# Please advise - Buying my parents house / private mortgage



## Mike (Mar 4, 2013)

My retired parents are soon looking to downsize from their property outside the city and move into a nearby retirement complex. For years they have had in mind that I would move in to their house when they leave, mainly for the purpose of allowing my dad to have access to all his shop equipment and “inventory” (some might call it junk). He wants access to the large shop without the obligation to do all the maintenance, yard work and the costs associated with the larger property.

My wife and I are open to this idea and we would enjoy living there, so we have always been in favor of doing this. I’d like your advice on tips to help me do this as cheaply as possible for me, while keeping it legal and fair for my parents as well as for my brother.

My basic plan would be to sell our house and use a portion or all of the sale price as a down payment to my parents, perhaps reserving a little for renovations. Then my parents would hold the mortgage for us and we pay them a reasonable interest rate as we repay the remainder. This keeps the interest paid on the mortgage in our family and not to the bank, and it gives my parents a steady income from the sale of their property.

The deal has to be legal and also fair, since all this would affect estate value which would eventually affect my younger brother. He is not able to afford doing this himself, and I have talked about this with him and he feels okay with it in principle, and he says at least the house is staying in our family. However I’d like to avoid resentment in the future too.

Since my dad has vested interest in that he wants the freedom to come use all his shop equipment whenever he wants, I’d like to work that in as part of the fair deal… in exchange for keeping all his “inventory” for the rest of his life, I’d like a bit of a discount on the property which I think could be considered fairly as “rent”. I’m also interested in creative (and of course legal) ideas to help the net purchase cost stay low, without making my brother think that he is being cheated. Also, what is the best way to incorporate the “rent discount” for his use of the property… a one-time purchase price reduction, or a monthly reduction in payment?

My current house is worth approximately $320,000, and I still owe about $20,000 on the mortgage. My parent’s place is probably worth say $600,000 on the market.

Would I be better off with a large as possible or small as possible down payment to my parents? I don’t think they would need much more than the monthly payments which will give them a nice income to live off of in their retirement. (they are just around 67 years old now).

What legal or financial counsel should I seek for this? I assume I will need a lawyer to at least draft up the purchase / mortgage agreement. How should it be handled if one or both of the parents were to die before the mortgage is paid off? Remember, I don’t want a big house and a broken family so I need to keep it fair to my brother. However, I would probably not be doing this if I didn’t have the advantage of buying flexibly from my parents.

Thanks for any advice you have. Sorry for the long (fisrt!) post.

Thanks,
Mike


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## rikk (May 28, 2012)

I recommend pencil in a few more of your thoughts and book some time with your lawyer ... they come up with truly creative solutions ... that are perfectly legal ... time and money well spent (smithing 100).


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## OptsyEagle (Nov 29, 2009)

Mike said:


> Would I be better off with a large as possible or small as possible down payment to my parents? I don’t think they would need much more than the monthly payments which will give them a nice income to live off of in their retirement. (they are just around 67 years old now).


Have you talked to them about this. You should never assume what someone else would want when it comes to money. Needing money and having money are two completely different things. The first is used for spending and the second is used for security. Both are important to people.

Also, this will effect your brothers inheritance, because it is hard to spend a house but very easy to spend monthly income payments.

Other then those thoughts, a lawyer would be useful. As long as all of you agree on something, then just about anything can be accomplished.


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## none (Jan 15, 2013)

WOuldn't it make more sense to rent it form them?


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## Cal (Jun 17, 2009)

Generally when a family member does a private sale to another family member the sale price is reduced by 4-5% as that is what they would have lost on the sale to the RE agents. So in this instance, generally speaking you would reduce the price on the $600,000 home by $24-30,000.


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## Mike (Mar 4, 2013)

Yes I have discussed this with them... but it was a few years ago and you're right - we should discuss it again more clearly.

I agree with the comment about being easy to spend money, but not spend the house. However, if we decide to not buy their house, they would probably sell it and take the cash anyways.

As far as renting goes, I'd like to do whatever is less expensive in the long run... which I imagine that renting is not.

Mike


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## none (Jan 15, 2013)

Don't imagine: do the math. It will likely surprise you.


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## Four Pillars (Apr 5, 2009)

I don't think there is anything wrong with the sale of a house between relatives, however I'm not sure about the continued use of the workshop/storage space.

You might want to use it yourself someday and do you really want Dad just popping around whenever he feels like it?


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## Mike (Mar 4, 2013)

Well, right now he owns it and I pop around whenever I feel like it. :chuncky:

I have my own key to the house too. In fact I take care of it when they are south for the winter.


