"A Foot in the Door: Many Look to Mom, Dad or In-Laws for Help"
by Emmet Pierce
Staff Writer for the San Diego Union-Tribune
Young people trying to leave the nest and buy a home of their own during the current housing-price boom will have to get creative or get out of town.
"Where will our children live?" asked Erik Bruvold of the San Diego Regional Economic Development Corp. "At home, in condos or far away. Supply is out of whack with demand. High house prices are continuing evidence of that. It is a real problem."
Real estate professionals say home buyers in their 20s are throwing away the rule book to attain homeowner status in San Diego County. To avoid moving to less costly housing markets, young buyers like Angela Koch are borrowing from relatives, pooling funds with friends or embracing riskier mortgage loans.
Koch, 24, recently moved out of her parents' Tierrasanta home and into a studio condo in Mission Valley. Although her new home encompasses only 500 square feet, Koch, who attended Serra High School, is happy to be living on her own. Escrow closed at the end of May. "It's pretty groovy."
Koch says she's financially independent from her parents. "There are occasional meals, but that's it," she said with a laugh.
Moving into smaller digs was no problem for Koch, who works for a banking services company.
"Considering that I lived with my parents with a small bedroom, it really wasn't that hard," she said. "To me it's better because I have my own kitchen and bathroom; not that I use the kitchen, but it's there. I was looking for something in central San Diego, and finding something that was not a complete dump was difficult."
A commuter to Rancho Bernardo, Koch says her new home offers convenient freeway access, and she likes being close to retail shopping in Mission Valley. This isn't the first time she has struck out on her own. She tried renting for a time but longed for the financial benefits of homeownership.
"I had lived in an apartment for about six months a few years back," she said. "It's a waste of money."
Young adults like Koch are trying to catch up with the runaway housing market before prices climb higher. Abby Wilner, co-author of the 2001 book "Quarterlife Crisis: The Unique Challenges of Life in Your Twenties," says America's children are remaining with their parents well into their 20s, especially in costly metro areas like San Diego.
"It used to be a given that you'd get a job and one day buy a home," she said. "It is not always an option."
Some experts say that without a big increase in home construction, homeownership may remain out of reach for many members of the demographic bulge known as "Generation Y."
Koch says a twist of fate enabled her to become a homeowner.
"My grandpa passed away in October 2003, and he left me an inheritance which helped me with the down payment," she said. "Without the down payment, I would not have been able to afford the monthly payments."
For many of her peers, homeownership is "really impossible."
"Being in your early 20s, you don't get the best job coming out of school, and you don't make enough to pay rent and save at the same time," she said. "Five thousand dollars doesn't do it. Ten thousand doesn't do it."
Koch's father is proud of her decision to invest in a condo. He was surprised to learn that a unit very much like hers recently went on the market for $35,000 more than she paid. "He almost had a heart attack," Koch said with a laugh.
If the market remains strong, Koch hopes to trade up to a one- bedroom condo. "I don't want to be in a studio for very long. I am hoping in two to three years to refinance or sell. I'd like to have a bedroom. That is my goal."
In Pacific Beach, Michael Pierce, 26, is resigned to remaining a renter until he improves his financial status. Pierce, who is seeking his real estate license, shares a townhome with his girlfriend and two other roommates.
"I know I can't afford anything," said the graduate of El Cajon Valley High School. "It's very frustrating. I just need to make more money. With money, you can improve your credit by paying things off. You can prove you can afford something."
He regrets missing out on the great gains in equity that homeowners have enjoyed here since 1998. "That is the most stressful factor, seeing how the market is moving."
Sharing a 1,700-square-foot unit with three roommates has worked well, Pierce said. That's partly because two of them have busy schedules that keep them out of the dwelling most of the time.
"I don't walk out of my bedroom door and run into them in the morning."
His plan is to find a home he can afford to buy, no matter how humble.
"For my first home, I will settle for a condo, even . . . an apartment that has been turned into a condo. Anything is a good start."
Although he understands the financial benefits of homeownership, Pierce says there are other reasons to buy.
"A lot of it has to do with personal freedom, that step of going from being a kid to being an adult," he said. "When you are paying your own bills, it's one of the steps toward adulthood."
