Giving – Lending Money for a Down Payment

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By PETER ROSENTHAL, President
V.I.P. Trust Deed Company

Recently I devoted a column to “Lending Money to Friends and Relatives:” this is often a very sore subject. I can think of only one related area that causes MORE heartache. I can’t tell you how many stories I hear about parents who gave or loaned their son and spouse or live-in, money to buy a house. Though there are many, many variations of this, let me give you an example or two.

Example 1:
Parents FUND a $50,000 down payment for daughter and son-in-law. Was this a loan to buy a house or a gift? If the kids contemplate divorce, the parents always have one interpretation; the divorcing son-in-law ALWAYS has a different opinion.

Example 2:
Daughter and boyfriend want a house. Parents buy a house (good credit). Parents expect daughter and boyfriend to make all payments: no problem. A year later the house has appreciated a lot and boyfriend complains they won’t continue the arrangement unless boyfriend is added to the title.

Example 3:
Look at number one above, the $500,000 house is now worth $1,000,000. The husband physically abuses the daughter, is a drug addict, gave the daughter a sexually transmitted disease and ran away with a stripper. Of course California is a community property (no fault) state. Husband properly demands half of the equity, ie: $250,000 appreciation PLUS half of the down payment.

Hopefully you have not personally experienced the anger and frustration resulting from the above scenarios or any of the many variations. Is there a solution to this – sure: it’s called DOCUMENTATION. So many people are under the false impression that documentation and family or documentation and LOVE don’t go together. Baloney!

Over the years my mother used to lend our company money for the purchase of Trust Deeds. Though my mother trusts us implicitly, we INSISTED on full documentation even though my mother felt her check memo was sufficient. Imagine the hundreds of millions of dollars Ivonna would have raked in if Donald Trump didn’t have a “pre-nup.” She did just fine without it anyway.

If you agree that documentation is essential, its time to speak to your family attorney. If this is simply a loan to your son and daughter-in-law, the attorney will recommend a note and a RECORDED Deed of Trust. If this is a gift, there may be gift tax consequences. If this is going to be a loan or gift to your daughter and live-in, has your daughter considered the consequence of a breakup six months from now if the “significant other” is on title. I haven’t even touched on John and Larry or Judy and Harriet.

If you are fortunate enough not to have had any experience close to the above scenarios you probably know someone who has. Actually most people don’t publicize these faux pas, so you probably do know people who have had similar circumstances even if they didn’t tell you. Divorce and the related bitterness is bad enough in families without compounding the hurt with undocumented transactions.

I hope, at least, one of my readers is helped with this advice before they enter into this type of transaction.

Peter Rosenthal
VIP Trust Deed Company