents should just sell it to a third party and buy a smaller house or senior friendly condo with the proceeds of the sale?

I think it's important to figure out how long your parents can feasibly live in that house. Are there stairs? A big yard they can't handle? And how easy will it be for you to unload the house or rent it out once they move? Not all properties work as "investment" properties --- it really depends upon the area and the market and a ton of other variables.

What happens when you want to buy a house but can't because your debt limit precludes you from getting another mortgage?
posted by snarfles at 1:45 PM on December 8, 2013 [5 favorites]

I bought my daughter's new home, and with the help of a lawyer issued a loan to her with no down-payments and no interest. This document keeps us both free of tax-isssues. The way the lawyer made the letter, I can either let her gradually pay it down, or eventually let her inherit the money, or gift her with the amount allowed every year. We are still thinking about that. Maybe this can be in some way useful for you.

Another thing is, as some have said: is this the best solution for your parents? Mine moved to more practical homes during their 60's. If this becomes relevant, your good intention might be completely off.
posted by mumimor at 1:50 PM on December 8, 2013 [2 favorites]

Maybe you could make a deal with your parents to pay x% of their mortgage each month, x being an amount that would help them but not leave you in financial trouble, and then if and when they sell they can pay you back what you paid, with or without interest depending on what ever works for you guys. Having the interest might make it easier for them to take the money as then it seems more like a business arrangement so might be less damaging to their pride, whether or not you take it at sale time is up to you.

My mum is too proud to take financial help, so each month I send her a bunch of gift cards to grocery stores and tell her they are non refundable, so she has to use them. I have taken to sliding some money off her utilities in winter, she had me set up her online payments so I know her password. She only looks at the total due each quarter and has never mentioned that she's noticed I'm doing it. So anyway you might be able to help your parents out another way by picking up a bill or 2 to cover each month.
posted by wwax at 2:07 PM on December 8, 2013 [2 favorites]

The house is somewhere near the "upside down" line--I'm not sure exactly, but I believe that it currently has slightly more value than what is owed.

and this:

I estimate the house to be worth $400k with about half paid off.

OH! I just realized that you might be somewhat confused. By "value" do you mean your parents' equity in the house (rather than current market value)? In other words, that your parents' equity in the house is slightly more than the outstanding balance on the mortgage? Granted, that's not a great place to be at retirement, but it's also NOT upside down. Normally, "upside down" in the real estate market refers to owing more on the mortgage than what the house is worth. For example, the house is worth 400k and you owe 401k. In that case, your parents would have negative equity in the house ("underwater" is another popular term).
posted by snarfles at 2:07 PM on December 8, 2013 [2 favorites]

Especially since there is the chance that my dad won't be able to pay the bills once he retires, thus bringing the house back upside down and turning the inheritance of the house into debt (or however that works... can banks pull from an estate upon the death of the debtor?)

I'm not a lawyer, but if it's a goal for your parents to be able to provide you and your siblings with an inheritance in the form of their house, you should also consider and plan for the case where one or both of your parents needs long-term medical care. I don't know where you're located, but your state's version of Medicaid might provide long-term care as long as your parents meet the asset and income limits, which they might or might not. After a Medicaid beneficiary dies, Medicaid can place a lien on their property so as to "claw back" the cost of the care provided out of the equity in the house, which could result in the home being forced to be sold. From what I understand, though, the implications for your parents' estate in such a case will depend on the laws in your state and whatever legal arrangements you have in place (a trust, for example -- which might also affect whether they qualify for Medicaid). The rules around this are complex and I have to admit that I don't understand them well at all, so this is really more of a heads up than anything. To understand the possible scenarios and what your options under each of them might be, you absolutely should talk to a competent estate planning lawyer.
posted by un petit cadeau at 2:23 PM on December 8, 2013 [2 favorites]

always struggled financially
crippling debt
when the inevitable request for money to help out comes (as has happened before)

I don't know where you are so a $400,000 house might be modest but it seems like a better way to help your parents - especially if you foresee another 30 years of life for them - is to help them get into a more affordable living situation and helping them learn manage their finances better. (I'm not trying saying they are irresponsible. Obviously, I don't know their situation. On the surface though, it looks like they could make some changes that might be less complicated.)

They will have a more solid financial footing right now and be better off long-term and you will be able to maintain your financial security.

