Co-investment with parents and sibling jealosy [Home construction]

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meercatter
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Co-investment with parents and sibling jealosy [Home construction]

Post by meercatter » Tue Feb 13, 2018 3:51 am

My wife and I live in a HCOL area in the United States. Her parents own a shoddy house nearby on a very nice lot and we have all been discussing tearing their house down and building a large multi-generational house (effectively two units) on their lot where all of us could live. In principle, if this house was built, my wife and I would own a percentage of the house in proportion to how much money we contribute to the construction of the new house. Although this arrangement does not seem typical in the United States, it is becoming more common in this particular area due to skyrocketing land/home prices.

However, when we presented this plan to my wife's siblings, they felt that the arrangement was unfair, even though her siblings don't live in the area and would not be interested in this type of arrangement. They felt it was unfair because we would be given an investment opportunity that they would not receive. In some ways they are correct in that a new house would significantly increase the value of the property and they would not immediately benefit from this. Also, if property values continue to rise in this area, our share of the house would continue to increase. I feel that in some ways they are mistaken, though. When my wife's parents pass away, her siblings will be left with a slice of a much larger pie.

Has anyone dealt with a similar situation when co-investing with parents? Is this type of arrangement fraught with peril?

denovo
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Re: Co-investment with parents and sibling jealosy

Post by denovo » Tue Feb 13, 2018 4:39 am

I agree with the siblings for a couple of reasons and think this is a bad idea.

1. A complete tear-down and rebuild with two units with the requisite permits could easily take 18 months for which they will need to pay for new living arrangements.

2. Like most people doing this kind of extensive remodeling, I suspect you are underestimating the costs and how easy the process will be. Will the city/county even let you build two units on one lot? Especially in a HCOL area, :moneybag :moneybag

3. As you already acknowledged, multigenerational housing is NOT popular in the United States so it is unlikely this kind of build will have a strong re-sale value or good rental value if one party vacates their unit. In other words, a bad investment.

4. I have no idea how old your wife's parents are, but if they are getting up there in age, it will be possible that one or both will eventually need to be in some kind of assisted living facility unless one of you are planning on being a full-time caregiver to your children and her parents. This isn't a good long-term idea possibly. Also if they need to sell to fund their retirement or long-term care...

5. Following up on the bad investment idea, what if you need to relocate for your work or are forced to because of a lay-off? Then your wife's family will be left holding the bag for a remodel that you couldn't even fully enjoy?

At the end of the day, it's their money/life and they can do whatever they want, but don't be surprised if your brothers and sisters-in law hold a lifetime grudge against you guys if any problems arise, especially if it's perceived that you and your wife pushed them into this.

Factoring in the headache of a re-build, plus them having to live somewhere else or long time, and how it may be affect the value, it seems like most of the downside is theirs, while most of the benefits are going to you.
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JustinR
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Re: Co-investment with parents and sibling jealosy

Post by JustinR » Tue Feb 13, 2018 4:50 am

Sounds great if you want your wife's siblings to resent you guys for the rest of your life. I wouldn't mix money and business with family.

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Watty
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Re: Co-investment with parents and sibling jealosy

Post by Watty » Tue Feb 13, 2018 5:37 am

On the more practical side this may not even be be possible for reasons like;

1) Unless their house is paid off you can't tear it down.

2) If you can't pay cash to build the new house you may not be able to find financing because of the joint ownership with them.

3) The zoning or HOA may not allow a multi-family unit on that lot.

4) There can be zoning limits on parking so not everyone that needs a car might be able to own one.

5) An unusual house like that might not sell for as much as it costs to build since fewer people would want to buy it.

6) When the parents die then you might not be able to afford to buy the siblings share of the house so you could be forced to sell it.

mouses
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Re: Co-investment with parents and sibling jealosy

Post by mouses » Tue Feb 13, 2018 8:36 am

My parents and grandparents had an arrangement like this. My parents needed more room, and the grandparents were starting to get old enough so that they might need help. My recollection is that the grandparents left their portion of the ownership to all their kids, and my parents bought the others out after my grandparents died.

I can see how this could be a mess in some families. Perhaps this could be addressed in the ownership paperwork to avoid a mess. Come up with some reasonable solution and lock it in legally.

