Able to pool funds for a downpayment and co-ownership of a home?

Question

I want to buy a house but I do not have quite enough for the 20% down payment I'd ideally like to post for the mortgage. My wife and I are thinking of chatting with our family and getting together some funds for a down payment. I was thinking, would it be possible to create some type of joint investment in the purchase of the home? Not just a gift or anything informal but joint ownership with some type of fractional ownership based on the downpayment. Here is what I had in mind:

Scenario One:
Home Purchase Price = $500,000
Home Sale Price = $600,000
Gain/Loss: $100,000.00
Costs for Closing at 5% $5,000.00
Net Profit $95,000.00

In the scenario above the tenant would be the one living in the property and paying all of the rent (hypothetically) for the privilege of earning a profit on their home when they'd otherwise be renting. Also, as they are owning they have an incentive to take care of the home as well to retain resale value. Let's ignore what would happen if the property were to be rented to someone other than the tenant for the time being.

I am interested in if any legal structures come to mind, if this is already done somewhere at scale, or whether there are U.S. or state regulations preventing this. For reference, this would be in the state of Illinois, Florida, New York, or anywhere in the U.S. ultimately. Of course, please let me know if something does not add up above.

Answer 1

I would emphasize what a terrible idea this is, but I'll just share some concerns:

You said one of the members would be living in the home, which means this would be a long term deal. You didn't mention how long. Is this contribution to the down payment an interest free loan for potentially decades ? Would the repayment occur when you sell the home ?
Over 20 years a profit of 95% isn't all that great. And the person actually buying the home (and paying the $500,000 mortgage) isn't actually seeing much of the appreciation.

Likewise with the mortgage: is everyone paying the mortgage and the tenant is paying rent to everyone ? What's his advantage vs renting and just dealing with 1 landlord ?

In short: you have a multiyear deal with 5 different people for significant sums of money and family ties complicating things. I hope you have a family where this all works out well. I don't.

Answer 2

Besides the fact that mixing family and money can be really hard, I'd like to add another detail:

If only the downpayment is shared, but the mortgage goes on only you, you as well could start from the original $500,000 from which $400,000 + $30,000 goes on you and the missing $70,000 on the different family members. That changes the percentages a bit, but would be a feasible way.

But there are still things open: Do you pay rent for the 14% of the house you don't own? Are you planning to buy these shares back eventually?

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But there is another option, but I am not sure if it would work in the U.S.: These people can provide you a loan which you secure with a lien on your house. I don't know how exactly the lien system in the U.S. works on houses, but in Germany, the bank would probably insist in having the first rank, so they would rank lower and would eventually get nothing if you default and the house will be auctionned.

Answer 3

As others have answered, this isn't a good idea because there are so many things that can go wrong. It would be far better to have the parents gift you some money or just wait until you have saved up the down payment on your own.

This blog post provides some food for thought on whether buying is even a wise decision. Read the whole thing, including associated addendums, links, comments. It may work for you (I do own my home), but home ownership isn't always the best financial option in a fair number of cases.

“Hey I’ve got an idea. We’re always talking about good investments. What if we came up with the worst possible investment we can construct? What might that look like?”

Well, let’s see now (pulling out our lined yellow pad), let’s make a list. To be really terrible:

• It should be not just an initial, but if we do it right, a relentlessly ongoing drain on the cash reserves of the owner.
• It should be illiquid. We’ll make it something that takes weeks, no – wait – even better, months of time and effort to buy or sell.
• It should be expensive to buy and sell. We’ll add very high transaction costs. Let’s say 5% commissions on the deal, coming and going.
• It should be complex to buy or sell. That way we can ladle on lots of extra fees and reports and documents we can charge for.
• It should generate low returns. Certainly no more than the inflation rate. Maybe a bit less.
• It should be leveraged! Oh, oh this one is great! This is how we’ll get people to swallow those low returns! If the price goes up a little bit, leverage will magnify this and people will convince themselves it’s actually a good investment! Nah, don’t worry about it. Most will never even consider that leverage is also very high risk and could just as easily wipe them out.
• It should be mortgaged! Another beauty of leverage. We can charge interest on the loans. Yep, and with just a little more effort we should easily be able to persuade people who buy this thing to borrow money against it more than once.
• It should be unproductive. While we’re talking about interest, let’s be sure this investment we are creating never pays any. No dividends either, of course.
• It should be immobile. If we can fix it to one geographical spot we can be sure at any given time only a tiny group of potential buyers for it will exist. Sometimes and in some places, none at all!
• It should be subject to the fortunes of one country, one state, one city, one town…No! One neighborhood! Imagine if our investment could somehow tie its owner to the fate of one narrow location. The risk could be enormous! A plant closes. A street gang moves in. A government goes crazy with taxes. An environmental disaster happens nearby. We could have an investment that not only crushes it’s owner’s net worth, but does so even as they are losing their job and income!
• It should be something that locks its owner in one geographical area. That’ll limit their options and keep ’em docile for their employers!
• It should be expensive. Ideally we’ll make it so expensive that it will represent a disproportionate percentage of a person’s net worth. Nothing like squeezing out diversification to increase risk!
• It should be expensive to own, too! Let’s make sure this investment requires an endless parade of repairs and maintenance without which it will crumble into dust.
• It should be fragile and easily damaged by weather, fire, vandalism and the like! Now we can add-on expensive insurance to cover these risks. Making sure, of course, that the bad things that are most likely to happen aren’t actually covered. Don’t worry, we’ll bury that in the fine print or maybe just charge extra for it.
• It should be heavily taxed, too! Let’s get the Feds in on this. If it should go up in value, we’ll go ahead and tax that gain. If it goes down in value should we offer a balancing tax deduction on the loss like with other investments? Nah.
• It should be taxed even more! Let’s not forget our state and local governments. Why wait till this investment is sold? Unlike other investments, let’s tax it each and every year. Oh, and let’s raise those taxes anytime it goes up in value. Lower them when it goes down? Don’t be silly.
• It should be something you can never really own. Since we are going to give the government the power to tax this investment every year, “owning” it will be just like sharecropping. We’ll let them work it, maintain it, pay all the cost associated with it and, as long as they pay their annual rent (oops, I mean taxes) we’ll let ’em stay in it. Unless we decide we want it.
• For that, we’ll make it subject to eminent domain. You know, in case we decide that instead of getting our rent (damn! I mean taxes) we’d rather just take it away from them.