Broker Craig Bramlett, owner of Cal Pacific Mortgage, says there are plenty of loans available to twenty-somethings, if they're willing to take on large debts. Creative loans typically begin with low monthly payments but jump to higher levels after a few years.
While some real estate professionals expect home values here to fall, most say housing is in such short supply that any decline is likely to be small and short-lived.
Borrow with care
A popular alternative for people with lower incomes or little money for down payments is the interest-only loan. By paying none of a loan's principal, interest-only borrowers can keep their mortgage payments low for several years.
"There is such a huge range of programs, and lenders seem to have a big appetite," Bramlett said. "If there is a strong will to purchase, we are usually finding a way to make it happen."
Critics say those who are unable to refinance loans with adjustable interest rates may put themselves in a financial bind when the low-cost introductory period ends.
Jill Morrow, president of Coldwell Banker San Diego, says there's nothing wrong with seeking creative ways to attain homeownership.
"We look for alternatives to see how they can at least get into what we call the appreciation game," she said.
The median cost of a home in the county recently passed the $500,000 threshold. Some economists have warned that current prices can't be sustained, and a decline or flattening of the market is inevitable. Morrow says that if prices continue to rise, the waiting game "can be dangerous, too."
Path to security
If they are willing to be creative, young adults "can actually own something here," she said. "There are alternatives. I don't consider them to be desperation. I don't consider them to be Band- Aids. I consider them to be options."
But some young adults say they've already run out of options. To save money, Heather Smith, 23, recently moved to her father's Hillcrest home with husband, Joshua, 28. Smith, who grew up in San Diego, attended the Academy of Our Lady of Peace in Normal Heights.
"I got engaged shortly after graduating from college," she recalled. "The man I married relocated to Nevada. Things there weren't very promising. In order to have a decent job . . . you end up working in the casinos with miserable shifts."
In Reno, Joshua serviced slot machines and paid out jackpots. Now working in San Diego, he plans to return to college, complete his bachelor's degree, and earn a teaching credential. Smith wants to attend law school.
"We are currently with my father," she said. "We do pay rent. It's not that anybody is low income. My husband is management at a retail store. I am an accounting assistant. Work isn't the issue. The availability of employment isn't the issue. It's the base cost of housing. Housing is out of control."
When first-time home buyers enter the California housing market, many fall back on what San Francisco Bay Area home seller Ray Brown calls "GI financing."
The term normally is associated with military veterans, but Brown's GIs are "generous in-laws."
"A lot of kids today have pretty good incomes but not a lot of money saved up" for a down payment, said Brown, co-author of the real estate primer "Home Buying for Dummies." "Here in the Bay Area, the median-priced home is over a half-million bucks. Where are you going to get $50,000 plus closing costs?"
In a formal equity-sharing arrangement, parents typically provide the down payment while children occupy the property and make monthly mortgage payments. At a predetermined date, the children buy the parents out. Ideally, both parties benefit from the property's appreciation.
"It is very important to get this all in writing, especially with a transaction of this magnitude, where we are talking about hundreds of thousands of dollars," said Marin County real estate law attorney Brian M. Collins.
Even with a contract, there can be downsides to buying a home with your offspring. By sharing the title, parents become responsible for repayment of and property taxes if their children drop the ball. And if the children fail to make mortgage loan payments, the parents could lose their
"One of the concerns is if either parent or child has a financial problem and gets sued, the entire house can be at risk," said longtime San Diego real estate agent Gary Kent. "People should be careful about that."
Most parent-child real estate partnerships are based on trust, not legal contracts, Kent said. Brown agreed.
"What I am seeing is `Let's just talk out some way that your mom and I can loan you money,' " said Brown.
That's how it worked for Luke Hampleman, 23, a real estate agent based in Tierrasanta. With little credit history, the University of San Diego graduate had to come up with a $20,000 down payment to attain financing for a Fashion Valley-area townhome.
In July, his parents loaned him the money. "It was vital," he said. "I don't think anyone under the age of 27, 28 can afford anything without a little help."
Informal loans to children may work, but a formal equity-sharing contract can create financial benefits for both parent and child, Collins said. "The agreement can be structured to maximize tax benefits to both parties for mortgage-interest and property-tax deductions."