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## RBull (Jan 20, 2013)

I would start by having a serious chat with your folks. List all of your questions/issues and then find out what they have in mind for pricing, financing, your brother's interest, the shop etc. Only then will you have an idea of whether it will work for you. At that point you can invest in services of a lawyer.


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## kcowan (Jul 1, 2010)

I think you need to do a separate and then collective "what if" analysis. Your parents are a relatively young 67. Imagine 87 and one has died and the other is in extended care, for example. There are lots of scenarios that need to be thought about. You or your wife might decide to downsize. What then? Etc...


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## blueeyetea (Feb 27, 2013)

Definitely hire a lawyer whether you think you need one or not. At the very least, she/he is responsible in making sure the titles are transferred properly and that there are no liens. They'll also make sure the language regarding the use of the property by your father is on the up and up as well as point out all the potential conflicts that may arise. They'll asks questions of what you'd likely do in case of breach of contract. 

I went through a similar scenario when we purchased our current house. My husband and I bought my mother-in-law's house from the estate after she passed away (they were 5 kids), and there was a bit of money saved but only in the real estate fees since no agent was involved. To be fair, we did get three estimates on how much the asking price should be if it had been put on the market and we did an average. In your case, you and your father will have to determine what it's worth to keep his stuff. I'm sure you can come up with a price tag - just look at what storage areas cost and multiply by the number of years you think your dad will use and come up with a ballpark to bring the price down. Let's say it's between $50K. That's fine and dandy for the contract and today. But how will you deal with conflicts down the road is the real question? You don't mention where his stuff is, but if it's in the basement, it might come to a point five years down the road when you or your wife won't want your father in the house for some reason and you'll put restrictions. From his point of view, he paid for the priviledge and he should have access when he pleases. What are you going to do? Hire a lawyer to deal with it? Have him evicted? Give him part of his money back? What if it means the break in relationship and you deprive your kids of their grandparents? Who wants to put themselves in such a situation? There will never be a win-win situation here. 

As for having your parents hold the mortage, if I were them, I'd refuse, mainly because money and family don't mix, especially when something goes wrong and the risk for conflict is high. Much better, and fairer for all around, to go out and get yourself a mortage through the bank. Your parents get their money upfront, and therefore, are available to help out if you need help down the line. Your brother's mind can be at rest, since you're paying the bank and aren't robbing him of a potential inheritance. As well, you're not creating a potential conflict of interest if you ever get to have power of attorney over your parent's financial affairs and decide you deserve a mortgage holiday (since the money will go to you eventually). 

Overall, except for keeping your dad's stuff, I think the scenario you propose is stacked only in your favour. You get the house while your parents are the ones assuming the risks (by financing you). If you value your relationship with your parents, just buy the house with no strings attached and be done with it. Everyone will be happier for it.


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## Mike (Mar 4, 2013)

Wow that's painting the situation pretty darkly... however I welcome the honest opinion and will consider this. It's very true that a lot of scenarios have to be considered... the "what if's"... even if they seem unlikely now.

Thanks.

Any other view points out there?

Mike


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## sags (May 15, 2010)

One problem I see is that you would be buying a home at today's prices, and that will very likely change.....up or down.....over the course of time.

What happens if the home value goes down............do you still owe the parents the full amount?

What happens if the home is worth much more when the estate is settled, maybe 20 years from now.d

The market value of the asset in the estate may be considerably higher at that time than you paid now.


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## humble_pie (Jun 7, 2009)

everyone has made valuable suggestions here & it does appear that, with prudent planning & a good lawyer, a win-win-win situation could develop.

i thought that blueeye raised many especially valuable points but am not clear about one issue. If OP (the son) obtains a conventional mortgage through a bank, as blueeye recommends in paragraph #3, how then would the parents be "financing" their son's purchase of the house as per blue's final paragraph?

in any event, if i were the parents i would not consider any mortgage payment deal with any child for any reason whatsoever. May i hasten to say i don't mean just the OP's family, i mean any family including my own. I totally agree with blueeye, this is not a situation to mix up family & money. The parents require income/investments for their old age that they can count upon absolutely. Their retirement should not be financially dependent upon one child's ability to pay up a mortgage.

