Are my parents ripping me off with this deal that doesn't allow me to build my equity in my home?

Question

When I bought my condo with cash for $155k, I paid $40k of my own money and my parents lent me $115k. Our agreement was that when I eventually sold the condo, my parents would get 75% of the gross sales proceeds.

I pay my parents $500 every month and I assumed I was building equity in the condo, but that doesn't seem the case since I can never own more than 25%. By the way, I am also responsible for all property taxes, insurance, and condo fees. Property taxes are about $3500 per year and condo fees are close to $4000 per year. I am also no allowed to sell the property without their consent.

I feel like this isn't actually a loan if I can never build more equity in the condo. Am I missing something? Are there similar deals like this or am I being ripped off my my parents? If so, what should I do?

Please help. I am starting to feel like I might have been betrayed by my family.

Answer 1

It's a little unusual, but I don't think the financial terms are completely unreasonable on their face.

What you describe is similar to an interest-only loan, where you make payments that only cover the interest due each month, and the entire principal is due as a single "balloon payment" on a specified date (in this case, the date on which the condo is sold). Your monthly payment of $500 on a principal of $115K is equivalent to an annual interest rate of 5.22%, which at least is not completely usurious. With a traditional mortgage you might pay a rate as low as 3%, if you had sufficient income and excellent credit - but I don't know, from what you've said, whether that's the case. Did you make the current arrangement because you were unable to get a loan from a bank?

The main difference here is that instead of the balloon payment being a fixed $115K, it's "75% of the gross proceeds of the sale". If the condo eventually sells for $155K, that would be $116,250, so that's slightly advantageous to them (assuming that "gross proceeds" means "before deducting commissions for either the buyers' or sellers' realtors or any other costs of the sale"), and thus slightly disadvantageous to you. If the condo appreciates in value, that's more of a win for them and more of a relative loss for you. But it's also possible that the value of the condo goes down, in which case this arrangement is better for you than a fixed balloon payment. So this deal does prevent you from getting a larger share of any gains in the value of the property, but it also helps insulate you from any losses. That's important to keep in mind.

There's also the issue of needing their consent to sell. That's potentially problematic - usually in a joint ownership scheme, either owner has the right to demand to be bought out or to force a sale. I guess it depends on whether you think your parents would be likely to consent under reasonable circumstances, or to insist on holding the property against your best interests.

It's true that you aren't building equity with this arrangement, and if you thought you were, you are mistaken or misled. But let's compare it with other options.

If you would qualify for a traditional 30-year fixed mortgage at 3%, your monthly payment would be slightly lower ($484), and you would be building some equity because your payments would reduce the principal as well as paying the interest. But a 30-year loan builds equity very slowly at first - after 7 years you'd have only about $20,000 in principal paid down.

If we assume that 5.2% represents the interest rate you'd otherwise pay based on your creditworthiness, then your monthly payment would be $631. So compared to that, you have an extra $130 per month that you can save or invest in whatever you want - you're not forced to invest it in your house.

Note that in either case you'd still be paying the condo fees, property taxes, insurance, and maintenance yourself. So we might as well eliminate those from consideration.

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It might be a good idea to find out what other options you would have - perhaps try to get an interest rate quote on a traditional mortgage from a bank, based on your income and credit history. Then you can decide what to do, taking into account:

• your financial situation; how much of a monthly payment could you afford?

• your relationship with your parents; are they likely to be reasonable about renegotiating? Do they in general tend to respect your wishes? Would it harm your relationship if you tried to get out of the deal, and how important is that to you?

• To what extent do you actually want to pay for equity in this property? Do you really believe it's a good investment, and have evidence to support that?

Your options include:

• Try to renegotiate the terms of the loan from your parents

• Try to "refinance" the loan, by getting a loan from a bank and paying off some agreed-upon amount of principal to your parents

• Try to force the sale of the condo and move to another house, financing it some other way

• Consult a lawyer as to whether your agreement with your parents is legally enforceable. For instance, do they have a lien on the property?

Answer 2

"Ripped off" may be too strong as it implies intent - I'm hopeful it's just bad logic or terminology.

