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Author: khaar Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127777  
Subject: financial dealings with family--long Date: 7/13/2005 4:18 PM
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There are frequently (one today even) questions on this board about doing financial deals with family and friends. While these can be beneficial for everyone involved, it is CRITICAL to treat these as formal business arrangements. Don't merely assume you know the persons you are working with and that everything will be fine. The following is an accounting of our family real estate purchase. Background info is given for those of you who think "something like that would never happen in OUR family."

My parents raised me to be honest, independent, conservative, careful, frugal, etc. We went to church at least every Sunday, including when we were on vacations. My parents were opposed to the many government hand-outs, but gave as generously as they could (a minimum of 10% of their gross for as long as I can remember, although we were only a very middle-class family) to the church and other organizations that they felt truly helped people. They were active in community and church activities, especially those dealing with education. Everyone thought ours was the perfect family.

My husband wanted to start a small wood-working business, so we decided to buy some property near where my parents live (since we visited them for 3-4 weeks every year and talked for a couple of hours every week and we loved the area). My parents asked if they could go in with us on a larger parcel as they were interested in building a new-but-smaller home. We all thought this sounded great—they would be around to help with our kids, it would be easy to help them as they got older. Found some property, bought it, and continued along the plan. We invested slightly over 50% of the total purchase price, most of which we borrowed on a commercial loan. My parents, my maternal grandmother, and one brother ("good" brother) put up the remainder in a home equity loan (parents) and cash, although my parents and our names were the only ones on the county records—simplified getting our loan. Consequently the tax records made it look as though my parents and we were each 50% owners.

First inkling that there was a problem came at Thanksgiving. All of us (3 brothers and their families, grandma, my parents, us) were together and discussing the property--how best to use it (there is almost a half-mile of a large creek on it, some wetlands, and a stand of old-growth cedars), how to divvy it up. One brother, who had invested nothing, got very upset and left because he didn't like the idea that we (DH and I) seemed to think that we had to know exactly which acres we owned. We tried to explain that, in order get a loan to build a house, we would have to have title to the portion the house was on. We also explained that, even though we all fully intended to live there forever, if any party ever needed to have their money out (death, divorce, kids' educations, emergencies) there had to be a way to do it that would work for everyone. This brother seemed to think that any agreement would adversely impact everyone's ability to enjoy the property together as one big, happy family—that we would want to keep everyone else off of "our" part of the property. My mother was upset that we had upset this brother! We just let the whole issue slide for the time being, figuring we'd let him cool down and talk about it later.

A year went by and a lot of other things happened. It became obvious that building a home near my parents was not going to work. We abandoned (for the time) the plan and DH took a job far away.

After another four years, we had paid off our part of the property, but my parents still had quite a ways to go on their home equity loan. (Grandmother and good brother had put in cash.) We suggested that we all just sell the property, but my father was vehemently opposed. So we backed off, not wanting to damage family relations any more than they already were.

Five more years passed, and more things happened--things that are not supposed to happen in nice families. The family split. We figured we'd have to wait till my parents died before the property could be sold. Didn't really like the idea of owning something with them, but didn't really want to try to take them to court. Good brother tried to discuss selling one more time and my parents explained how much money they would lose if they sold (even though they were still making payments on it).

A year later good brother gets a phone call from parents informing him that they had talked with a realtor and were listing the property and please let his sister (me) know that the realtor would be sending us a copy of the listing agreement to sign. I came just a little unglued momentarily, but it was what we all wanted, so we decided to go along and signed the 6-month contract with the agent.

Got one offer just before the contract expired (parents listed property in late August—definitely not the time to list for that area). Could not negotiate a sales contract, largely because my parents wanted to hold out for a full-price offer. When came time to renew the listing contract, my parents wanted to up the asking price by almost 50%, plus they had started sounding as though they didn't want to split up the proceeds according to how much everyone had put in initially!! DH and I refused to relist until we had a signed division of proceeds statement and until the price was back down to something reasonable. Took almost a month, but finally got there. A great offer came in the next month, and we closed on the property end of June, even making a profit.

In spite of all this, our mistake was NOT that we had a business deal with family, but that we did not have a formal, written agreement spelling out the arrangement—including (and especially) how one or more parties could exit the deal. We made assumptions that my parents would reach the same conclusions as the rest of us, given that they had raised my brother and me, and given that my mother was raised by my grandmother. We were wrong. We feel extremely fortunate to have gotten out of this without losing our shirts.

So if a deal with a family member looks sensible, at least get a book or an agreement template and discuss and write down the terms. If the other party's response is "we don't need to do that because we're family," there's no need to argue, but don't do the deal!!!!

Kathleen
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