3funder
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Re: Co-investment with parents and sibling jealosy

Post by 3funder » Tue Feb 13, 2018 9:07 am

I wouldn't do this. Full disclosure: I'm of the mind that a home is a place to live. As for investments, I stick with stocks and bonds.

Nowizard
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Re: Co-investment with parents and sibling jealosy

Post by Nowizard » Tue Feb 13, 2018 9:25 am

Practically, it could make sense, emotionally, it could be a disaster in terms of family relationships. Building of two or more homes on one lot is extremely common in Nashville, Tennessee, though primarily by developers who purchase old homes and build new ones in gentrifying areas. Typically, you will see an address such as "458A" and "458B," etc. to designate where this has happened.

Tim

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Pajamas
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Re: Co-investment with parents and sibling jealosy

Post by Pajamas » Tue Feb 13, 2018 9:37 am

You're mixing investing, housing, parental support, and sibling issues all together. Could end up being volatile. Try to separate them as much as possible.

Why don't your parents just sell the dilapidated house? Problem solved.

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sunnywindy
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Re: Co-investment with parents and sibling jealosy

Post by sunnywindy » Tue Feb 13, 2018 9:38 am

Forget any logical or practical arguments for or against such a move. This is all about emotion. I think these siblings had a different idea about how their parent's endgame would play out. They feel like you are taking their parents away from them because you are now their 'protectors'. Again, it doesn't matter that they do not live in the same city and aren't doing anything similarly proactive (per se), but that's how they feel.
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freebeer
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Re: Co-investment with parents and sibling jealosy

Post by freebeer » Tue Feb 13, 2018 9:44 am

One thing that could help would be to structure the arrangement arm's-length, which would protect the value of your parents' asset. If you are in Bay Area you will know that TIC ("Tenant In Common") arrangements are common and often among strangers not family or even friends. There are well developed legal frameworks for them in that area, including even fractional equity mortgage loans. You could ensure an equitable division of the equity based on capital contributions including the value of the lot contributed by your parents. In principle then either you or your parents could even sell their TIC unit separately. That would not necessarily make your siblings entirely happy on the emotional side but if it was crystal clear that this was not a way of your getting an unfair share of a future inheritance but instead helping your parents increase the value of their property, that couldn't hurt.

scone
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Re: Co-investment with parents and sibling jealosy

Post by scone » Tue Feb 13, 2018 10:11 am

There are regions, such as Silicon Valley, where TICS and granny flats are quite common. They are not necessarily more difficult to permit and finance than other RE projects-- some places are quite difficult and expensive to build in, no matter what you propose. And every property has its own unique issues.

The sibling issue is an entirely different matter. One argument could be made: remind the siblings that you are likely going to be doing most of the work to care for your parents as they get older, because you are "johnny on the spot." If you end up spending a lot of money to do that, then some sort of shared arrangement begins to look more "fair" in some sense. The flip side of that argument is: the siblings then take no responsibility for the parents, and the burden of care begins to weigh heavily on you. Of course the latter outcome might happen no matter what arrangements are made-- they might not help, or they might not be in any position to help.

In any case, no matter how this is structured, you could still get into legal trouble with the siblings, especially if there is a lot of money involved. Hell is paved with good intentions. And real estate does lose value sometimes, maybe just when you want to sell. Remember that all the money spent on rebuilding is locked up in an undiversified and illiquid investment.

So overall, the "value proposition" may not work for any of the parties. IIWY I'd advise the parents to sell and downsize, possibly into an independent living unit with a program to ramp up care as needed. Put any remaining cash into investments for the parents, keeping it in reserve for long term care/nursing home care, which really eats up money.
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vested1
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Re: Co-investment with parents and sibling jealosy

Post by vested1 » Tue Feb 13, 2018 10:17 am

This is a horrible idea, especially since the siblings are already complaining.

We went through something similar, when an extensive remodel was proposed by my wife's siblings of our own home, so that my MIL could move in with us, as she was getting to a point where she could no longer care for herself. The siblings suggested that my MIL should pay for the remodel, which would not add much, if anything, to the value of the house because it would cause the home to far exceed local resale values. Our home value already exceeded comps in the area.

We were judged by a grown grandchild as trying to rip off my MIL by having her pay to remodel our home, which was only needed to accommodate her needs. It wasn't even our idea and neither my wife nor I wanted to do it, but the other siblings were insistent that we broach the subject. The gossip mill created by the grandchild ran wild as the story spread to extended family that we, or more accurately me, was proposing this out of greed, rather than offering our home as an alternative to a rest home. Upon hearing of this I cancelled all discussion on the matter.