If you are set on buying the house, have you talked with your siblings about your plan? You say you will inherit a third of the house so your siblings are possibly expecting a similar inheritance. They might object to your plan. Or they might be willing to chip in and all three of you split the cost and help your parents out together.

Good luck!
posted by Beti at 2:35 PM on December 8, 2013 [4 favorites]

One more thing -

living under crippling debt

What kind of debt (other than the mortgage)? If it's high interest credit card debt, you'll get more bang for your buck helping them out in that department. As a bonus, you won't have to take on a mortgage for a house where you'll never live that also prevents you from getting your own house.

I think you all really need to sit down with a financial planner to discuss you and your parents finances in detail before you even start thinking about something like this.
posted by snarfles at 2:35 PM on December 8, 2013 [2 favorites]

NO.

-The house will be split 3 ways upon inheritance, but what happens when you own the house?

Presuming you buy it at a discount, will someone think you are stealing from them??

- If you simply pay a portion of the mortgage, then you are investing in something YOU DO NOT OWN that will eventually be split 3 ways. Plus, you'll be losing out on tax benefits.

- Is the neighborhood gentrifying or otherwise permanently desirable? Otherwise, this will never ever ever be an investment that pays off.

----

It sounds like if your parents sold the place and downsized they would be OK.

Help them do this.

Talk to a qualified financially planner. I'm sure they'll agree this is a bad idea and suggest even better solutions than me.

Good luck.
posted by jbenben at 2:53 PM on December 8, 2013

If the house was gifted to me, I would have to pay gift taxes

Assuming that you are in the United States, the default is that the giver is the one who pays the gift tax. However, in some circumstances, arrangements can be made for the receiver to pay the tax. It is something you would need to work with a tax professional on.

I recommend that your parents sell this house and move into more modest accommodations that they can pay for long-term, even in retirement. Or, have them move in with you.
posted by Tanizaki at 2:57 PM on December 8, 2013

>If the house was gifted to me, I would have to pay gift taxes

If you are in the US, this will apply only to a gift over $5.2 million. Not likely a problem.

Talk to an accountant. If you pursue snarfles's excellent advice, maybe you can consider paying toward or paying off their other debt, taking a second mortgage based on those payments, and then shifting their monthly mortgage payments (part or all) to add to that second obligation over time, only when and to the extent you financially can. That way you have a better chance of having your advances repaid when they die.
posted by yclipse at 5:57 PM on December 8, 2013

The house is somewhere near the "upside down" line--I'm not sure exactly, but I believe that it currently has slightly more value than what is owed.
...
I estimate the house to be worth $400k with about half paid off.

So is it that the mortgage has $200k in equity, and you estimate it could get $400k in current market conditions and your parents bought it for about $600k? Meaning, if they sold it today, they would be left near $0?

Also, is this the kind of house which will allow your parents to "age in place"? Assume they can no longer drive, or walk, or climb stairs safely. Can they do all daily activities on one floor of a home, like bathe, sleep, laundry, prepare food? Will they be able to make doctors appointments? Get grocery delivery? If not, you shouldn't even be trying to calculate this house into any future plans. Let it go.

You also need to consider your siblings thoughts on all this. These kinds of deals done without full transparency can lead to deep family divides. I think you should find a financial planner and get all parties involved.

You also don't mention how long until your parents retire. Is it soon? Do they have any plans for long-term care? Medicaid requires a large amount of assets to be spent down before it'll contribute to long-term care costs.

BTW, You can message a mod and answer the follow up questions.
posted by fontophilic at 7:35 AM on December 9, 2013

If you really want to help, tell your parents to sell the house, and give them the money they'll need to make up any shortfall and to pay the realtor.

Houses don't get more stabile as they age, and living in a house is MORE expensive, not less, especially if you're still paying a mortgage.

At retirement age, folks are eligible for 62+ apartments. Apartments are great. They're smaller than houses, so easier to keep clean. Cheapter to heat and cool. And frankly, why should someone have more house than they need?

Houses will always require maintenance, and as people get older it becomes onerous. Mowing the lawn? Feh. New roof? Is there enough money for that?

We owned my MIL's house outright. Her electric and gas bills were more than a utilities included apartment in that area. We were forever helping her out with fixes. New subfloring, roofing, septic, it went on and on.

It's a myth that a paid-for house is better than an apartment in retirement. The happiest day of my damn life is when we signed that house over, for absolutely NO money, to her boyfriend. He was putting all the money and labor into the house at that point and it seemed the fair thing to do. Now she's living in a little place next door to her BF and she could not be happier.

