Wednesday, April 18, 2007

Baby Boomer National Bank Merges with United Helicopter Parents

Since real estate is obscenely high in magnet cities which attract young people, and since until recently the prices just seemed to go straight on upward, it is not surprising that many parents help their offspring to purchase a property. The thinking is why throw money away on equally obscenely high rent when it can go towards equity, and also that getting into the market at entry level will create leverage to buy larger housing later. This thinking isn't so clear cut now that the housing bubble is upon us, but people haven't stopped buying properties.
Business Week featured one approach where parents are joint investors with their children, called an equity sharing mortgage or a shared equity financing arrangement. While it sounds like an obvious win-win, it seems to have a few serious drawbacks. One is it could also, though unlikely, turn into lose-lose. Another is that it means the parents are TRULY invested in their offspring's home, not just emotionally invested. You go visit your kid, and you're visiting your investment. Suppose you don't like the colors she picks, or the renovation he's planning? Or if you don't think the garden is being properly tended? It certainly leaves many opportunities for tensions and control issues. From the kid standpoint, there is a huge cost to feeling like all your decisions need to be vetted. Perhaps some parents can refrain from weighting in on matters, despite their being financial backers, but most would find it tempting to butt in at least occasionally.
Circle Lending specializes in managing inter-family loans. This is a different approach, where the two parties draw up a promissory note and this site manages all the paperwork, money transfers, and account keeping. They explain that if the interest rate is lower than the market rate, the difference can be taxed, an issue I've read about elsewhere. Seems to me this approach would give everyone a shot at better boundaries.
Anyone out there have any experience with how these work out, from either the loaner or borrower point of view?

1 comment:

meenal said...

Very interesting. We have been both borrower and lender on more than one private party loan, all of which have been paid up. It's a great way to pass on interest to people you know rather than anonymous banker types. We did draft a promissory note each time, stating the payment terms for both parties. If this site, in these days of electronic banking, transfers the funds between borrower & lender regularly, it's sure to give the lender great peace of mind.