Generally, equity-sharing contracts provide that the parent-investor is not liable for losses in excess of the original down payment. The child-occupant typically agrees to be responsible for repairs and maintenance.
Also, the contract can be crafted to require the child to sell the property if there is a change in marital status or if the child becomes insolvent.
A contract may seem cold and detached, but it's the best way to ensure that cordial family relations will continue, Collins insists. "It is human nature that things are going to go sideways if it is not in writing."
More information on equity sharing is available on the Web site of the Sullivan Collins law firm, www.marinatty.com.
Emmet Pierce: (619) 293-1372; firstname.lastname@example.org
© 2004 San Diego Union-Tribune
Reproduced with permission
All rights reserved
Share the wealth.
Through shared-equity agreements, individual real-estate investors can do just that to help a family member or friend buy a home -- and reap some profit and tax benefits in the process.
Some accountants and financial advisers are recommending that their clients, especially those with adult children, consider these investment vehicles as home prices have skyrocketed.
The pacts are co-ownership agreements between two parties, an investor-owner and an occupier-owner. The investor-owner puts up cash for either some or all of the down payment for a house that a family member or friend wants to buy. Once the property is purchased, both parties have an ownership interest in the property.
The family member or friend becomes the property's occupier-owner. For tax reasons, under the Internal Revenue Code (Section 280A), the investor-owner must charge the occupier-owner fair rent for the right to occupy the property if he or she wants to take any tax deductions related to the property. The investor-owner can then use that rent to cover the expenses, including mortgage payments, homeowners insurance, and property taxes.
"I almost always recommend that the investor-owner charge rents so [he or she] can maximize tax benefits," says Brian Collins, an attorney in Ross, Calif.
The agreement has a finite life, often varying from three to 10 years, after which the occupier-owner can buy the investor-owner out or vice versa; the property can be sold with the proceeds being divided between the parties; or the term can be extended.
These agreements can be advantageous for both parties. For instance, if the property is sold at the end of the deal's term, the investor-owner gets back the original down payment plus a share of the proceeds from the sale. Also, the investor-owner can get a tax write-off on expenses and could receive tax deductions for depreciation.
Owner-occupiers can benefit by deducting mortgage-interest payments and property taxes on their income-tax returns. What's more, if and when the property is sold, they qualify for exemption from capital gains -- as much as $250,000 for individuals and $500,000 for couples, as long as they lived in the property for at least two out of the previous five years.
There are some risks, though. For one, the occupier-owner might fall behind in payments and even default on the mortgage, which could force the investor-owner to foreclose on the property -- a lengthy and costly process. The investor-owner would have to pay out of pocket for the foreclosure process.
In some cases, there's also the possibility of the property depreciating so the investor-owner either would get less or just the down payment back. In addition, the occupier-owner also could neglect upkeep of the property, which means it wouldn't be attractive to a buyer when the agreement ends.
Sandra West, a Frederick, Md.-based certified public accountant, points out that it's important for investors to consult with a real-estate attorney familiar with the jurisdiction in which they're investing. "Each state has different rules regarding real-estate titling," she says. The names of all participants in the agreements must be on the property title.
AGREEING TO SHARE
Shared-equity financing agreements can be used to create a tax benefit for a parent or other person helping an adult child or other loved one to purchase a residence. Here is how such an arrangement can be structured.
The arrangement provides that the investor:
Furnishes the down payment of 20% toward the purchase price of the home
At the end of five years, the home is sold and the investor receives back the original down payment plus/minus 50% of the profit/loss on the home (which is treated as long-term capital gain/loss)
Is not a co-signor on the mortgage but may take over the home and mortgage if the buyer defaults
Is subject to the risk of loss if the property sells for less than the purchase price, but is not liable for any losses in excess of the original down payment
The arrangement provides that the buyer:
Selects the home and must qualify for the mortgage
Pays the mortgage and gets tax deduction on interest
Is responsible for all repairs and maintenance
Must sell the home when any "triggering event" occurs such as change in marital status, the ceasing of the use of the home as the principal residence, or insolvency. In general, must sell at the end of five years, unless there is agreement to buy out the investor based on qualified appraisals
Keeps half of the profit on the home when sold
Write to Ray A. Smith at email@example.com
© 2004 The Wall Street Journal
Reproduced with permission
All rights reserved