The Bank of Mom & Dad
Saturday, April 4, 2009
Real estate agent Brandon Green had a buyer lined up for a one-bedroom co-op he recently listed in a trendy Adams Morgan building. But two days before closing, the lender requested that the buyer come up with $9,000 more in cash.
Green got worried. His seller panicked.
But the buyer found a solution: She called her grandfather, who wired the additional money just before settlement.
"Everything is surprising in banks these days," said Green, principal broker of Brandon Green & Associates. "We have seen a dramatic increase in the number of parental-assistance purchases."
Not long ago, it was possible to a buy a house with little or no cash. But those no-down-payment mortgages were among the risky loans that helped cause the current financial crisis as overextended purchasers began defaulting. As a consequence, banks have tightened underwriting standards and require more money down. That has pushed many buyers in search of cash to turn to what some used to see as the lender of last resort: their families.
"In the last six months, I've dealt with more parents than I ever have," said Jay Seville, an agent with Re/Max Allegiance in Arlington. "They're part of the financing now, either with the down payment or a secondary loan."
Real estate agents and financial advisers caution that getting help from family members can raise not only financial and legal complications but also thorny emotional issues: Who gets the final say on a house? Who takes the hit if a home declines in value? What happens if I can't pay back the loan?
And the big one: How much do I really trust my relatives?
"There are two types of pain in life: the pain of discipline and the pain of regret," said Nicholas Yrizarry, founder of a wealth management group in Reston. "In the case of family matters, one must have discipline upfront . . . rather than having pain of regret later."
Broaching the question can sometimes be the most difficult part. Several real estate agents suggested simply being upfront, particularly about the cost of homes in the Washington region. The more information relatives have at the outset, they said, the more smoothly the transaction is likely to go.
"Obviously, when you get to be an adult, you don't want to call mom and dad and say, 'Gee, I don't have the money,' " said Joseph Himali, principal broker at Best Address Real Estate in the District. "I've heard of people just finding creative ways to make it happen."
No matter how the arrangement is structured, several financial experts agreed, all parties should have a clear understanding of the terms of the agreement and write them down for future reference. Memories can be faulty, and, in a worst-case scenario, written documents can be references in a legal battle.