Loan to a family member

How to explain ERE, arranging family matters
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Randy
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Loan to a family member

Post by Randy » Thu Apr 12, 2018 11:12 am

Okay, before everyone says what a bad idea it is, I know. I know it could get messy and should be very carefully done, but I’m considering it anyways.

My aunt is considering buying a house that is adjacent to my parents (her sister) in pursuit of a quaint life of growing old near family. The house is just barely out of her budget comfort zone, so she’s wondering if we can make a deal so she can keep her mortgage payments where she wants them. To make matters worse, this is a time sensitive deal and would have to happen soon.

I’m wondering if there’s a way for me to act like a bank, but give better terms than the typical mortgage. Maybe it won’t be very high yield investment for me, but she is family after all. She is trustworthy, steadily employed and has never had money problems as far as I know, so I am not too concerned about her not paying me back. I would have the terms outlined in a contract. I know it would surely be easier to just say no, but she is family. Call me naïve, but I want to help.

Has anyone done something like this before? I have no idea where to even start.

suomalainen
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Re: Loan to a family member

Post by suomalainen » Thu Apr 12, 2018 11:31 am

Loans to family members go by another name: gift. A contract is pointless unless you're willing to enforce it (i.e., sue), so you have to decide which is more important - the relationship or the money? If the former, make it a gift and maybe you'll be pleasantly surprised by repayment. If the latter, make it a loan. But if she's uncomfortable from a budget perspective with a larger loan from a bank, why would she be any more comfortable with the exact same-sized loan from a combination of the bank and you? It sounds like even she is thinking of it as a gift. Whatever you decide, good luck.

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Seppia
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Re: Loan to a family member

Post by Seppia » Thu Apr 12, 2018 11:40 am

Randy wrote:
Thu Apr 12, 2018 11:12 am
She is trustworthy, steadily employed and has never had money problems as far as I know, so I am not too concerned about her not paying me back.
Assuming the above is true, that's what matters in my opinion. If she has proven to be trustworthy I don't see where the issue is.
The fact that she is reaching for a bigger house than she can afford makes me doubt a little though.
Randy wrote:
Thu Apr 12, 2018 11:12 am
I would have the terms outlined in a contract.
This is very smart
Randy wrote:
Thu Apr 12, 2018 11:12 am
Call me naïve, but I want to help.
No, you're human. I would never lend money to an untrustworthy family member, but I would 100% lend money to those who have proven throughout the years to be worthy of my trust.

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Re: Loan to a family member

Post by jacob » Thu Apr 12, 2018 11:44 am


Jason
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Re: Loan to a family member

Post by Jason » Thu Apr 12, 2018 12:13 pm

I was going to call you out for buying your boyfriend’s niece a birthday present but I was afraid of appearing like a baby hating asshole (which I am). But I have absolutely no compunction in appearing like an Aunt buying a house hating asshole (which I also am).

If you want to act like her bank, follow their lead and don’t loan money to an overextended person. This way she continues not to have money problems and you can buy her a plant when she buys the house she can truly afford.

George the original one
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Re: Loan to a family member

Post by George the original one » Thu Apr 12, 2018 12:35 pm

Randy wrote:
Thu Apr 12, 2018 11:12 am
so she’s wondering if we can make a deal so she can keep her mortgage payments where she wants them.
Lending a couple thousand is okay. Lending tens of thousands is not. In other words, if you lose one biweekly paycheck for familial solidarity, it's not the end of the world, but losing more than a paycheck stinks.

Basically, if the bank won't lend her the money, there's no reason for you to do so. After all, her mortgage payments will still be the same whether you loan the money or a bank loans the money since it's very hard to undercut current mortgage rates.

***
Circumstances that would alter "just say no" condition: if she has another house that she will be selling within a year or two that has adequate equity for her to repay you, so you are essentially providing a bridge loan.

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Tyler9000
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Re: Loan to a family member

Post by Tyler9000 » Thu Apr 12, 2018 1:55 pm

I think you're a good person for wanting to help your family. That said, I'm not sure I'd do it myself.

1) You're being asked to help someone purchase a home she can't afford. Even with a solid job and the best intentions, I'm highly skeptical of her ability to pay you back.
2) As Jacob mentioned, you should look into any tax issues. Even if you see it as a loan the IRS could see it as a gift. And there could be other complicating factors as well.
3) What's to stop your next family member from coming to you in 6 months and asking for the same deal? Why would you say no then when you agree now? What problems will that create?
4) Her getting legal ownership while you bear the financial responsibility seems like a bad deal to me. Maybe I'd feel differently if you were willing to purchase it yourself and rent it to her at a discounted rate.
5) The pressure to act quickly would likely turn me off immediately.

