Due to the rising house market in 2013, I encouraged my son to buy a condo in Charlestown, a part of Boston, while it was still affordable. After several conversations, my son finally agreed to put up one-third of the 20% down payment for a newly renovated condo and I paid the other two-thirds of the down payment. We didn’t have any written agreement because of the father-and-son relationship.
Here is what I said at that time about this transaction:
It is an investment, no interest. If the condo’s value goes up at the time we split, we share the profit proportionally. If it goes down, we are going to lose our money together.
Since my son needed a place to stay near Boston, the condo was signed totally under his name. He took care of the paper work and has lived there since then. He pays all the regular mortgage payment and condo fees. I am an invisible investor in this transaction.
Now that I need the money for another investment, how should I split the investment? The condo price has steadily risen about 25% since 2013 and the total appreciation would be around $60,000 now. Here are the four thoughts about sharing the profit.
1. Take my own investment money back without any interest or profit
Why? Because there was no written agreement and father helps out son.
2. Take two-thirds of the $60,000 profit and my own initial investment
Why? It is an investment and there is no additional dilution after the down payment. All mortgage payments would be considered as operational expense. It is just like renting this place to another tenant. I already forfeited my potential rental income if the place would be rented for a higher price.
3. Take percentage of my down payment money against the total down payment plus principle paid down by my son
Why? My son continued to pay for mortgage (both interest and principle) so his accumulation of principle paid should be considered as further investment on top of down payment. For example, if my son paid down additional $20,000 in principle, then the investment amount should be down payment, plus $20,000 so his share of profit should be larger than one-third.
4. Take the percentage of my down payment against the value of the entire condo at the time of purchase
Why? Even though the condo has not paid off yet, the investment is the purchase price of the entire condo, not just the down payment.
Which option would be considered fair? I considered option No. 2 but my wife said option No. 4 should be fair. I finally chose option No. 1 because of the importance of this relationship. My son chose option No. 4.
Oh, boy. It sounds like you cajoled your son into buying a puppy dog that has grown over the last five years, and now you are about to take it away.
As I read through all these options, my little green Irish heart nearly melted into a pot of shamrocks. (I wondered how much I could get for them on the black market in Boston.) No. 1 is the move I recommend you take, if you both agreed to this investment. Take out what you gave your son. You are his father and you gave it to him without a written contract and now he can afford to pay you back. You wanted to buy this as an investment and your son paid the mortgage. Good for him.
Your son has proven that he deserves it and he is a responsible young man. If you wanted to sell it out from under his feet, then you should have bought yourself another condo.
So many of these options — in fact, the whole arrangement — seem punitive. I don’t see how you can partake in the appreciation given that you haven’t paid the mortgage or the upkeep over the last five years. It feels like your son has been shoehorned into an arrangement. There’s a much better arrangement: It’s a win for him and it’s a win for you, by proxy. I give you Option 5. Ask your son to repay your portion of the down payment and allow him to stay in the condo.
Your list of options reminds me of the father who wanted to split up his annual financial gift among his children and, rather than give his children different amounts, decided to put the money in a mutual fund for his grandchildren instead. Obviously, they are two very different situations. But there was a meticulous approach to each that seemed familiar. It can teach your son the value of a dollar and allows him to appreciate how helpful you have been (minimizing any risk of entitlement).
Ask your son if he would like to remain in the condo. If he does and he doesn’t have the money, he can take equity out of his home to make up the difference.
It’s his name on the deed, after all. Give him Option 5. And go from there.
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