Recently, I received a letter from a woman who wanted to share her experience as a cautionary tale for trusting souls who may inadvertently lose their homes to unscrupulous family members. She and her sweetheart (they aren’t married) are in a legal mess because her partner made a verbal contract with his son, and, according to her, the son did not hold up his end of the bargain.
I shook my head as I read her letter, because it brought to mind dozens of examples where things had gone poorly for people who did business on a handshake and/or did business with family.
The woman shared that her partner removed his name from the deed to their home and put the house in his son’s name in return for a loan worth about half the value of the house. The verbal agreement stipulated that when the father repaid the loan, ownership of the house would be returned to him. However, after the loan was repaid, the son refused to put his father back on the deed and is now in the process of evicting his father from the property.
Not only is this a legal and financial mess, but it is also a sad story of broken trust and broken relationships. Unfortunately, it’s not all that unusual. Many people fall into the trap of transferring their home’s title to a loved one, only to end up on the wrong side of the deal.
There are valid reasons to share ownership of your home with a grown son or daughter or to transfer title to them. If you plan to bequeath the house to them eventually, you can make them owners now and mitigate inheritance tax. In some cases, the son or daughter will get better tax benefits from home ownership than you will, so why not help them out?
The problem is that once you share title, you’ve given another person the right to sell their portion of the property or to borrow against it. A friend of mine has a new neighbor who throws loud parties on weeknights because her old neighbor, the man who built the home, made his daughter a co-owner. The daughter borrowed against the house and couldn’t repay the loan, so they had to sell the property to pay off her debt.
Also, any property owner can be sued and have to forfeit their interest in the property if they lose.
No matter how much you love your family member (or friend), do not enter a business transaction without a written contract. There are many reasons why a contract is important. Most of all, it protects both parties against misunderstandings. A good lawyer will ask a lot of questions before drafting the agreement — questions that may not have occurred to either party.
Sadly, sometimes people change over time. Other times, people have an idealized version of a loved one — they want to believe the best even when there is evidence to the contrary. Someone who is in their right mind when an agreement is created may start to suffer from mental illness, dementia, drug or gambling addiction, and other issues that affect their ability to make sound decisions. Also, new family members can change the dynamic. I know a son who was deeded the interest in his mother’s house. He later got married, but died prior to his mother. The son’s widow inherited her mother-in-law’s house and forced the mother-in law to move.
While written contracts cannot prevent every misunderstanding, they can provide some legal protection. Also, agreements drafted by lawyers benefit from the attorney’s errors and omissions insurance — legal holy water.
It’s fine to bequeath your home to your child. It’s even fine to share or transfer title before you pass away. Just make sure you put legal protections in place so intentions are clear and no one can go back on the agreement without serious consequences. Be aware, in California, you can record a deed on transfer of death to assure your son or daughter will become the new owner without having to go through the hassles of settling an estate.
If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years. He is the president-elect of NORBAR, but the opinions expressed here are his and do not necessarily represent NORBAR.
