“Should I help my adult child buy a house?” The question comes up so often and the answer is almost always “Yes.”
If this is on your mind these days, I encourage you to have a frank discussion with your attorney and your accountant to see if it is something you can afford and something you might be interested in doing. Then have a frank discussion with your adult child and see if you can make this work.
For most Baby Boomers, buying a home was a given. We had the advantage of much lower prices, easier lender requirements and good, steady jobs with regular paychecks to make homeownership relatively easy. With the appreciation of the last several decades, we have reaped tremendous benefits from those early investments. In most cases, our real estate purchases have provided us with tremendous security, real increases in our net worth, and planted us firmly in a community.
It’s hard to watch our kids sitting out this real estate market because they can’t save enough for a down payment or can’t qualify for a loan. Over the last decade we’ve all known or heard of new homeowners who were “upside down” (owed the lender more than the house was worth), couldn’t refinance to take advantage of the lower interest rates or couldn’t sell to get out from under. Many new potential homeowners have shied away from venturing into the real estate market. I think much of that is behind us and there are new opportunities. I am not talking about speculation and “flipping.” I am talking about homeownership: buying a house to live in and enjoy for a generation, getting married, raising kids, paying off the mortgage, retiring. The American Dream.
Owning a house creates a sense of achievement. Belonging to a neighborhood brings with it new friends with a shared sense of place. It is a fundamental step in “getting a life."
There are several ways to help your adult child purchase a home and most of them are a good deal for both generations.
Many of the older generation are disappointed by the vagaries of the security markets, bereft of returns from savings accounts, and longing for the steady income of a safe investment. Lending or gifting your adult children a down payment for their home purchase can provide a good investment for Boomers. This is the most popular way of helping.
Acting as the mortgage holder, or carrying a loan, is another good way to help your adult children. You are actually lending the money to the kids for the entire purchase, and they pay it back plus interest every month, just like they would be paying the bank.
Yet another practice that we are seeing these days is the older generation buying a house and renting it to their kids. Buying a property together as co-owners is another way to go. Transferring ownership can be accomplished over a period of years, in accordance with the maximum tax-free gift allowances.
Several of our clients are purchasing a home for each of their minor children and just keeping them for the future. They plan to rent these properties out until the respective child is ready to assume the role of homeowner.
One of the concerns frequently voiced by clients is how to deal with the “son-in-law or daughter-in-law” issue when helping out your child. How can you protect your investment and your child’s if somewhere down the line, the adult children separate or divorce? This issue needs to be addressed and resolved in advance. The older generation doesn’t want to bring this up; one of my friends calls this “walking on eggs.” So be sure to make this a part of your conversation with your attorney as you are discussing how title should be held, which is a crucial part of the long term success of this endeavor.
It goes without saying that the terms of any purchase, loan, or gift from one generation to another need to be memorialized in writing. Make sure that you decide which way you want to proceed BEFORE you get actively involved in house hunting or making offers. In order to qualify for the maximum benefits, you need to do your homework in advance of finding the property you might want to buy. Funds, title issues and agreements need to be in place in advance of the purchase.
How do you get started? How do you know what the right price range is? Sit down and talk to a loan agent, usually one recommended by your realtor and get you and/or your adult child pre-qualified. A loan broker will ask you questions, ask for document backup, and will tell you exactly what you can afford.
Here’s my personal advice: value for dollar is what both generations should be looking for. Usually the younger generation identified the property and then invites the parents into the transaction. You might want to try a different approach. Maybe you can start the process. There are properties even in the best neighborhoods in surprisingly affordable price ranges. Get onto the Internet, look at real estate sites like Redfin.com, Zillow.com, the MLS.com, Realtor.com. Google the community and add “real estate,” and up will come your choices. Read the real estate ads in the newspaper (“Oh how quaint,” the adult children will say for sure.). Here’s also some more advice: buy a house instead of a condo if you can. It’s just so much better of a solid investment.
Get out to Open Houses on Sunday with your adult kids and see what happens.
Here’s the bottom line: where the kids live, there liveth the grandchildren. Imagine having them in a house with a yard. Imagine them living ten minutes from you. It doesn’t get much better than that!
From a real estate standpoint in 2012, the conditions in the market could not be better. First of all, prices of property seem to have bottomed out and may even be rising. Interest rates are low and time is flying by.
Fran Flanagan is the Estates Director of the Pacific Palisades, California office of Coldwell Banker Previews International. She has been selling properties for two generations. firstname.lastname@example.org