This house will not be a blessing to you in the future, it is certainly NOT a blessing to your parents now.

Float a trial balloon about potentially selling the house. You may be surprised at how eager they are to do it, but they haven't brought it up because you seem to be counting on it as an inheritance.
posted by Ruthless Bunny at 7:36 AM on December 9, 2013 [1 favorite]

Mod note: This is a followup from the asker.

Thanks for all the answers so far.

I should have clarified that this thread is to help me figure out how this would work and if I want to consider it--before mentioning it to anyone in my family. I don’t even want to tentatively raise the possibility unless I know there is a scenario that I’d be willing to follow through on.

For the comments related to inheritance and my siblings, thanks for the good advice. None of this would be done without the full consent and involvement of everyone. My siblings and I all wish that my dad would stop worrying about paying off the house or providing us with an inheritance and enjoy his life. This is something that is very important to him though, and as he’s struggled for decades now to maintain and pay for the house, he is thoroughly entrenched in the idea of the house being handed down. The truth is that the house would simply be sold and the proceeds (if any) divided. I know both my siblings would readily agree to just letting me take over the house and would yield their rights of inheritance, no questions asked. (Not that I’d do this, I would insist on a fair division.) Both of them passed a substantial amount of their student debt to my parents, and both have been receiving financial help from them for a while. I’m not going to hold that against them, but it might compensate for any slight bias in my favor that might be intrinsic to any agreement we can come up with.

The tricky part for me is how to actually make the transfer work. Several people have pointed out that I am confused on the terms (“upside down” etc). In fact I am even a little unsure on the facts, and will have to sneak more information out of my dad this Christmas. But my understanding is that the house is worth roughly $400k and has roughly $200k still owed to the bank. (Sadly, I think the house was originally bought for around $200k, but multiple refinances, home lines of credit, and failure to pay down interest lead to this sort of thing.)

So in my best-case-scenario, I-really-don’t-understand-the-complexities thinking, it might go down like this: I get a $400k house for half off (only $200k). My parents are relieved of their burden and pay a much reduced rent. I pay less on the house than they did, because my credit is great. Inheritance wise, something fair is figured out (maybe we divide the $200k which was paid off three ways, and then divide any rent I received from my parents three ways).

Is "everybody wins" a possible scenario here? I am still not at all sure of that.

The idea of downsizing makes a lot of sense, and I haven’t considered it only because I know my dad would never consider it. But it may be that it’s something that he could eventually be talked into. I will think of a way to breach this topic.

Re: questions about the nature of my parent’s debt: the debt is from the house, (refinances, home equity lines of credit, etc), from many maxed out credit cards, from my siblings student loans, and a car loan. A recent bankruptcy helped with a lot of this while somehow allowing them to keep the house, but it didn’t help enough. This raises another question: can the creditors seize the estate after my parents passing? If so, there would be nothing left. So a transfer of the house ownership out of their estate might be a way to protect it from that?

Clearly I need to talk to a professional, and my family. But this thread is helping me figure out whether I even want to begin the process.

posted by cortex (staff) at 9:23 AM on December 9, 2013

Upside-down means that more is owed on the house than its worth.

If all that is owed to the bank is $200,000 and the house is worth $400,000, then there is $200,000 of equity in the house. That means if your parents sell the house, they'll have $200,000 handed to them in a check at closing. This amount is tax-free, if this is the primary residence. (clearly, talk to an accountant, but that's pretty straight-forward.)

To really understand the totality of the indebtedness of the house, you'd need to know how many other debts the house is securing.

There may be a second or third mortgage, which would need to be paid.

There may be a HELOC (Home Equity Line of Credit) which would also need to be paid.

So in order for your parents to be in a position to sell the house, they have to sell it for enough to clear up any other loans against it.

So you don't really even know if you can get this house for $200,000, you may have to pony up for all the other loans too.

Now, you would NOT be eligible for a regular home loan. This is not your primary residence. So you won't be getting the very best interest rates. There are also "closing costs" when you buy a house, typically about 3% of the total price. Because this isn't your primary residence, you'd need to put down a substantial downpayment, 10-20%, depending on the bank.

The house would need to be appraised before you'd be allowed to finance it, and it has to be worth what the loan is, if not more. Housing prices have dropped in a lot of areas, so if the last appraisal was 5 years ago, your dad may be in for a rude awakening.

