March 14, 2008

Today’s Real Estate

Give your kids a break: A hand up, not a handout

By Donna Nardi
Special to the Times

Molly and Riley were in a typical first-time home buyers’ dilemma. This newly married couple desperately wanted to buy a home, but just couldn’t come up with the down payment, nor afford the monthly mortgage payments at Silicon Valley home prices.

When their son, Jackson arrived, the “nesting” desire became even greater. They realized if they were ever going to be homeowners, drastic measures must be taken. Reluctantly, they decided to do something uncomfortable for any new and growing family - they moved in with Riley’s retired parents, Lynn and Ruth.

Despite their reduced expenses and increased savings, two years later, Molly and Riley were still coming up short. Although Lynn and Ruth wanted to help, they knew the younger family needed a sense of responsibility and accomplishment, but shouldn’t be overloaded with debt and a high mortgage. How could they responsibly help, and avoid a handout simultaneously? There was a fine line between a hand out, and a hand up.

Molly and Riley called their friend and realtor, Brett Jennings with Keller Williams in San Jose. After considering several options, they came up with a win-win solution for the entire family--shared ownership.

Using the money Molly and Riley had saved as a base, Lynn and Ruth would contribute 50 percent of the purchase price by liquidating two of their out-of-area investment homes. The four of them would share title on the property yet the now affordable mortgage payment and the upkeep of the property would be the responsibility of Molly and Riley. Lynn and Ruth would retain the tax benefits and half of the earned equity of an investment property.
Legalities

To prevent any misunderstandings, they wrote up a “contract” with details on how the equity share would work, and how to get out of it, if necessary. They then had their contract notarized, which made it legal, able to stand up in court. Although using the services of an attorney is optimal, if money is prohibitive doing it yourself, with the help of a notary can also work.

Attorney Lino V. Martire recommends that whether the family decides to own the home as “tenants in common” or as “joint tenants,” a base agreement must always be formed, clearly setting the terms of ownership. This agreement should include at the very least, mortgage payment responsibilities, property maintenance and improvements and sharing tax benefits.

He also advises the parents to consider their own estate and tax planning circumstances before entering into an equity share agreement with their children. Their estate plan should include plans to pass their portion of the home’s interest to the children, without going through probate in order to minimize potential estate taxes.
Win for the kids

Not many young couples can afford the steep mortgage payments of a home in Silicon Valley, especially when children arrive. That problem is compounded if one parent stays home with the child and there’s only one income.

With the parents investing along with them, this allows pride of homeownership, and begins the equity earning process without the stress of sky-high mortgage payments. All four have the benefit of tax savings with paid interest deductions.

Research has shown homeownership is more than a financial benefit, but also social. Communities with a high homeownership ratio show better grades in school, and better household health - all of which allows our families to grow up in a healthier community.

The parents may have prepared carefully, but with improved health care, people are living longer, and so, may need an additional retirement investment. In Silicon Valley, history shows homeownership to be the very best investment out there. What’s a more gratifying investment than allowing idle home equity money to be used for your children’s future.
Perfect home

Once they had the down payment and funds in place, Molly and Riley began an earnest search for their home. Brett explained to them that with all the short sales, bank-owned, and pre-foreclosures on the market, they were buying at a perfect time. They found a well priced home with good “bones,“ which was near Lynn and Ruth’s home. With Jackson as their only grandchild, the grandparents were thrilled to have the younger family close.

Once escrow closed, Molly and Riley did some nice upgrades to the home: granite in the kitchen, designer paint and all the trappings they had only dreamt about. It was now reality for them, thanks to the help of Lynn and Ruth, who knew they had helped in the most responsible way possible.

By thinking outside the box, this family was successful in creating a win-win situation. Lynn and Ruth had their grandson nearby, and had helped Molly and Riley without interfering with their sense of responsibility. Molly and Riley have an affordable home, financial benefits and pride of homeownership. Lynn and Ruth now own another investment property and a tax write-off, but not the day-to-day responsibility of property management.

If you would like to know more about responsibly helping your adult children on the path to homeownership, an informational seminar on this subject will be held on March 18. For more information, contact Donna Nardi at Prudential California Realty in San Jose. (408) 313-3169.

Donna Nardi is a Realtor, Accredited Staging Professional, and Senior Real Estate Specialist with Prudential California Realty in Willow Glen. You may reach her at (408) 918-4410, or donna.nardi@prurealty.com, or www.HappyWayHome.com.