Q: My husband and I have a son who is in his third year at UC Davis. We’ve been paying for his tuition, including his room and board, and it has occurred to us it may be a better investment to buy him a house. That way he can have his own home if he stays here after he graduates, or at least we will have an investment property if he leaves. Our question is: What is the best way to go about buying a home that will give him an opportunity to own the house, but will let us have control to keep it or sell it depending upon what his future plans become?
A: There are a number of different ways you could go about it.
First and foremost, though, you have to stop thinking of him as your son in this transaction, and start thinking of him as a business partner. Because that’s exactly how the law will look at him.
Obviously you can simply purchase a property and he can live there as a renter, even if he doesn’t pay rent. If he graduates and you want him to have the home, he can simply buy it from you.
Of course, that may be a little easier said than done with the typical credit and starting salaries of new college graduates.
I’m assuming you will be getting a good sized mortgage on the property. If your son purchased the property from you, he’d have to come up with a down payment and mortgage of sufficient size to pay off your mortgage. That may be a difficult task during the first few years.
If, on the other hand, you pay cash for the house, you could sell it to him at any price and under any terms you see fit.
The one thing the plan above won’t accomplish is helping your son to build credit.
Plan B would be for the three of you to apply for a mortgage together. Even though he has little or no income right now, you should be able to get a mortgage on the strength of your income and credit.
Under this plan, your son would build credit with every payment you make.
The potential downside to this method is that your son would be a one-third owner, thereby potentially making the management or sale of the property difficult if the three of you can’t agree on the details.
Believe me when I tell you that I’ve been involved in more cases where unappreciative children wind up suing their parents, or vice versa, over a co-owned property. Of course, nobody anticipated that would happen at the outset, but I’m afraid it’s always a possibility that can make family Thanksgiving dinners really uncomfortable.
And frankly, entering into co-ownership with your children without having a clear, written agreement as to how management will be handled is an invitation to tearing apart otherwise happy families.
Under the first plan, you need to have a rental agreement with your son where it is clearly spelled out how long he can live in the house, who has control with regard to his roommates, when he will be expected to start paying rent, etc.
Under Plan B, you need to have either a tenancy in common agreement, or perhaps a limited partnership established.
While the intricacies of each of these agreements is too much to go into with the remaining space in this column, suffice it to say that you need a plan clearly spelled out in plain English with regard to who is in charge of the property, what their powers are and if the house is sold, where the money goes.
Often, when I suggest families have written, signed agreements between themselves, everyone is afraid of hurting the other family members’ feelings by implying that they aren’t trusted.
Instead, I tend to think of these agreements as simply roadmaps so everyone knows what the plan is, not only today, but many years from now when memories may have faded.
Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like to have answered in this column, you can send an email to [email protected].