When the parents may want to move in with you . . .

Question

I apologize if this topic has been addressed before .

Would love suggestions on this topic - my parents are getting to that age where their house (mortgage free) is getting to be too much for them.  I'm their only child and about to have "the talk" about what their ideas are for the future in relation to their house (among other things).

My husband is completely on board with them living with us, if they would like.   In order for us to combine households in a property where we don't feel like we're on top of each other, we'd need the proceeds from their home to do so (we live outside of the DC area and land/big houses are quite expensive).  My hubby and I would rent out our current house because we do have a mortgage to contend with.

One point before I forget is that THEIR house has quite a bit of deferred maintenance.  It's a 3 bed/2.5  bath colonial with a pretty open layout (considering it was built in 1969) which would have to go one of  2 ways -

1)  HELOC it and do a total rehab then list and sell for top dollar, pay off HELOC and use proceeds to fund this "joint venture"

2)  Sell as is, which is def going to be 50 cents or less on the dollar compared sold comps in the neighborhood (anywhere from 300K to 500K) and use proceeds to fund this "join venture"

--->  I'd love to hear pros and cons to both of those points  <---

From an investor perspective - what is the best way I should approach this?  Obviously, we'd love to get as good a deal on this venture as we'd like to on a buy-n-hold cashflow rental.  But how do you market to people who own 2 or 3 acre lots (which I'm seeing on the MLS) or those in 6+ bedroom houses - I should ask which would be the BEST way to market to these owners?

My ideal scenario would be that we find a 2 or more acre lot, hubby the 2 kids and I are in the "main" houses and there is a cottage house or some sort of agreeable sized outbuilding where my parents are -- hence, they are close enough where we can help them out but both families have their own space.

This more than likely would have to be new construction as I don't know if these types of properties are available around here (at least listed on the MLS).

And of course space costs money in real estate.

Any suggestions (other than don't do it, ha ha!), perspectives, etc., would be appreciated.

Thanks!

Bill Gulley · Answer

Sounds to me like this is not about them, it's all about you getting your hands on thier house. Did they charge you anything while they had you in thier house? Doubt it. So what you're looking for is how to justify getting thier asset and money from it to do for them what they did for you!

Why don't you go over there and fix what you can, clean the place up, didn't they fix things for you and clean up after you? There are many services they might be able to use to stay in thier home.

Ge'me, ge'me'ge'me ge'me! While I try to make it sound like I'm the good person....LOL!  :(

Jon Holdman · Answer

Christina R. I think this path is fraught with potential problems.  As you've described it, I think this is a horrible idea.  Sorry.

Here's a real life example of how this went horribly wrong.  One of my wife's very good friends did exactly this.  They were the parents.  They sold their house, and took the equity to buy a house with their kids.  Like you describe, it was a bigger house so they could all live their comfortably.  They're older and not in the best of health, so the intention was they could stay here the rest of their lives.  They put in a bunch of cash for a down payment, and the kids were supposed to make the payments.  The kids ended up taking HELOCs on the house and used the money for improvements and a really fancy music room (one of the kids was a musician.)  Times got tough.  Payments got skipped.  The house was foreclosed.  Now the parents are seriously struggling and living in low income housing.  The kids moved on with their lives.   For all practical purposes, the kids took the parents equity, spent it, and left them penniless and struggling.

Don't be those kids.

I know you think this is a great way for you to improve your situation and help out your parents in the process.  In some cultures, extended families living together is common.  Not so much here in the US.  Your scenario is outlining the upside.  Consider the downside.  If things get bad for you and your husband, are you willing to do whatever it takes to support your parents?  If times get tough for you, and all your parents equity is tied up in your joint project, are you willing to sell, let them take back their equity and live in a small house (rented, maybe) to get by?

Helping out your parents is great.  But when "helping them out" moves into improving your situation, I think you're crossing a line that shouldn't be crossed.  Instead, focus on them separately.  Help them with getting a HELOC and fixing up their house (if that's truly necessary) and selling at a nice profit.  That's THEIR money.  Then, if you guys all want to be close but not under the same roof (which is what you describe), find some area where you can buy the house you want (and can afford on your own, independent of them) and they can use the proceeds from their house to buy or rent something that works for them.   Maybe a condo or townhome to avoid some of the maintenance issues.  Maybe something small and close to you where you can help with the maintenance and see them a lot.

Christina R. · Answer

So the talk was over 2 hours long, productive and opened up other quality of life issues to be discussed.  This phased ended with me strongly recommending that my parents get the CMAs so they have a basis $ viewpoint from which to start- for as-in condition, recommended upgrades to increase value and ARV.   Hopefuly they will follow through and then we'll move to the next step, whatever that may be.

