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.
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.
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.
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).
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