I would say better agreements would be:

• You own the condo 100% and borrow the remaining 75% through a private mortgage from them. They get made whole when you sell or refinance the condo.
• You keep just a 25% stake but call the $500 "rent" instead of a "loan payment". They effectively just bought a 75% stake in the condo and are charging you rent (ideally at 75% of market rent). You can decide whether you should also split the taxes and fees or just pay it all, with an equivalent reduction in rent.

Borrowing money from family/friends is always risky. If you and your parents are comfortable with the situation and can reliably keep records of how much is owed at any given time (and how much of the $500/mo is interest) then the loan might be a good option. If not, and your parents don't need the income stream from the loan, then I would recommend the second option since it's much cleaner.

In any case, make sure everything is in writing and the proper legal procedures are followed (just as if you had borrowed the money from a bank). That means either filing a mortgage with the county for option 1 or having both parties on the deed, and having the ownership percentages in writing.

Answer 3

To expand on what @fishinear and some others are saying:

The only way to look at it is that the parents have invested, because the parents get a % of the property in the end, rather than the original loan amount plus interest. It is investment; it is not a loan of any kind.

One way to understand this is to imagine that after 20 years, the property triples in value (or halves in value). The parents participate as if they had invested in 75% ownership of the property and the OP as if 25% ownership of the property.

Note that with a loan, there is a (potentially changing) outstanding loan balance, that could be paid to end the loan (to pay off the loan), and there is an agreed upon an interest rate that is computed on the outstanding balance — none of those apply to this situation; further with a loan there is no % of the property: though the property may be used to secure the loan, that isn't ownership. Basically, since the situation bears none of the qualities of a loan, and yet does bear the qualities of investment, the parents have bought a % ownership of the property.

The parents have invested in 75% of the real estate, and the OP is renting that 75% from them for:

• $500/mo, +
• their share of the property taxes: 75% * $3500/12 = $218.75/mo, +
• their share of the condo fees: 75% * $4000/12 = $250/mo, +
• their share of the insurance of undisclosed, say 75% of $700/12 = $43.75, +
• maybe their share of the maintenance, unknown

The total rent the OP is paying the parents for their 75% of the property is then (at least) $1012.50/mo,

A rental rate of $1012.50/mo for 75% of the property equates to a rental price of $1350/mo for the whole property.

This arrangement is only fair to both parties when the fair-market rental value of the whole property is $1350/mo; it is unfair to the OP when the fair-market rental value of property is less, and unfair to the parents when the fair-market rental value of property is more.

Of course, the fair-market rental value of the property is variable over time, so the overall fairness would need to understand rental values over time.

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I feel like this isn't actually a loan if I can never build more equity in the condo. Am I missing something?

No, it isn't a loan. You and your parents are co-investing in real estate. Further, you are renting their portion of the investment from them.

For comparison, with a loan you have 100% ownership in the property from the start, so you, the owner, would see all the upside/downside as the property valuation changes over time whether the loan is paid off or not. The borrower owes the loan balance (and interest) not some % of the property. A loan may be secured by the property (using a lien) but that is quite different from ownership. Typically, a loan has a payment schedule setup to reduce the loan balance (steadily) over time so that you eventually pay it off. With a loan you gain equity % — the amount you own outright, free & clear — in two ways, (1) by gradually paying off the loan over time so the unencumbered portion of the property grows, and (2) if the valuation of the property increases over time that gain in equity % is yours (not the lenders). However note that the legal ownership is all 100% yours from the start.

Are my parents ripping me off with this deal that doesn't allow me to build my equity in my home?

You can evaluate whether you are being ripped off by comparing the $1350/mo rate to the potential rental rate for the property over time (which will be a range or curve, and there are real estate websites (like zillow.com or redfin.com, others) to help estimate what fair-market rent might be).

Are there similar deals like this...?

A straight-forward loan would have the borrower with 100% legal ownership from the start, just that the property secures the loan. Whereas with co-investment there is a division of ownership % that is fixed from the start.

It is unusual to have both investment and loan at the same time where they are setup for gradual change between them. (Investment and loan can certainly be done together but would usually be done as completely separate contracts, one loan, one investment with no adjustment between the two over time.)