Ideally, we (my hubby and I ) would find a smaller place for them near us that we buy as an investment, they rehab their house and then rent IT out for cashflow for themselves and 1) they've downsized, which is a big part of what they want,  2) we're in proximity to help them and 3) they are using their equity for fun stuff they want to do and also getting tax benefits again by carrying a mortgage that will be more than paid by a tenant.

Thanks for all the advice and please keep it coming. I'm sure to be asking more questions in the future on this.

Christina R. · Answer

@Karen Margrave-  thanks Karen for sharing - great to get a woman's perspective as well.  Right now my parents' health is good, Thank God.  Both are retired.  My dad has a pension from his days as a G-man and they are both have social security.  They are not destitute; at the same time, they are not extremely flush with cash.  Honestly, my parents don't talk about finances with me - I guess they are old school in that respect.  And I'm not sure if I should press that particular point tonight so that I can better determine options for them.  And how to do that??

Karen Margrave · Answer

Christina R. You need to talk to your parents and ask them what they want. As was mentioned, get a few agents that work the area to come by and run some comps for you, "as is" and "with repairs done". Then do the math.

What is the health of your parents? A townhouse probably would be a bad plan if it has stairs. Is there any senior housing nearby? What are the rates? What is your parents income?

The scenario you are considering probably wouldn't work, because at the age your parents are, in reality, they probably won't be capable of living independently for that many more years, then, their equity will be spent, and they may not have the means for paying for assisted living, etc.

Maybe you could move in with your parents, and help improve the house while you're living there.

When my step father passed away, my mother lived on her own for a few years. As she began having a hard time living on her own, and we were building a new house, we designed a room and living area specifically for her. We then sold her house, and I put the money aside for later in case she'd need it. A few years later she had more serious health problems, and she moved into assisted living. It was two blocks from m  home, and I stopped by a few times a day to check on her. She loved being around other people her age, that had lived through the same things she had, etc. A year later she passed away. I wouldn't trade the time I had with her when she lived with us for anything. At the same time, it's a huge commitment. Look at the BIG picture, because rarely do things go as planned.

Christina R. · Answer

Jon Holdman - all your points, scenarios and the questions you have raised have been exactly what I was looking for and why i posted in the first place.  It's not necessarily you that I'm referring to in the assumption of motives department.  The way you communicated your concerns was much better received by me than another post - same content but your delivery was much more mature, in my opinion.   The relative anonymity of internet posts lets people just shoot off their mouths via their typing skills  - I always wonder if the same exact words would be verbally spoken if a real person was standing right in front of their face.  
Anyway  - we discussed this (hubby and I) and we agree that any cohabitating arrangements   - if it ever came to that - would be ones that we need to fund completely.  Both he and I do not like the idea of using my parents money, which is why we have pushed this conversation off.  My parents will be 80 in 5 years so I know we are at a crossroads in having a talk and seeing what they want and how we can accommodate that without jeopardizing their financial security.  HOpefully it will go well tomorrow.  My number one suggestion is the 3 CMA analysis.  I think that is going to bring a reality shock to my father, who is to some degree mentally living in the RE land of 7 years ago when houses sold in their neighborhood for almost 700k that were complete wrecks.  I tried my best to get them to sell and downsize then but they really missed the boat - they weren't ready to pull the trigger and it seems like with most good deals in RE, you snooze . . . you lose.  Of course I am over 40 and have lived in 4 different places in the last 20 years.  They have lived in this ONE house for almost 50.  I'm not surprised they didn't pull the trigger.

Jon Holdman · Answer

Christina R., about 11 years ago my sister and I convinced our grandma to move from rural MO here to Denver.  It was, in some ways, similar to what you're trying to do.  She lived out in the country, five miles from the nearest town and 70 miles from any significant medical care.  She didn't drive and needed help for the smallest errand.  She didn't move in with either of us, but lived in an independent living apartment until she passed away in early 2012.  While it wasn't a perfect arrangement, she was close enough that we could get her to the doctor or store, we could get together frequently, and if an emergency came up one of us could get to her place quickly.

In living in her apartment community, I saw and heard about a lot of very bad kid behavior.  Some of her neighbors struggled to make ends meet, yet would have over money to their adult kids on request.  I already told you about my wife's friend who's now struggling, thanks to the financial interaction with their children.  I actually have several additional examples.  Its not at all unusual for parents to go though their entire lives always looking out for their kids first and themselves second, even to the point of impoverishing themselves.  IMHO, its not just necessary for kids to avoiding asking mom and dad for money.  Its also a matter of saying "no" when mom and dad offer, if that's going to potentially hurt them.
 