The OP says:



> I don’t think they would need much more than the monthly payments which will give them a nice income to live off of in their retirement. (they are just around 67 years old now).


this is where i think the line towards a happy future is being compromised. The OP in my opinion should not be having the last word on what kind of income his parents will need in their old age, nor - optimally speaking - should he be involved with providing that income, for example on a monthly basis, as a mortgage payment or a loan payment or any other kind of payment.

parties such as the parents who can afford to live in a $600k house usually have other financial resources, so it is a bit puzzling as to why the OP would regard income such as mortgage payments from the house as sufficient for their needs ...

there was a case in my family of adult married children buying their parents' large house as the parents downsized. The younger generation got a conventional mortgage from a bank, the parents got paid, the sibs were happy, everything worked out fine.

suggestion: if the OP takes the bank mortgage route, in order to guarantee peace-of-mind for the next few decades, he might consider making the largest possible down payment to his parents. This will lower his mortgage payments considerably, he might be able to negotiate a real favourable rate if he shops around.

lastly, i can't see any need to worry about future value of the house in any inheritance. The parents are going to sell the house in the relatively near future. Whether they sell to their own offspring or to a stranger is irrelevant; they will receive the proceeds of the house sale - something like fair value minus a certain percentage because there will be no real estate agent involved.

which brings me to the basement workshop, since the OP intends that parents' access to the workshop be monetized & even used to reduce the cost of the house! this seems a bit mercenary, especially since the OP says Dad now maintains the workshop but he, the OP, "pops around" for free use whenever he feels like it!

is the OP himself going to use this workshop in the future? he says he always has, so what is going to change when he buys the house including its workshop? how can he "pop around" to use the workshop in his own basement but feel OK about charging his Dad for the same popping?

(laughter) i think the workshop & the popping should be re-thought. Ideally, Dad should (i think) get to pop for free. Especially if the OP is also popping for free. Maybe look at it this way: OP is getting a workshop full of valuable power tools at no cost, which he already likes to use, so why should Dad pay extra to pop? the key issue should be regulating the popping schedule, imho.


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## Mike (Mar 4, 2013)

Thanks for all the thoughts everyone.

Regarding the last post... I have paid for half of a lot of the shop equipment already, and I have helped my parents finish the house and build the shop with a whole lot of labor over the years. We have a good relationship and personally I don't see all the red flags which are mentioned in these posts. However, that is exactly why I am soliciting for opinions - so I can evaluate the situation thoroughly.

Thanks
Mike


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## Four Pillars (Apr 5, 2009)

Sounds like you already had your plan of action in place and your mind made up. So why exactly did you start this thread again?


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## Mike (Mar 4, 2013)

I started this post for exactly this reason: to get feedback, look for pitfalls and red flags, and creative financing ideas.

Thanks everyone for voicing your concerns and ideas. Our mind is not made up and there is much to consider. You’ve been a help.

Thanks,
Mike


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## NotMe (Jan 10, 2011)

re: "the what-if's" seem pretty unlikely.

ALL what-if scenarios seem unlikely, until they happen it seems. Money does funny things to some people, and not always the people you think it will affect.


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## rikk (May 28, 2012)

Mike said:


> I started this post for exactly this reason: to get feedback, look for pitfalls and red flags, and creative financing ideas.
> 
> Thanks everyone for voicing your concerns and ideas. Our mind is not made up and there is much to consider. You’ve been a help.
> 
> ...


Hi Mike ... thanks for starting this thread ... and of course you had a plan ... always bring something to the table. I've been following because I'm considering selling my home to my son, thought I might pick up some ideas but as Homer once said ... "Marge, I've learned absolutely nothing." I'm considering holding the mortgage ... one thought ... if son can't make the payments I take back the house, and we start over. Short story ... I'll go visit the lawyer ... my opinion ... a lawyer has seen and heard just about every possible scenario and outcome ... he'll just sit there and listen politely while coming up with what's best for all of us ... then politely present a solution in such a way that we think we came up with the solution ... thanks again, enjoy the day :encouragement:


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## blueeyetea (Feb 27, 2013)

*setnitv shout*



Mike said:


> Wow that's painting the situation pretty darkly... however I welcome the honest opinion and will consider this. It's very true that a lot of scenarios have to be considered... the "what if's"... even if they seem unlikely now.
> Mike


I'm really sorry for that, but you have to think about these things (or your lawyer should point them out). People will deal differently with family than they would with strangers, for better or for worse. Money changes things, even though we think it doesn't. It comes to the same old advice that if you lend money to a relative, you should consider it a gift (because you'll be scrutinizing every purchase they make thinking they should have used that money to pay you back.) 

Another thing you might also bear in mind, and should be documented, what happens if anything happens to you? Will your wife continue on with the arrangements or will she be able to sell the house? This should also be spelled out in the contract.


