Friday, July 11, 2008

Investing with Family

Question:

Hi Frank
My Name is Erica and I am wondering if you would mind sharing a bit of your wisdom. I stumbled upon an article on msnbc.com that referenced your blog so I thought I would check it out. I appreciate all the information you have posted there already its quite helpful. First let me give you some information about me and my “disclaimer” and if you are not able to offer any advice I fully understand.

I am an American living in Canada – married to a Canadian
My Husband and I are interested in purchasing a property in the US with the intent to rent it for most of the year
My Husbands Sister and brother in law are interested in making this purchase with us (all three of them are Canadian)
We are currently looking at homes/town houses/condos in Southern California (I know this is NOT your area J )

None of us have ever purchased property in the US and I understand the process is a bit different there than it is here in Canada. I want to make sure we are well informed before we jump in head first as most of the process for us will be done long distance. My sister in law and I are planning a trip to southern California at the end of the month to meet with a real-estate agent she has been communicating with and to view some homes in areas we have been researching.

So after all of that my questions are these do we need to be preapproved for a certain amount before we make an offer on a property there? Do laws very by state regarding the purchase and sale of a home? We have a wonderful relationship with my husbands family and we want to keep it that way so are there specific clauses that can be placed in the purchase agreement that hold every one equally liable regardless? Keeping in mind that my husband and I might be the “little fish” in this bigger deal we want them to know that if something goes wrong as this is all very new to all of us that they will not be left holding the bag.

Again I do understand that you work on the east coast and not in California, though I wish you did because I LOVE your MLS site and the information you provide there. I appreciate any bits of wisdom you might be able to offer.

Kindest Regards
Erica


Reply:
Hey Erica,
Every area is different, but I'll tell you about my area, but you will have to ask your agent about your area. (and California is another beast altogether)

1) So we need to be preapproved for a certain amount before we make an offer on a property there?

YES. While you don't HAVE to have a preapproval letter first, any/most listing agents will require one. Kinda a "we will consider your price of XYZ, IF we know you can pay for it."

Also it just isn't good to be offering on places until you have a decent level of certainty about your ability to but it. ESPECIALLY if you are buying it as a partnership, which can make MUCH stricter rules (ie more money down, higher rate etc)

2) Do laws very by state regarding the purchase and sale of a home?
Yes.

3) We have a wonderful relationship with my husbands family and we want to keep it that way so are there specific clauses that can be placed in the purchase agreement that hold every one equally liable regardless?


Yes, a clause that says "Sorry family members, we love you too much to go into business with you." It really is a recipe for disaster. Everyone has good intentions, and one thinks that they can write out all of these "what if" scenarios, but you can't even scratch the surface with the unknown. What if one wants to sell and another doesn't? What if the market drops in half and one wants to sell? What if it doubles and one wants to sell? You will buy them out at the "fair price?"

4)
Keeping in mind that my husband and I might be the “little fish” in this bigger deal we want them to know that if something goes wrong as this is all very new to all of us that they will not be left holding the bag.

> It might be easier to make it a straight loan and not a revenue sharing deal. That way they wouldn't have any say in when to sell. As long as you make your payments, they can't say anything. But remember, it will be MUCH harder to get a loan for this.

Written by Frank

1 comment:

Erica said...

Good information - what I expected to hear. I was hoping that each state would be regulated by the same laws and guidelines. As for the family concern we are very aware that things can get messy. That is why neither party is investing more than we can afford to loose and the revenue is not needed just a bonus. As for the future sale, we are not looking for a quick flip or a huge pay out just an opportunity. I think most people enter into these things emotionally and naively, we are pretty level headed and focused on reality not pipe dreams. Thank you again for your assistance it is appreciated.