Long story short -- do what you think is right but be careful.

saving-10-years
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Re: Loan to a family member

Post by saving-10-years » Thu Apr 12, 2018 2:20 pm

My mother gave my sister the money needed to pay for sister's partner's half of the family home when the relationship broke down. This avoided my sister having to get a mortgage and they agreed that the rate would be less than the bank would charge and what my sister could afford on rather her part-time job (she had two school age children). What happened is that this worked well for a few years and then my mother wrote off the loan. I expect that is quite a common result of these types of loans - my sister had years of paying in front of her and my mother eventually did not feel the need for return of the money,

As your aunt gets older you may find yourself less able to ask for the money even if there is a legal agreement. She is not only related to you but living next door to your mum so evicting her should she fail to pay does not sound that possible.

Could you consider loaning her an amount which would help her buy and meet mortgage in the short term (the shortfall) and give her a holiday from making payments - if there is some asset she could sell or perhaps some way to make the house pay (sub-let?) Then if you end up not getting repaid it won't be a huge loss.

I can see that the house next door to your parents is a limited availability deal. This will not only make your aunt happy but your parents also and may save you stress if you are only child and relied on by both parties - or that may be the case in the future. So worth doing it if you can. Hope you can make it work.

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Re: Loan to a family member

Post by jacob » Thu Apr 12, 2018 2:53 pm

Why not buy the house and rent it to the aunt? The cashflows are approximately the same, but the risk-attribution is different in the buy and rent scenario (and more in your favor).

It's good to keep in mind that you're always trading a vector of (reward,risk) and not just the scalar of (reward).
Nerds may extend this metaphor along other dimensions as much as they desire (think different kinds of capital #EREbook).

Curmudgeon
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Re: Loan to a family member

Post by Curmudgeon » Thu Apr 12, 2018 3:27 pm

If she can't afford to pay the bank on the higher mortgage, how will she be able to pay YOU back? Sounds like you're considering a gift, not a loan.
I like jacob's idea, if you can raise the money, except that that then puts you in the undesirable position of having to evict your aunt, if she can't pay.

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Re: Loan to a family member

Post by RealPerson » Thu Apr 12, 2018 3:52 pm

I was thinking of the same idea as Jacob, i.e. buy the house and rent it to her. But eviction procedures can get very messy, especially if you put your aunt out on the sidewalk. After considering all options, my advice is to stay out of this. You are doing your aunt no favor by helping her overextend herself.

The only scenario that I would consider viable is to give the money to her outright, with zero expectation of repayment. But that also could change the family dynamic in a bad way and then you may be dealing with the gift tax problem.

Randy
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Re: Loan to a family member

Post by Randy » Thu Apr 12, 2018 4:10 pm

Some clarification: this whole ordeal started with my mom half jokingly suggesting I buy the house and rent it to my aunt. Aunt gets to keep lower payments and I get a real estate investment. I don’t have the money or desire to do this. So then joint ownership was suggested. Again, no desire to have my money sunk into a house I can’t sell when I want to. The bank would definitely loan my aunt the money, but since my mom has planted the idea that I might be willing to invest, my aunt is asking me also.

The idea that seems to make the most sense to me is a bridge loan like George mentioned. I can provide the money for a larger down payment so she gets a low mortgage rate, and then she repays me when she sells her townhouse. The townhouse is in a highly desired area so I’m not worried about problems selling.
Last edited by Randy on Thu Apr 12, 2018 4:21 pm, edited 1 time in total.

Randy
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Re: Loan to a family member

Post by Randy » Thu Apr 12, 2018 4:12 pm

Jason wrote:
Thu Apr 12, 2018 12:13 pm
I was going to call you out for buying your boyfriend’s niece a birthday present but I was afraid of appearing like a baby hating asshole (which I am). But I have absolutely no compunction in appearing like an Aunt buying a house hating asshole (which I also am).
I’ve done enough reading on the forum to know you’re an asshole, no need to try to hide it ;)

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Seppia
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Re: Loan to a family member

Post by Seppia » Thu Apr 12, 2018 4:37 pm

You shouldn’t reason like a bank here in my opinion.
You are not a bank, and she is not a stranger.

If you think she is trustworthy and if the money you’re lending is not relevant to you I would do it.

The key is your ability to evaluate people.

Jason
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Re: Loan to a family member

Post by Jason » Thu Apr 12, 2018 4:58 pm

Seppia wrote:
Thu Apr 12, 2018 4:37 pm

The key is your ability to evaluate people.
Recent comments lead me to believe she's highly qualified in that area.

