Q: Our family has a vacation home that we own free and clear. The property is held in a trust for all of us.
Due to the current local market conditions, we haven’t been generating any income from the trust. But the house needs some repairs that none of us can afford to make.
We thought about getting a home equity line of credit, but then someone told us that one of us would have to be liable for the payment each month. Unfortunately, none of the 15 family members who own the house wants to be the one who signs for the home equity loan.
But we had another idea. Since we own the house free and clear, could we obtain a reverse mortgage? Since the amount of the mortgage would be repaid when we sell the property, no one would be financially liable?
Will this work? There has to be a way that we can utilize the equity in the house to do these necessary major repairs.
A: The short answer, unfortunately, isn’t one you’ll want to hear: I don’t think a reverse mortgage is going to work for you.
To qualify for a reverse mortgage, the house has to be the primary residence of the homeowners. And, at least one of the owners of the property has to be 62 years of age or older.
From what you have described, it sounds to me like you and your 15 family members own the property collectively and you use it as a vacation home as well as a rental. The way things stand today, the owner of your type of property may not qualify for a reverse mortgage.
I’m more troubled by the idea that no one wants to take financial responsibility for the home equity loan. While not all 15 people need to sign on to the loan to make it work, the trustee for the trust that owns the property should be able to take financial responsibility. As long as the value of the home is assured, and the loan is secured by the property, it would be repaid monthly like any other home equity loan. If the trustee fails to pay the loan as required, the property could or would be sold to satisfy the debt.
If that’s not possible, and if no one is willing to step forward and assume financial responsibility for the home, then the family should consider selling it (if the trust will permit a sale).
If you let the home fall into disrepair, it will be worth less and less, and you’ll have fewer opportunities to rent it. That’s a bad cycle to fall into. And, it’s always a shame to take what should be an appreciating asset and watch it crumble.
Q: We moved a year ago from the sane real estate market of South Carolina to the insane real estate market of Southern California. We have become really good friends with another couple with young children, and we are all fed up with apartment life.
We’re considering going in jointly to purchase a duplex giving us the comfort of owning a home, but payments that won’t break the bank.
How do we approach a lender to do this? And what legal concerns do we need to handle in advance? The market is so hot here we know that we could easily rent the unoccupied half of the duplex if either of us decided to move on.
But I’m sure going into a deal like this is more complicated than it appears.
A: Of course it’s more complicated.
If you both want to own (as opposed to you purchasing the property and renting to your friends), then you need to look for a multi-family building that has at least two units.
Before you do anything, think this through carefully before you do it. What happens if your neighbors fail to make the mortgage payment? Your credit could be tanked along with theirs. What if they simply disappear one night? You’d be on the hook for everything but wouldn’t own the property outright.
You should think about how you and your friends want to own the property. You can buy the property as tenants in common or joint tenants. Or, you can hire an attorney to help you subdivide the property legally and turn your building into a condominium.
What’s nice about turning your property into a condominium is that you separate the legal ownership of the property. You can sell at any time without consulting your neighbors and they can do the same. It doesn’t get as messy.
Although attorneys are not normally used to purchase property in California, you should hire a real estate attorney to help you work through the issues relating to co-ownership of property. Often, individuals in your situation will draft a partnership agreement that spells out the nitty-gritty details of the ownership, management and financial responsibilities of each party.
Finally, spend some time with your friends discussing what kind of property they want, what is their neighborhood of choice, and how you can make this work out well for everyone.
Jan. 19, 2009.