You wrote several things in your first post that made me very concerned.

All these statements talk about combing both your physical households and your finances.  There's a lot of space between helping your parents get into a more appropriate living arrangement and combining your households and finances.  There's several alternatives about how to get your parents to a better place that don't have any effect on your living arrangements.  Yet, those have been bypassed and you're talking about using their equity to buy a house you live in.  I don't see you saying you would sell your existing house and use the equity from that to contribute to buying the new place.  That sort of talk leave me very concerned about why you would make that leap.

Now, I have seen situations where kids bought a house with a "mother in law apartment" and let mom or dad move into that.  But its the kids buying that house, not mom and dad.  My grandma did actual own real estate when she moved out here.  She had some money, but not enough to pay her rent here without selling all or part of her property.  My parents didn't want that, so they agreed to help her pay her rent out here on the condition that she wouldn't sell any of her property and they would receive that when she passed (which had actually been the plan put in place by my great, great grandpa long ago.)

Sorry if I have come off being somewhat accusatory about your motives.  I've just seen this sort of situation turn very bad.  Some of what you wrote came across as being more focused on your situation than your parents situation. I think it would be much better to focus independently on the question of improving your folks situation without any consideration to changing yours.   If it turns out that combining households is the proper way to go, let that fall out of the evaluations.  But I'd like to see what your contribution is into making that happen, not just your parents.  Perhaps I'm just taking a cynical viewpoint when your intentions are nothing of the sort.

Christina R. · Answer

I do appreciate the comment about the long-term care facility complications.   I do find it perplexing that the presumed assumption is that I'm going to essentially screw my parents over to elevate my personal residence, wallet, ego, whatever . . .  since it's taken essentially 4 years to get to the conversation stage I'd say that isn't the situation in my case - in any event, any advice that is specific is appreciated and that's what I got from Jon Holdman and Steve Babiak. Anyone else who can add to that in the same vein, keep it coming.  I am going to propose having 3 agents do a CMA for my parents when we have our talk this Tuesday and then eventually I'll have some numbers, Jon, that I can PM you about - thanks!

Steve Babiak · Answer

What happens when the parents, on title with you jointly on that new piece of real estate, have to go into a long term care facility due to some issue that is so serious that you cannot care for them any longer?  Those facilities will want to get the parents' share of that asset, and since I guess most of the equity in that new property will actually be coming from proceeds from your parents' sale of the existing house - will you have a new majority share co-owner perhaps.

Jon and Bill have given you food for thought - you have to now "do the right thing" ...

Jon Holdman · Answer

Most properties don't make good rentals.  Now, because they own it free and clear, they could certainly rent it and have positive cash flow.   But the rate of return might be very low.  It may well still be a crummy rental.  For that matter, yours may be, too.  Remember, rent must be DOUBLE your P&I payment to be break even, if you're using a PM.  Rent needs to be about 1.5 times P&I to be break even if you're self managing.  And then you're contributing your time for free.  And owning rentals without adequate cash reserves, six months rent, IMHO, is very risky.  So, before you consider renting either property, take a hard look at it purely from a rental perspective.  If you want, give us the numbers and we can take a look.

Sounds like they want to downsize into a property that better fits their needs.  That's certainly reasonable.   By far the simplest thing to do is to sell it and buy something smaller.  Yes, there are transaction costs for selling and buying.  But if you're choices is keeping it as a crummy rental vs. selling, sell and be done with it.

Fixing and selling vs. selling as-is is trickier.  Fix and flipping works because many buyers want a move in ready property.  Many don't have cash to do any significant repairs after they buy.  So, fixing it first and getting it move in ready MAY produce the higher net return.  OTOH, it may not.  That's why banks sell their REOs as-is.  Some buyers can pay for repairs, especially if they're relatively minor.

So, get at least three agents to come out and give you feedback.  Ask what it would bring as is.  And farily soon.  A very common error sellers make is to overprice the house.  Price it right from the start and you will get the best price.  Overprice and it will linger and you'll end up selling for less.  And ask the agents what needs to be done to get a better price.  Then get estimates for that work.  Knowing these numbers: as is price, fixed up price, and costs of the fix up (including the costs of the mortgage to pay for it) and its just a matter of choosing the option that produces the higher net amount.

Then your parents can take that cash and buy something that fits their needs.

On the scale of options, here's how I see it.

Helping your parents out to get a place that meets their needs:  good
Combining households: maybe OK, not an option I'd choose, but might work for you.
Combining finances: not OK.  Unlikely to work out well.
Actually profiting personally in any way (cash, better house, anything) from your parents:  BAD, BAD, BAD.  Don't be that child.

When the parents may want to move in with you . . .

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