How To Find, Secure, Buy, Document and Protect your Child’s Fist Property Acquisition

How To Find, Secure, Buy, Document and Protect your Child's Fist Property Acquisition

How To Find, Secure, Buy, Document and Protect your Child’s Fist Property Acquisition

 As parents and grandparents, one of the most noble and satisfying acts is to help our kids get a leg up on the real estate ladder. Often, the first home, even a starter becomes a difficult reach if not an impossible achievement for young buyers. From their perspective,all they need is a little down-payment money and mortgage approval assistance; “we’ll take care of the rest.” The senior generation wants to make sure that the younger generation is not getting in over their head financially or pragmatically (undue exposure, liability, etc). For many families as with the first car, the first home has morphed into a right of passage which somehow must be satisfied. The problems seem overwhelming at times.The mort­gage company requires income verification, down payment source, job security and so forth. There seems to be a lot of ways to say NO and a scarce few to say YES. Usually, our client demands YES.

 Enter my team and me. We do know the ways; the strategies and techniques to achieve your family goals and can’t wait to share a few winners with you. It’s not my mission to suggest your best approach but rather to explore a few ideas with you which might spark your interest.

The protection part is this: the LP child cannot refinance, further leverage the home (2nd mortgage, etc.) without the GP’s written approval. No sale or tenancy agreements, HELOC’s, nothing of value or liability can be secured by the LP without the GP’s express permission. The partnership can be set up for the GP to receive a ROI on the $1OOk if desired as well, though this is rare.Plan A: Family Partnership or LLC (some rare cases; a trust)…The parent(s) form a general partnership. Mom and/or Dad (or grandparents) is the GP,  the child the Limited Partner. The partnership is funded with down payment cash plus a closing and improvement fund for legal, financing, maintenance, emergency, etc. The partnership agreement also spells out the partners equity and loan arrangements for seamless mortgage application and closure. For example, we will assume a $100,000 cash deposit into the partnership funded 99% GP and 1% LP. The partnership or LLC is structured for the senior generation GP to receive 99% of the tax benefits, cash, equity and “control” of all important decisions. The LP child receives 99% of all equity appreciation (GP can even contribute some or all of the initial funding in the form of a gift without tax consequences if done properly).

Plan B: Direct buy LLC with quitclaim deed …The parent(s) purchase the desired property preferably through a new LLC for liability protection. They pay cash or mortgage; makes no difference. If the property is financed the senior generation “owner” is naturally the mortgagee and bears full responsibility for the loan. Whether the loan is assumable or not is mute: the parent is at risk as the debtor irrespective of deed transfer. Once the property is closed, the parent can quit claim the deed to the child yet remain on the paperwork for loans, taxes, etc; thereby effectively controlling the property and protecting it from liability or indebtedness.

Usually, the plan is for the child to eventually qualify for a mortgage and/or for the parent to gift all or a part of the equity value to the child at a later date. Plan B allows for the transfer of deed /title to the younger generation without the senior generation losing effective control.

Plan C: LLC Purchase; Lease with an option to buyAs with Plans A and B, the senior generation  provides the economic and credit value to close on the target property. With this traditional option, the parent purchases the home and leases it to the child. The lease provides for a small premium to be paid for the right to convert to ownership within a stated period of time. This approach is extremely  attractive to both generations for obvious affordability and tax (even cash flow) purposes. The idea is for the child to buy some time and become financially stable enough to purchase the property from the parent at a later date; to exercise his ”option to buy”. Once again, all options remain open for the parent. If the goal is to further assist a few years down the road, a partial gift may be used as well, thereby assisting the child and perhaps making the home ownership goal much more attractive. In the meantime, the parent(s) can realize the normal tax benefits associated  with income real estate.

 

Any purchase assistance plan is quite flexible. The objective is simple and clear cut. Estate, gift and capital gains tax planning all enter into the picture so make sure your professional advisor takes care of all of this.

At our firm, we are always looking for ways to embrace and enhance the family legacy and family unity goals. These plans are optimum opportunities for teachable moments and years; from the senior to the younger generation.

I  encourage your follow  up with this topic and  how we might help you and your family with that first home purchase. My team of experts lenders and tradesmen will work with you to achieve the very best outcome available. I especially enjoy these transactions; they are always so rewarding  to work on. From finding  the perfect home to ownership structure,entity formation, closing and  post-closing  restoration, remodel, etc.

 Closing tidbits: The fed will keep nudging up interest rates. Chairwoman Yellen just announced again “at least a few more 25 basis point (one quarter point) increases throughout the year… ” Mortgage and consumer rates are increasing as well. According to the AP in a mid-March report; “U.S. home­ owners wary of rising interest rates refinanced their home loans in the waning months of 2016, causing a spike in financing that outpaced  purchase loans. Lenders issued more than 883,000  mortgage refinanced loans in the fourth quarter of last year, an increase of 20 percent from a year earlier , according to real estate information company data from Attom Data Solutions

My point is this. The handwriting is plainly on the wall. Our economy  is heating up rapidly and if Trump succeeds with three major proposals; health care reform, tax reduction and regulations  reduction;  this growth is real, significant and sustainable,  particularly  reflected in corporate earnings, payroll (income) and jobs growth. As our GDP continues to rise and consumer confidence goes up, the fed will accelerate its damping effect by

bigger/faster rate increases to “combat inflation”. Message? Buy NOW . Refi NOW. Among all of my stellar team members and experts, my lenders are my pride and joy. If they can’t make your deal work to your best interest you’re better off taking a pass.” As always, I’m only a call or click away.

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