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## blueeyetea (Feb 27, 2013)

humble_pie said:


> i thought that blueeye raised many especially valuable points but am not clear about one issue. If OP (the son) obtains a conventional mortgage through a bank, as blueeye recommends in paragraph #3, how then would the parents be "financing" their son's purchase of the house as per blue's final paragraph?


I was referring to the OP's original scenario where his parents hold the mortgage and the OP makes monthly payments to them, then the parents are assuming the risk their son will not default. If he gets a regular mortage via the bank, than the risk to the parents is no longer there.


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## humble_pie (Jun 7, 2009)

rikk said:


> ... one thought ... if son can't make the payments I take back the house, and we start over.



but would you do this to your very own son ?

suppose somehow he becomes down & out & can't pay. So next thing you'd do is, you would act to force him out of his own home by taking back the house? 

somehow i don't think so. But this is the weak link, this is the achilles' heel where the intra-family mortgage is so vulnerable. Son loses job/bad accident/divorce/whatever, parents' income goes down the drain. Although this outcome could so easily have been prevented.

not that it matters - although i can see that it matters hugely to the OP in this thread - but nickel-&-diming dear old Dad for the right to use a shared workshop doesn't seem to rhyme with good relationship. Fifty grand ($50,000) seems like a hefty price to charge for occasional use of a workshop that probably won't continue for more than a couple of decades, or perhaps not even for one decade.

if i were Dad or Bro, i wouldn't go along with this. I'd take some fair division of the tools, i'd donate them to one of those community centre woodworking workshops for seniors that exist in many larger cities & i'd arrange with that workshop that i could have free access, even on a daily basis, for the rest of my life.


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## Mike (Mar 4, 2013)

It’s true… you do never know. Right now all looks good – my marriage and job and what not, but all is subject to change.

I don’t think it’s fair to accuse me of “nickel and diming dear old Dad” – remember this plan was his idea originally and he has thought this way for a long time. And the $50k number raised was not my post.

And it’s more of an auto / metal shop.

Honestly, if my dad didn’t want to do this, I wouldn’t be entertaining the idea. I would not instead seek out another $600k property to buy either. This is what HE wants, and I thought it might end up being a good investment/lifestyle change for my family as well. 

Thanks,
Mike


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## rikk (May 28, 2012)

humble_pie said:


> but would you do this to your very own son ?
> 
> suppose somehow he becomes down & out & can't pay. So next thing you'd do is, you would act to force him out of his own home by taking back the house?


OT: I didn't say I'd force him out ... I'd simply take back ownership of the house ... the house would remain in the family both during the mortgage and in the event of a default ... rather than with "some frikken bank". Our situation is different in that the house comprises 2 separate living quarters ... we currently share the house and the plan would be for that to continue ... to be written up by our lawyer ... something like the situation below ...

Buddy and his wife bought the mom's house ... mom holds the mortgage ... the agreement is that mom occupies part of the house ... dunno if she keeps her power tools there or not ... let's assume she does Mike  ... on mom's demise the house passes to Buddy ... the mortgage I guess is forgiven ... I didn't ask for the details ... maybe goes to the estate, the estate goes to Buddy which would be a paper exercise.


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## humble_pie (Jun 7, 2009)

what a sweetie your Dad sounds! you, too each:

an auto/metal shop! i love it.

can't this somehow become part of the family legend? stories, photos & videos for your own children & even grandchildren about how the pater & the grandpater puttered together over the most amazing vehicles anybody ever did see?

for the MI (money involved) in the concept, how about a nice family holiday instead, including Bro & Bro's wife & kids if there are any, to be hosted by the parents out of the house proceeds if the deal concludes. Maybe some place with a famous automobile race.


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## none (Jan 15, 2013)

Currently, I strongly believe you can only consider a house in Canada as an investment if you put the word 'bad' in front of it.


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## RBull (Jan 20, 2013)

^LOL, are you schilling for Garth?


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## none (Jan 15, 2013)

No, but I agree with his assessment on housing. .. Not that it's unique at all - I think considering whether Canadian housing is over valued or not right now is a bit of a no brainer. I've also been saying it for years (again, no brainer).


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## rikk (May 28, 2012)

none said:


> Currently, I strongly believe you can only consider a house in Canada as an investment if you put the word 'bad' in front of it.


OT: A house is not an investment ... to strongly believe that a house is a good or bad investment makes absolutely no sense ... well ok, I will concede that my current house has turned out, for a house, to have been an exceptional investment :encouragement:


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