Augustus
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Re: Loan to a family member

Post by Augustus » Fri Apr 13, 2018 2:57 pm

NO. Don't do it. Don't listen to anyone else. Here's why: If you like your aunt, and you give her a loan, it will forever taint your relationship. You will no longer be as close. She will look at you as the person she owes money to. You will look at her as the person who owes you money. Your conversations will change, she wont feel comfortable talking to you about things she used to feel comfortable discussing with you, etc.

Anyone who I had a friendly relationship with before entering into a business relationship with, the relationship was forever altered and not for the better. Don't do business with people you want to be friends with. They are mutually exclusive. I have a hard and fast rule now of absolutely no business with friends. Zero. I'll HELP people, giving them money or something, but I absolutely do not do any kind of business with them.

This completely ignores things like her not paying you back, etc. Those scenarios are all even worse. Is it even worth the risk of having to either be the asshole who kicks their own family out of their house, or to have your aunt be the asshole who wont pay back a loan? People get disabled, happened to my mom, she can no longer work. In my opinion, no, it's not worth it. Unless you have an excess of family and don't particularly care about her OR what your family members will say, let the bank be the asshole. Then there's the bit about setting precedence, why is anyone in your family learning that you have money? Do you realize how many people are going to come asking you for money now that that info is out there?

Here's a good exercise, how comfortable are you going to a company dinner? Do you say everything you want to say? Do you tell your boss how you slack off and try not to work so hard? Do you discuss personal topics, such as things that may negatively affect your performance?

I lost a few old friends through this, I will never do it again. Technically we're still friends, no one screwed the other over, but I haven't talked to them in years. Too much stigma.

pukingRainbows
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Re: Loan to a family member

Post by pukingRainbows » Sat Apr 14, 2018 11:24 am

Yeah, I wouldn't do it.
From what you're describing it sounds like it's a lot of potential hassle for you and strain on the family relationship with little to show for it. If she can already finance the house without you, then let her do it and keep it simple for the family. If she wants to keep her mortgage payments low, why not offer to go through her finances with her and see how she can squirrel away extra money for extra payments and eventual refinancing.

If you don't feel comfortable getting involved in her finances, that's understandable, but it's also what you will be doing inevitably if you become her financier.

Good luck!

Randy
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Re: Loan to a family member

Post by Randy » Sat Apr 14, 2018 11:49 am

Update for anyone interested: just heard word that my aunt isn’t going to pursue the house. Just too big of a change for her right now.

I feel like I dodged a bullet, but I still would have helped if my aunt and I had reached an agreement. I’m glad I don’t have to go through the hassle though. I think this illustrates why some people keep their financials secret - to avoid situations like this. Ultimately I’d like to be transparent with my family about my financials, but maybe I’ll just feed them bits and pieces at a time.

Thanks everyone for the advice and sharing personal experiences.

suomalainen
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Re: Loan to a family member

Post by suomalainen » Sat Apr 14, 2018 6:20 pm

Randy wrote:
Sat Apr 14, 2018 11:49 am
Ultimately I’d like to be transparent with my family about my financials, but maybe I’ll just feed them bits and pieces at a time.
Why?

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Re: Loan to a family member

Post by jacob » Sat Apr 14, 2018 6:39 pm

In order to slowly promote them to the next level...

Randy
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Re: Loan to a family member

Post by Randy » Sun Apr 15, 2018 3:29 am

@suomalainen Why would I like to be transparent? Or why I might limit their info?

I’d like to be transparent because I like my family and value their opinions. It would be great if they could support or at least understand my goals one day without thinking I’m being crazy.

Why I might limit their info - what Jacob said. I think it will take time for them to adjust to the ERE way of thinking. In the mean time I don’t want my mom to try to rope me into family vacations of 10 day cruises because she thinks I have money to burn.

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Re: Loan to a family member

Post by EdithKeeler » Wed Apr 18, 2018 10:14 pm

I would advise NOT being transparent with your family about your finances, no matter how much you love and respect them. Why? Well, they may be financially ok now, but sommething might happen in the future if they’re not. If it’s something you want to help them with, fine—you can slip them some cash as you want. But maybe the time comes when your brother has great inside information on a multilevel marketing program selling the artificial neon pink AstroTurf that’s guaranteed to become a “must-have” in every home in America, and he wants YOU to invest in this once in a lifetime opportunity. It’s WAY easier to say “no” when he doesn’t know you’ve got $500k in the bank. Way easier.

