Question: We’re interested in buying our first house and our uncle – a very rich uncle – has said he’s willing to help. When he said “help,” we thought he might give us an outright gift in the form of a check, but instead he wants to be a co-owner with a 25 percent interest in the property.
Because he’s a co-owner we will have to pay rent to him each month. Is this a good deal?
Answer: Do you have the dollars and credit to buy on your own? If not you might want to consider your uncle’s offer very seriously.
There seems to be some sort of confusion about family wealth. Your uncle may be very rich, but that does not mean he’s obligated to give you a penny. Instead of offering to help you finance a first home he could just as easily have wished you good luck.
What your uncle is offering is a “shared equity” arrangement. As an example, he might offer to provide the 50 percent of the money needed for a downpayment and closing costs in exchange for his 25 percent interest. His 25-percent share of the property has two important meanings.
First, he is a co-owner with his name on both the title and the mortgage. When the property is sold he will be entitled to 25 percent of any sale profits. At the same time, if prices drop he will need to absorb 25 percent of the loss.
Second, you must pay rent.
Suppose you buy a home with 1,800 sq. ft. If your uncle has a 25 percent interest in the home, then his proportionate share of the home is equal to 450 sq. ft. However, you’re using the whole thing – including your uncle’s 450 sq. ft.
Let’s say the fair market rental rate for the property is $2,000 a month and that the monthly mortgage payment is $1,500 for principal, interest, taxes and insurance.
You will pay $500 a month to your uncle (25 percent of the fair market rental value for the property) and he, in turn, will pay $375 to the mortgage company (25 percent of $1,500). You will also owe $1,125 per month to the mortgage lender (75 percent of $1,500).
As resident owners you should be able to deduct your share of the mortgage interest and property taxes while your uncle may be able to deduct his share of the mortgage interest, property taxes, depreciation, repairs, etc. Speak with a tax professional for details.
For purposes of simplicity, your uncle will likely combine the money everyone owes to the mortgage company and make a single monthly payment.
Is this a good deal for you?
No doubt you would like to own 100 percent, but if you don’t have the money or credit to make it happen then 100 percent is just a pipe dream.
With your uncle’s plan, or some version of what’s outlined here, you can get real estate equity that hopefully will grow in value over time. When you sell the first house then, perhaps, you will have the funds and credit to buy on your own.
It’s also possible that your uncle may be thinking in the long term. Perhaps he will forgive your debt in his will. That would be a very substantial inheritance, if he’s so inclined.
If you accept your uncle’s proposal, then be sure to have an attorney provide a proper equity sharing agreement because, family or not, this is a business deal.
There are a lot of considerations to cover including such issues as whether there is any requirement to sell the property by a given date, what happens if you get a new job across the country and have to move, and how profits and losses will be split.
As an alternative to your uncle’s offer, or in combination with it, check and see if you qualify for any downpayment assistance programs in your community or if you can simply finance by yourself through the VA (nothing down), FHA (3.5 percent down), or with a conforming loan (as little as 3 percent down).
Shared equity financing is available through the FHA, VA (a “joint” mortgage), as well as with conforming loans that can be sold to Fannie Mae and Freddie Mac. Work with a skilled lender to get the best rates and terms.