Co-ownership can solve down payment
shortage -- page 2
To take the tax deduction, "You really do need to rent the
property," he says. That requires drawing up an agreement that
says how much of the property the parent owns and collecting a portion
of the payment as rent.
The ultimate goal is for the children to buy out the
parents and own the house outright. The time line for making that
happen can be spelled out in a co-ownership agreement. Until that
happens, the parents and children can split the tax deductions,
and are entitled to their part of any appreciation and profits gained
if the property is sold.
Peter Bielagus, author of the Penguin Putnam NAL book
Loaded: A Complete Personal Finance Guide for Students and Young
Professionals, can attest to the problems that young adults
encounter in coming up with a down payment.
"Adding a parent into the mix can make that happen,"
he says. "Co-owning is a way for parents to diversify into
real estate ... Wouldn't you love to have an investment property
where you say, 'I've known this tenant for 26 years'?"
The most important part of the process, Bielagus says,
is upfront communication and understanding each other's goals. Parent
and child need to agree about the division of the tax deductions,
and any proceeds if and when the property is sold.
In the Los Angeles area, real estate agent and mortgage
broker Silva Mirzoian says she sees a lot of co-ownership deals,
with parents buying condos or houses with their children who are
going to college. With the child's name on the title, it helps him
build credit for buying his next house.
"It helps to teach the kid the responsibility
of a good credit history," she says. "If anything does
ever happen, there's an upfront equity built into the house. I look
at it as a future investment for the child and parent. Hopefully,
they're buying at the right time and place. It's better than just
giving them the down payment. The parent has had the interest write-off
for those years and now the child has a future. It's a great thing."
Disadvantages of co-ownership
Other lenders are less enthusiastic about the deals. Los Angeles-based
mortgage broker John Loftus with First West Lending Corp. says he's
seen plenty of parents give their children money for a down payment,
but he's never had a parent put his or her name on the title of
a piece of property and not actually live there.
"If the parent isn't living there, I think underwriters
would question that," he says. "If you're the primary
borrower, you have to be listed as a non-owner occupied investor."
If that's the case, you can plan on paying a higher
interest rate for the loan, usually about a percentage point higher,
There are other potential drawbacks too, most of them
related to making major purchases with other family members. If
the child is single, what happens when he gets married? If he gets
divorced, how is the property divided?
If the parents and child have a falling-out, bad feelings
can quickly turn into bad financial situations. If you want to get
back at Mom and Dad, what better way than to say 'no' to selling
the house, tying up their money and keeping them from getting a
nice return on their investment? The same holds true for parents
trying to teach Junior a lesson.
"People always want to tippy toe around those,"
Haislet says. "On a gift, you gave it away, so you may just
be ticked off. If you're an equity owner and there's some kind of
responsibility for formerly married children to pay, you're now
a partner of an estranged family member.
"You may be subject to rules of tenants in common.
You have to go to court and sue the other person who's unwilling
to sign and have to demonstrate why it's a good reason to sign.
The court takes control of the title, orders it sold, and the net
proceeds are split between you. Hopefully, your agreement says you
get your money back first."