To do both investment and loan would be unusual but certainly be possible, I would imagine; however that is not the case here as being described. I am not familiar with contracts that do both so as to take over the equity/ownership/investment over time while also reducing loan balance. Perhaps some forms of rent-to-own work that way, something to look into — still, usually rent-to-own means that until the renter owns it 100%, the landlord owns 100%, rather than a gradual % transfer over time (gradual transfer would imply co-ownership for a long time, something that most landlords would be reluctant to do).

Transfer of any particular % of real estate ownership typically requires filing documents with the county and may incur fees. I am not aware of counties that allow gradual % transfer with one single filing. Still, the courts may honor a contract that does such gradual transfer outside of county filings.

If so, what should I do?

Explain the situation to your parents, and, in particular, however far out of balance the rental rate may be. Decide for yourself if you want to rent vs. buy, and where (that property or some other). If your parents are fair people, they should be open to negotiation. If not, you might need a lawyer.

I suspect that a lawyer would be able to find several issues with which to challenge the contract.

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The other terms are important as well, namely gross vs. net proceeds (as others point out) because selling a property costs a % to real estate agents and possibly some taxes as well.

And as the others have pointed out, if the property ultimately looses value, that could be factored in as well.

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It is immaterial to judging the fairness of this particular situation whether getting a bank loan would be preferable to renting 75% from the parents. Further, loan interest rates don't factor into the fairness of this rental situation (but of course interest rates do factor into identifying the better of various methods of investment and methods of securing a place to live, e.g. rent vs. buy).

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Contributed by @Scott: If your parents view this as an investment arrangement as described, then you need to clarify with them if the payments being made to them are considered a "buy out" of their share. This would allow you to gain the equity you seek from the arrangement.

@Scott: Terms would have to be (or have been) declared to that effect; this would involve specifying some schedule and/or rates. It would have to be negotiated; this it is not something that could go assumed or unstated. -- Erik

Answer 4

First, this was never an arrangement for you to build equity, this was an arrangement for them to speculate on another house under the guise of teaching you a life lesson like responsibility or something contrived.

The only way you profit from this is if the value of the house goes up and you sell it. You get 25% of the proceeds, maybe.

If this was an equitable arrangement then they would be paying 75% of the property taxes and a little more for your maintenance efforts.

Answer 5

You are getting totally hosed mate. Assume you live in the house for ten years, can get a normal 30 year mortgage and house prices average at 3% annually You could get a mortgage at 3.8% so your monthly payment would be $560 a month. $60 a month difference over 10 year is $7200 Because you are paying down on a conventional mortgage you would owe 93500 after 10 years. On top of that the house would have appreciated by $47000. You would have to give you parents $35500 of that. So by avoiding a normal loan it's costing you an extra $49000.

Answer 6

If I understand you situation correctly, then the accepted answer is extremely misleading and incorrect. Your arrangement with your parents is definitely unreasonable.

It is definitely not "similar to an interest-only loan". In an interest-only loan, like you can get from a bank, you will loan a sum of money, which you are expected to pay back at a certain time in the future, or when you sell the condo. But you pay back the original sum, not the value of property at selling time. For the access to the money you pay an interest to the bank. The bank gets their profits from the interest. The property only serves as collateral in case you are not able to make your interest payments.

Another way to view it, is that your parent bought (a share of) your condo for investment reasons. In that case, they would expect to get their profits from the increase of the value of the property over time. That looks most like your situation. Granted, that is more risky for them, but that is what they choose to sign up for. But in that case it is not reasonable to charge your for interest as well, because that would mean they would get double profits.

So how does the $500 monthly payment fit in? If it is interest, then it would work out to a yearly interest of about 5.2%. Where I live, that would nowadays be extremely high even for an interest-only mortgage from a bank. But I don't live in the USA, so don't know whether that is true there.

I think in your situation, the $500 can only be seen as rent. Whether that is reasonable for your situation I cannot judge from here. It should be 75% of a reasonable rent for a condo like that. But in that case, your parents should also stand for 75% of the maintenance costs of the property, which you don't mention, and most of the property taxes and insurance fees.

In short, no it is not a reasonable arrangement. You would be better of trying to get a morgage from the bank, and buy out your parents with it.

Answer 7

Yes, you are getting shafted. In the end, you will have paid the full price of the condo, but still own only 25% of it. Your parents' stake in the home should decrease as you repay the loan. The way it is now, they're getting 75% of your condo for free!

