The bank of Mom and Dad: high home prices lead to unusual solutions

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Published Date 5/14/2024

Homeowner. It’s a word not as many members of younger generations can slap on themselves these days. Many are resigned to being renters the rest of their lives.

Realtor.com’s Janet Siroto reports on a 30-something therapist and her husband, Conrad Useldinger, 30, a dance academy director, live in San Jose, CA. Smack in the middle of high-rent establishments like Apple, Google, and Nvidia, they reside in one of the most expensive housing markets in America — where median home list prices hover around $1.46 million. That translates into homebuyers needing to earn at least $361,000.

Enter “the bank.” No. Not the one that stays open from 9 to 5 — the one that raised you. “My husband and I started investing in Silicon Valley real estate in the early 1980s,” says Kathy Fitzgerald Sherman, a retired lawyer. “We benefited greatly from the explosion in real estate values, which also made it impossible for our kids to purchase real estate on their own. Our decision to help them was a ‘pay it forward’ kind of action.”

So just a few months ago, the couple helped Leslie and her husband close on an $850,000 condo, offering 25% ownership to their kids, while they legally own 75%.

Siroto explains how this unusual deal came together, along with the pros, cons, and other considerations that homebuyers (and their parents) might want to consider.

“The two generations sat down to craft a shared equity deal — sometimes called a ‘rich uncle’ arrangement in jest. Based on their income, they figured out how much the young couple could afford to pay monthly. Next, they worked backward to determine what size mortgage the young couple could handle. The parents stood ready to pay the rest.”

Once they figured out how much house they could afford, they began the hunt as a team. “Since we’d had experience buying several properties in the area, we went with them, pointing out plusses and minuses,” says Kathy. She admits that she didn’t give them carte blanche to choose just any place but were also sensitive to their feelings and wanted them to love what they purchased.

Some homes were on larger parcels where home improvement projects and maintenance costs seemed to pose too much work. So their attention turned to condos, and they found one they all liked —a two-bedroom, two-bath with a spacious kitchen, office space in the primary bedroom, and in-unit laundry. Also part of the package were a pool, hot tub, playground, and beautiful gym. They were sold and made an offer the very next day, before others came in. It was a strong one, too: with the parents’ parents’ backing, the couple could offer all cash if needed, with no contingencies. They snagged the property for $850,000—$5k below asking price).

At closing, her parents ponied up $650,000 in cash, leaving Leslie and Conrad with a $200,000 mortgage. Leslie and Conrad also pay property taxes, homeowners association fees (currently $465 a month), and maintenance.

Siroto added that while the young couple pays for all repairs, they split any major upgrade costs with the parents — still the same 75% versus 25% proportion. This was no pie -in-the-sky arrangement, however. It was all put into writing in a rock-solid legal agreement. “This is exactly how you want to do this to protect all involved—no casual “pinky swear” kind of deals allowed,” says Siroto. “Such arrangements need guardrails.” If ever there arose a disagreement about how to handle something, all they had to do was review their original agreement.

There are infinite ways to structure investing in a home for a child, lending experts admit. In some cases when the property sells, the parents might get their money back plus interest— similar to what their funds would have earned if they had been sitting in the bank. Or, if the child is making the interest payments and maintaining the home, they might want to negotiate a bigger cut of any gains in the property’s value.

An attorney is a must for most families executing this kind of deal, however. In this case the mom was a retired lawyer, so she simply bought a boilerplate equity-sharing agreement and modified it to suit their needs. “In theory, anyone can do this,” she notes.

But what about that old saying “Never do business with friends or relatives?” Agreements can backfire. Jobs can be lost. Divorces can happen. To avoid problems, you would definitely want the contract to spell out how decisions about changes to the home will be made as well as how to deal with all the “life” variables that could occur.

Realtor, TBWS

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