Owner Financing to Help Your Kids

Seller financing can sometimes provide a way for parents or grandparents
to help their children or grandchildren.  Such help may spring from
an effort to avoid taxes, help a spendthrift relative, or many other
reasons.  Such goals will complicate the transaction and make problem
solving more difficult if there is a problem with the loan.  However,
it may still be worth considering.

For example, in 1971 we were moving to Albuquerque so I could go to
graduate school.  My in-laws located a house near campus for sale
by owner (FSBO) for $18.900 with $5,000 down an assumable old loan at
5% interest, and the sellers would carry the balance on a New Mexico
Real Estate Contract.  ( A NM REC is a very good form of seller
financing which exists in NM but not elsewhere.  I discuss it in
detail at RealEstate-Contracts.com).  They had recently moved themselves
and were not in a position to help.  $5,000 was a lot of money in
those days and my wife and I didn’t have it either.

After much thinking we approached my grandmother for a loan.  As
it turned out, she had that kind of money sitting in a savings account
and was happy to loan it to us so we could buy our first home.  We
wrote up a simple note, and payed her monthly over a five year period.

I think this is a perfect example of circumstances where family members
with different financial needs can help each other without giving up anything
themselves.  My grandmother needed to earn interest on her money
so we paid her what she was getting at the bank.  We needed a chunk
of cash, but could look forward to increasing income when I finished
school so repayment was not difficult.  The house was right
next to the campus and in good condition.  My in-laws had moved
frequently, always moving up with their homes, and in their experienced
view the house looked like a good investment.  It all worked out
very well in the end.

Looking back I can see a number of ways where the result might not have
been so good.

If my grandmother had suddenly needed her money back, we couldn’t have
done it.  If she had tried to sell the contract to a note broker
she would have learned that a contract in third position behind an institutional
first and a seller financed second is almost worthless.  We would
probably had to choose between telling her “Sorry” or selling the house.  In
any case it would not have been fun.

Her contract was not paid via an escrow account like the first and second.  If
we had quit making payments on the first and second she would not have
been notified when the foreclosure started.  In fact, if we had
kept paying her we could have lost the house and she would not have known.  In
a situation where more money was involved this sort of financial “Mishap”
could have expensive effects.

It was a very informal loan.  If she had died while we were paying
her and her heirs were at war with each other over the assets of the
estate there would have been some potential the legal action(s) could
have splashed our way and created problems with the title.  For
example, what if we want to sell the house.  Who would sign to release
the note if several people are litigating it’s distribution.

I could go on, but you get the idea.  Helping your kids is good.  Helping
your kids is dangerous.  For investments the correct answer is always
“It depends.”