Answer 8

Talk to your parents, and find out if you are reducing the debt or not. Find buyers, sell the place now and get out the deal. Of course you will have to wait to get a good price on it. Short term you haven't lost that much, but long term you will.

Take your 25%, and use it as a down payment on a regular bank mortgage. Lesson learned move on.

Answer 9

First, I don't think your parents are ripping you off, but you should get your agreement in writing. The fact that you never own more than 25% doesn't matter. If the condo's value is increasing, you are in fact building equity. Your share of the equity just doesn't increase, but it doesn't decrease either. For example, if the condo is worth $300,000 now, you have $75,000 in equity. Of course if the value is decreasing, so is your equity.

If you are paying $500/month in interest (as OP clarified above), and you don't have a written agreement, you are probably unable to claim that payment as mortgage interest if you itemize your deductions on U.S. federal or state tax returns, thus you may be losing out on a legal tax deduction (assuming you earn enough to itemize). They will need to give you each year the proper IRS form for mortgage interest (Form 1098). And, they have to claim the $500/month as interest income on their tax returns. Having a written and signed contract eliminates confusion and potential for heartbreaking misunderstanding the future--and it sounds like you are already experiencing some doubt and confusion now. Your rate seems within market rates for an interest-only loan.

Let's say you wanted to buy out your parents' share of the condo right now. Would you pay $115,000 or would you have to get an appraisal to find out what the condo is worth now? If you can't answer that question, you need to get that in writing so that you won't have an argument over it someday. If the condo has appreciated significantly and all you have to pay is the $115,000, then that's a sweet deal for you, because you'd be buying out a much more valuable property for much less than it's worth. If that is the agreement, and the property is appreciating (no guarantee, especially with condos), then you are essentially building equity. If the property is declining in value and you do wish to sell it, then you won't have to pay $115,000; they'll just end up with their 75% share, which will be less than the $115K they invested. Both of you would lose some of your investment, but you would have had all the benefits of living in a nice condo all those years and they wouldn't. They are definitely taking more risk than you are.

Second, if you had $40,000 cash saved up, your parents probably raised you with some good financial sense and work ethic, so I'm optimistic they have good intentions for your future. Operate from that frame of mind when you go to ask for a written agreement.

Next, read up about Equity Share Agreements. There are many models that will help inform your decisions. But, you should engage a real estate lawyer to help you draw up a fair agreement for both parties.

I was in an equity share agreement for my first townhouse. It's a common practice, and it won't cost all that much to get one created. It's worth the money to get it done properly.

Answer 10

No It's not a loan. It's an equity investment.

Think of it as a business. The parents bought 75% of the equity with $115K, and are entitled to 75% of the sale proceeds, should you someday liquidate the business (i.e. selling the house).

The $500 per month is just business revenue and is paid to your parents as a dividend. Imagine you rent it out to your self and charge a $666.66 rent - you take 25% of that back and give your parents the rest.

Like any equity investment, the risk for them is that if the value of the house goes down, they will have to shoulder the loss.

And you are right, there is no way to build equity. You already sold that to your parents.

Answer 11

Actually if you look at a loan for $115,000 over 30 years at current interest rates you would have a payment of about $500 a month. I would argue your $500 monthly payments are building equity the same way a loan repayment schedule would.

Is your agreement in writing? If it is, there's nothing you can do unless they agree. If it's not then write up a contract for a $115k loan that you will pay back over 30 years at $500 a month with the amortization table. That will show how much equity you're building over time. (It's not much the first 10 years!) Note that some states require real estate contract to be in writing or else they are voidable by either party.

Whatever you do, get something in writing or you'll probably either end up in court or feeling bitter for the next few decades.

Answer 12

The time to have looked into this is before you bought the condo, not now. You are presumably an adult. Your parents have apparently made it possible for you to have a roof of your own over your head for what is probably below rental rates (but I don't know your area, so can't say). From their point of view, they may have been doing you a favor, while giving themselves an investment opportunity. What would they be doing with that money otherwise, and at a higher or lower rate of return, and with greater or lesser risk? Where and how would you be living otherwise? More Importantly, if you can't talk to them about this you have bigger problems than money.