Have you done a Zillow. It's not super-accurate, but it will give you an idea of what houses have sold in the neighborhood recently and for how much. You can also check Realtor.com, to see what other homes in the neighborhood have sold for recently, or are on the market for today.

You will need to insure the home and depending where it is (tornado alley, Florida, a flood plain) that can be REALLY expensive, like $300 a month. Also, you won't get the tax benefit a owner/occupier gets. If you own and live in a home, you can deduct the mortgage interest of the loan, so it can sometimes make sense to finance a house. As a landlord, your tax situation will be very different, you may have to declare the rental income as INCOME. This may drive you into a different tax bracket.

Don't discount any repairs or maintenance that would need to be done on the house. A new HVAC system can cost $10,000 even with rebates, etc (BTW, most of those rebates are only available to homeowners, not to investors.) A new sewer line will run you about $7,000. I don't even want to get into foundation problems, a new roof, storm windows, etc.

I cannot stress to you enough that your thinking on this is so flawed that you're down on your hands and knees BEGGING to go bankrupt on this endeavor.

Bailing your parents out will not help them. Enabling poor financial decisions will not help them.

You're thinking on this is sweet, but you are NOT in a position to do this. Not unless you can buy the house outright, and have a few grand left over in case something breaks. Which it will.

Houses don't get better with age.

If your parents are so terrible with money that they've gone bankrupt, and they didn't have the good sense to get out from under their house, this will only prolong the problem and drag you under too.
posted by Ruthless Bunny at 9:41 AM on December 9, 2013 [3 favorites]

Thanks for the update. This really is a nice thing that you are trying to do for your family, but the more information you share, the more I'm convinced it's a terrible idea.

My dad is a proud guy that sometimes can't afford to be, so I totally get where your dad is coming from with his attachment to the house and the idea of an inheritance.

I think you should examine your motivation in buying the house as opposed to helping them out in other ways. Is this the smartest way to help your parents or are you just playing into the mindset that has gotten them into serious financial trouble over and over again? I'm really saying this as kindly as possible because I know this is an emotionally fraught situation.

Imagine your parents coming away from the sale of their house with 200k or even 100k -- they could make a substantial down payment on a condo or apartment and have some to spare for paying off high interest loans or to put in a retirement fund. If you buy the house, they get nothing except to stay in a house that's probably costly and time consuming to maintain. They will still have "rent" even if it's less than the mortgage, not to mention utilities that are far more in a house than a condo or apartment. As for the inheritance, none of you even WANT to live in the house. And in my experience, adult children who have to split and sell a house are never especially thrilled about the process -- unless there's substantial equity and a good real estate market it's almost always more work than its worth.

Finally, are the student loans in your parents' names or your sibs? If the latter, they really need to step up and take care of those themselves. Adult parents only a few years from retirement who already have a ton of debt should not be paying their children's loans.
posted by snarfles at 10:55 AM on December 9, 2013 [2 favorites]

There is no such thing as an "everyone wins" situation, especially when you're mixing family and money.

You think you're getting a deal for the $400k house. Ruthless Bunny has pointed out the dozens of ways in which this will not make you any money. Only do this if you are in the position to do this as charity.

You're also seeming to have some friction with your siblings, thinking they share responsibility for your parents debt, thinking you're due something out of your parents since you didn't cause them as much debt. Basically, you think you're being reasonable. Don't assume everyone else will agree. I see some shades of my mother's siblings' decades long disagreements around this very issue. What was given by your parents freely and willingly should not be held against your siblings. Do not begin to view this situation as how to get what is fair or due to you. Money is fleeting, and it seems like you are well off. Family is forever.

You need to answer the basic question, can the sale of the house wipe out all of your parents debts? Could it leave them with a nice chunk of change?

If that answer is yes, a scenario that would possibly make sense for your parents, is if you went in on a condo with them. Co-signed the mortgage, paid a down payment, helped get the old house ready to sell. If the sale of the house nets any money, get it into an investment account, saved for long term care. You could make an agreement to split the sale of the condo, after their deaths, between your siblings, minus your down payment (possibly with modest interest).

I agree that bailing your parents out won't help them learn, but in the end, the ball will fall into your, and your siblings, court. Read up about the interactions of long-term-care costs and medicaid if you need some motivation. Having your parents be financially solvent is a much better gift than inheriting a house. Maybe thats where you can start talking the issue up to your parents.
posted by fontophilic at 11:18 AM on December 9, 2013 [1 favorite]