Needless to say, this experience left some scars. Don't do it.

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steadyeddy
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Re: Co-investment with parents and sibling jealosy

Post by steadyeddy » Tue Feb 13, 2018 12:26 pm

What happens when your parents move out or pass? Do you rent out the unit to strangers? Sell the house? Occupy both units?

What happens if you need to move out? Can you sell your stake in the home to strangers?

FoolMeOnce
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Re: Co-investment with parents and sibling jealosy

Post by FoolMeOnce » Tue Feb 13, 2018 1:05 pm

meercatter wrote:
Tue Feb 13, 2018 3:51 am
When my wife's parents pass away, her siblings will be left with a slice of a much larger pie.
If you own and control more than half of the property, how will the siblings get their money out? Will you buy them out at some unknown future date for some unknown future value? (Nearly) Nobody can guarantee that ability. And what if the siblings control half and force a sale of a home you planned to live in for decades? Do you have a plan for how to address this, and to decide who will have the right to choose what to do with the property when the parents pass?

A larger pie is nice to look at, but useless if you can't eat it.

psteinx
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Re: Co-investment with parents and sibling jealosy

Post by psteinx » Tue Feb 13, 2018 1:12 pm

meercatter wrote:
Tue Feb 13, 2018 3:51 am
My wife and I live in a HCOL area in the United States. Her parents own a shoddy house nearby on a very nice lot and we have all been discussing tearing their house down and building a large multi-generational house (effectively two units) on their lot where all of us could live. In principle, if this house was built, my wife and I would own a percentage of the house in proportion to how much money we contribute to the construction of the new house.
While it's not entirely clear from the above, it appears that if, say, you contribute $300K out of $600K in teardown and rebuild costs, you'd own 50% of the resulting property. If that's the case, then it assigns no value to the underlying land, which, particularly in a HCOL area, may be quite valuable.

NotWhoYouThink
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Re: Co-investment with parents and sibling jealosy

Post by NotWhoYouThink » Tue Feb 13, 2018 1:16 pm

Sounds like a great plan as long as you and your spouse keep your jobs and want to stay in the same area, and your in-laws have the good grace to age in place while they help take care of your kids, then die in their sleep, preferably on the same night.

But if stroke, cancer, heart failure, widowhood and remarriage, dementia, incontinence, 24-hour caregiving needs develop, then it will get complicated, and no one will ever be able to figure out what money is or was whose.

FoolMeOnce
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Re: Co-investment with parents and sibling jealosy

Post by FoolMeOnce » Tue Feb 13, 2018 1:20 pm

Also, this:
meercatter wrote:
Tue Feb 13, 2018 3:51 am
In principle, if this house was built, my wife and I would own a percentage of the house in proportion to how much money we contribute to the construction of the new house.
It seems like you would obtain a significant portion of the value of the land as a free bonus, which could be a huge slice of the pie in a HCOL area.

E.g. the land is worth $1 million. You could pay 750k for construction while the parents pay 250k. You would then own 75% of a $2 million property, immediately doubling your "investment" at the cost of the parents (and the siblings' future interest).

JoeRetire
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Re: Co-investment with parents and sibling jealosy

Post by JoeRetire » Tue Feb 13, 2018 1:35 pm

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JoeRetire
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Re: Co-investment with parents and sibling jealosy

Post by JoeRetire » Tue Feb 13, 2018 1:35 pm

meercatter wrote:
Tue Feb 13, 2018 3:51 am
In principle, if this house was built, my wife and I would own a percentage of the house in proportion to how much money we contribute to the construction of the new house.
Sounds like a terrible idea.

If you want to buy a house and rent part of it to your in-laws (or they buy the house and rent to you) that makes sense. Trying to apportion ownership - that makes no sense to me.
Also, if property values continue to rise in this area, our share of the house would continue to increase.
I don't understand this. How would your percentage ownership change due to the increase in value?
I feel that in some ways they are mistaken, though. When my wife's parents pass away, her siblings will be left with a slice of a much larger pie.
And when they want their slice, do you move out and sell?
Is this type of arrangement fraught with peril?
Yes. It's like co-signing a loan... on steroids.