Answer 13

Basically, you have purchased 25% of the condo for $40,000, and your parents bought 75% of the condo for another $115,000. We imagine for a moment that it wasn't you who lived in the condo, but some unrelated person paying rent.

You are paying $7,500 a year for tax and fees, plus $6,000 a year, so there is $13,500 leaving your wallet. If $15,500 a year was a reasonable rent, then the tax and fee would be paid out of that, there would be $8,000 left, of which you would get 25% = $2,000. If you were officially "renting" it, you would pay $15,500 a year, and get $2,000 back, again $13,500 leaving your wallet. So you are in exact the same situation financially as you would be if you paid $15,500 rent.

Question: Is $15,500 a year or $1,290 a month an appropriate rent for your condo? If a neighbour is renting his condo, is he or she paying $1,290 or more or less? Could you rent the same place for the same money? If $1,290 is the correct rent then you are fine. If the rent should be lower, then you are overpaying. If the rent should be higher, then you are making money.

Keep in mind that you will also be winning if rents go up in the future.

Answer 14

Are you in the United States?

Is there some sort of written agreement that the money your parents paid into the house is a loan that will be paid back?

I assume the deed to the home is in your name, and your parents do not have a lien on the property in any way?

In the United States provided there is no lien and your parents are not also on the mortgage, that home is 100% yours. Now I would argue you still owe your parents money, but absent some sort of contract it sounds like an interest free loan that you'll pay back at a rate of 500$/month.

Your parents could attempt to sue you and if this happens I recommend you find a real estate attorney. It's unlikely that they would win the case since there's no paperwork and even if there was it is unlikely to hold up since it so strongly favors them ( your parents ).

Now if your parents are listed on the mortgage or somehow have a lien on the house, you have a bigger issue as they technically own (or at least have an interest in) part of the property and when you decide to sell the house you would have to involve them.

Answer 15

yes and no its definitely not charitable as they are making money of off you but depending on the outside conditions if you had to pay a mortgage on that condo with only 35k in payments to start off it would more than likely exceed 500 dollars a month however there would always be a point were the mortgage would end and it dosent sound like thats going to be the case with you paying your parents so it depends on how long your going to have that condo and how much mortgage would have been.

Answer 16

I would go see a Lawyer no matter what. It's a form of a scam your parents are doing. Make sure it's YOUR name only on the title of the building if it is, then you have a MAJOR case against them. This is a form of Equity scam, in where you aren't really going to make hardly any money. Once you pay them that money towards the loan legally their stake needs to decrease according to what you said. ABSOLUTELY CONSULT A LAWYER!

Answer 17

You're paying 5.2% 'interest' on the $115K (500 * 12 / 115,000) * 100 but the amount you pay back is not $115K but 75% of the property value at sale. Is that right?

A mortgage would have cost about half that rate and the balloon payment would have been fixed - you would pay back $115K at maturity plus you could have sold it whenever you liked

As Gnasher729 said, if you consider it to be rent then the situation looks different but the point of buying a house is to avoid paying 'useless' rent, build equity and hopefully make a capital gain

I'd speak to a lawyer & possibly an accountant (regarding the numbers)

Answer 18

It depends on the selling price, but if we can assume the property will be sold at a profit, they are getting a pretty sweet deal at your expense. They are both getting about 5.2% interest on their money, plus the lion's share of any property appreciation.

I would say that fair would be either of:

1. They pay 75% of the taxes and condo fees (you're the only one benefitting from the utilities, so that's all yours to bear) and they get 75% of the gross sale, or
2. They pass through to you the interest cost of money they provided (assuming they had to borrow it, and 5% does sound reasonable), but on sale they only get their original principal (115k) back, or
3. They operate it like a real mortgage where you pay them interest plus a portion of the principal each month and on sale, they only get the balance of that principal back (less than the original 115k).

Answer 19

You are being ripped off on several counts.

1) 40k is 26% not 25%.

2) Why should you pay them $500 rent? they bought a share of the property, they should fund it if they intend to keep 75%

3) Why do you need to pay them for the 75%? why dont they need to pay you for the 25%?

You are better off getting a loan for the 75% and going solo so you get to buy equity.