I think it’s fine to be transparent to the extent you tell friends you’d like to retire early someday and so you’re trying to make prudent financial decisions, and probably to have that “if I die, you can find all my information here, but I would not be transparent about dollar amounts, where you invest, etc.

suomalainen
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Re: Loan to a family member

Post by suomalainen » Wed Apr 18, 2018 11:08 pm

@randy - the why was the former one. I can understand being open with your family about your values: I'm a frugal person; or I like having a safety net; or I can't afford 10 day cruises because I'm saving money for X goal which I greatly prefer to cruises, so can we do some hiking in the local park instead; or whatever, but the question was about the financials specifically? What difference does it make if they know you have $2k, $20k or $200k saved up?

Randy
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Re: Loan to a family member

Post by Randy » Thu Apr 19, 2018 5:09 am

I know it's a valid point about the ease of saying "no" - that was the lesson learned here and my aunt didn't even know how much money I have. That being said, I waffled on this decision because I personally thought there might have been a way for it to be beneficial for everyone involved. I think I would be able to say no to other "investment opportunities" if I thought they weren't worthwhile. If family members come to me asking for help because they are financially struggling, I would probably slip them some money as long as I knew they would spend it responsibly, or at least try to improve their habits. My weak spot would be my parents because they saved money for my college education and gifted me a wonderful used car that I'm going to drive until the day it dies. My mom makes jokes about me someday caring for them when they need help in a retirement home, but I know these aren't really jokes and that shoe will drop someday.

As far as specific financials goes, I think it's almost harmful the amount of our financial picture we hide from each other. I have no idea how much money my parents have saved, which is probably relevant information if I have to take care of them some day. I had no idea that my savings rate was high compared to my other peers. I didn't know the basic proportions of household budgeting. All of my financial basics I learned online or from books, not through discussion with people around me. My parents did have the foresight to teach me the basics of credit cards and how nasty that debt can be, but even when I was in college I had no idea how much money they had really put aside for me or what was reasonable spending, I just minimized it based on my gut.

If we actually talk about and discuss these things, much like we do on the forum here, we can help each other improve and set good examples. As Jacob has pointed out, it can be hard to introduce people directly to the ERE lifestyle, so I'm not going to initially bombard them with my views and opinions. I won't even try to convince them that ERE is the way to go, but I will try to gently sway them in that direct. Probably starting with leaking small financial improvements that can be directly beneficial to them and gently pointing out some of their more ridiculous consumer purchases, e.g. "I just saved $60/mo on my cell phone bill, you guys should look at this company," or "do you really want to spend $50 on a scarf? I found this other one for $10" etc. I could then build up to "I spend $XX per month, how much do you guys spend?" and then the bigger financial picture of "with $XX saved and spending $XX per month, I think I'm going to retire in a year or two." Even if they ignore all my advice, I'd like them to at least be in a position of thinking I may be crazy, but that I know what I'm doing.

suomalainen
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Re: Loan to a family member

Post by suomalainen » Thu Apr 19, 2018 8:59 am

Randy wrote:
Thu Apr 19, 2018 5:09 am
but I know these aren't really jokes and that shoe will drop someday.
Valid concern. I have no idea what to do about this either if it ever happened. Something something big fight with siblings something something. :shock:
Randy wrote:
Thu Apr 19, 2018 5:09 am
I think it's almost harmful the amount of our financial picture we hide from each other.
It's probably important for the parents to share more with the kids in order to teach them about finances but I disagree that there's any good to come from the information flowing the other way, unless, I suppose, you are in a more communal arrangement than is typical in the US. For myself, I would detest a communal arrangement, so again, that's just personality.

Totally agree with most of your last paragraph. My reaction to your initial phrase was probably one of diction. "Financials" to me means sharing personal income statement, balance sheet and cash flow statements. What you describe in the most of your last paragraph is talking more about "finances" or "personal finance" or "budgeting" which is a skill and not necessary personal information. I totally agree there's little downside to discussing those, other than people disagreeing due to different preferences or values. Where I'd still agree to disagree (and I'm not trying to change your mind, honestly, I'm just trying to tease out exactly what it is you're saying) is that it seems like you want to bring them with you on your ERE journey ("even if they ignore all my advice") instead of just wanting to show them that you're thoughtful and educated about these things and aren't stupid or crazy. Props to you if you can inspire and maybe even educate others, but from a horse and water and drinking perspective, I'm more cynical about these things. I'll only share if others are pursuing me; I'm not trying to teach/convince those who resist, if that makes any sense.

Anyway, you seem to have a good head on your shoulders and a good start to your life's journey, so keep it up and enjoy the ride!

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