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Sandtrap
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Re: Co-investment with parents and sibling jealosy

Post by Sandtrap » Tue Feb 13, 2018 1:36 pm

meercatter wrote:
Tue Feb 13, 2018 3:51 am
My wife and I live in a HCOL area in the United States. Her parents own a shoddy house nearby on a very nice lot and we have all been discussing tearing their house down and building a large multi-generational house (effectively two units) on their lot where all of us could live. In principle, if this house was built, my wife and I would own a percentage of the house in proportion to how much money we contribute to the construction of the new house. Although this arrangement does not seem typical in the United States, it is becoming more common in this particular area due to skyrocketing land/home prices.

However, when we presented this plan to my wife's siblings, they felt that the arrangement was unfair, even though her siblings don't live in the area and would not be interested in this type of arrangement. They felt it was unfair because we would be given an investment opportunity that they would not receive. In some ways they are correct in that a new house would significantly increase the value of the property and they would not immediately benefit from this. Also, if property values continue to rise in this area, our share of the house would continue to increase. I feel that in some ways they are mistaken, though. When my wife's parents pass away, her siblings will be left with a slice of a much larger pie.

Has anyone dealt with a similar situation when co-investing with parents? Is this type of arrangement fraught with peril?
This happens often in Hawaii. Parents own older home free and clear. Land is worth millions. Children build a huge addition or new home for "multi generations". Everyone goes into debt. Life changes. Some move out. Some move in. Sometimes parents move away to get out of the drama or stay and get left with the bills, can't pay, sell.
This is more than what can be put down on a spreadsheet.
No matter what the "numbers", long term family dynamics and integrity should be the priority.

mahalo,
j :D

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Re: Co-investment with parents and sibling jealosy

Post by inbox788 » Tue Feb 13, 2018 2:06 pm

meercatter wrote:
Tue Feb 13, 2018 3:51 am
In principle, if this house was built, my wife and I would own a percentage of the house in proportion to how much money we contribute to the construction of the new house.

However, when we presented this plan to my wife's siblings, they felt that the arrangement was unfair, even though her siblings don't live in the area and would not be interested in this type of arrangement. They felt it was unfair because we would be given an investment opportunity that they would not receive. In some ways they are correct in that a new house would significantly increase the value of the property and they would not immediately benefit from this.
Family dealings are always fraught with peril. On family matters, you're probably better off dealing with psychologists than economists, but there is an economic area of study that applies to your situation. You're seeking a Pareto-efficient envy-free solution that requires more attention to variables that are often held constant.

https://link.springer.com/chapter/10.10 ... -29700-7_7

Most folks are familiar with the "I cut, you pick", or "You cut, I pick" solution to dividing up a pie or cake. It works in most situations, but there is a paradox where the person cutting is disadvantaged because the person picking always gets the bigger/better piece. As more variables are introduced, fairness gets even more complex.

Unfortunately for you, I don't think you'll find a solution where they'll feel fair and you won't feel unfair. Your "In principle" will soon meet "in reality" that is likely far from ideal.

Just based on what was posted, I would avoid business dealings with the parents because the siblings are involved, and avoid those siblings because they seem unreasonable and they'll feel that you're unreasonable. Best of luck!

Do you or the siblings have children? How is the parent's inheritance being distributed, per stirpes vs per capita?

https://en.wikipedia.org/wiki/Per_stirpes

jminv
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Re: Co-investment with parents and sibling jealosy

Post by jminv » Tue Feb 13, 2018 2:44 pm

You are ignoring the value of the land which is an issue. Since you are considering doing a teardown, the real value is in the land. If you contribute 50% of the rebuild costs you should only control 50% of the actual physical building ie the physical improvements, not the underlying land value as well. This would be getting something for nothing or in this case something that should have been split with the siblings under this scenario. Also, depending on how you do the multiunit conversion meaning perhaps you have to go with a SFH that accomodates you all for permitting reasons, the siblings will not be able to realize the value of the property if you continue to stay in it. This would cause even more discontent further down the line.

Best not to mix family and money in that way. Siblings can get crazy about things like that and float all sorts of wild stories creating endless resenment.

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Re: Co-investment with parents and sibling jealosy

Post by LadyGeek » Tue Feb 13, 2018 4:43 pm

This thread is now in the Personal Finance (Not Investing) forum (real estate). I also retitled the thread.
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