Hoping there are some of you with some knowledge or experience of a situation where a son or daughter wants to buy land from their parents and build on it to live but do not have the funds to buy the land and build the home.
Has anyone heard of this before within families?
Obviously just interested in your ideas and advice and will pass any relevant ones on when/if we get professional assistance.
Background:
My father owns one farm in WA which is split into three 50 acre blocks, each with their own title. One he lives on. One has sheds and water tanks. One is an empty block. I work on the farm but have a main job elsewhere. I live on a rented farm block nearby with my family.
For a few years now Dad and I have discussed the idea of me building on one of the empty blocks and living there with my family. We agree it would have great advantages for both of us.
The problems we face however are quite significant. Foremost, I cannot afford the block and the build. I have over $250k in savings and my mortgage broker suggests I could borrow an extra $500k from a bank but the block is worth approximately $700k. Then there is building the house, which we have already investigated plans for which would come up at around $350k.
Dad and I have pondered many ideas including family loans, trusts and inheritance but get stuck every time mainly due to not being very cluey on the topics. I am also cautious of the whole idea as I do not want to financially disadvantage him in any way. I also have three brothers who live in the city to also consider and although we get on very well and they like the idea, I understand how money matters can mess up the best of families. This is maybe the main reason why I have not pursued it further.
I think there isn’t really a way around this but thanks for reading and any advice appreciated to help us make or break the idea.
why cant your dad sell you the block with a balloon payment eg you have the rights to buy the block anytime between now and 10 years from now until then you pay “peppercorn rent” but in 10 years from now you buy the block for $700k + the projected increase.
it sounds like the people you need to consult are your brothers eg to show that you are paying “going market rate” and the reason you want to do this is cut down on commute times to when you are driving to the farm for “farm work”.
Thanks for the reply Dean.
By rights to buy the block do you mean it is placed in my name? I should of made it clear that even if it was, with some type of family loan made for the block, I would still need to obtain a small loan to build the house. I won’t be able to get a bank loan without the property in my name.
I am not an expert in these things but how about this:
1. If the Block is Valued at $700K and there are you and three other brothers who in the event of your Dads passing I assume that it would be split 4 ways, so $175K each. So your share of the block would be $175K and the other siblings $525K.
2. Assuming the value of the property after the build would be $700K + $350K (added by you)= $1.05m. Then the sibbling component after the build would still be $525K as you have added value with the build and their share is the unimproved value. $525K is 50% of the total value once built.
So if your father added you to the title as “tenancy in common” with a 50 % share of the home, then if he was to pass away, his estate would administrate his share of the property which would go to the three brothers. This allows for growth in value and for the brothers to share in that growth. your father can have his will articulate how his shares would be distributed allowing protection for your family allowing you to pay them out from your portion of your inheritance from the other two blocks.
I would think that the bank would only require your Dad to go guarantor on the loan as he is on the title, but the loan would be in your name,
Additionally, there can be a caveat on the tittle not allowing the sale while your family lives on the property (but some banks may have an issue with it) .
Just an idea, as I said I haven’t come across this before but its an idea that provides the brothers security and your father,
Thanks for the reply Dean.
I won’t be able to get a bank loan without the property in my name.If you had the rights to buy the block in X number of years (and most importantly your brothers knew you were paying going market rates for it eg the money was helping your dad out when he retires/goes into aged health care etc) I’d be very surprised if you couldn’t find a bank to loan you 50% on construction of the house eg $175k cash and $175k loan – particularly if your father would go guarantor on it.
The best way to move forward on this is get your brothers on board with the general idea that you are going to buy the 50acre (eg 1/3rd of the farm) and once they are on board then go and approach a bank to work something out. You’re on the right track btw….and better to deal with this now than in an estate situation or later when your father is older/less able to make decisions.
Thanks John and Dean. My Dad and I have taken in your comments and feel much more enthusiastic about this idea becoming a reality. We like the idea of placing us both on the title. Not sure how this will affect the first home owners grant for building a new home (not that it is a deal breaker). Dad suggested I borrow the $100k to build the house from him and I pay him back, with interest (instead of a bank).
As the brothers are happy with the basic idea, I guess the next stage is taking this to a professional. Someone who has experience in these types of matters to offer advice and also to have it properly drawn up from a legal side. Would this be a property lawyer?
I would speak to a solicitor who has experience in property transactions, joint ventures and also estate management. That way you are covered by all three aspects of the arrangement.
Cheers
Just an update. It looks like we will proceed with the idea of tenancy in common. Good part of this is that I may only have to pay $20 stamp duty as the lot is currently used for primary production and is “intended” to be used after the title is amended.
We approached a property lawyer who seemed quite knowledgeable but haven’t gone any further than a phone conversation. As much as we would like to sit down with him and have a good yarn about the idea. At $600/hr we are wondering how much we can draw up ourselves. We haven’t made much on the sheep this year so trying to watch every penny although we understand the need for this to be done properly.
As it would appear the title amendment to be not too difficult. I guess the next step is to get a more definitive price of building a house on the site and ensure there are no other issues there and then look at the best way to get finance for that – through a bank loan or through Dad. Then take all that to the family and ensure everyone is happy before having the will reflect the changes.
Anyone see any other issues to take into consideration? Also, are there any major tax implications of suddenly acquiring 25% of land? Other than that, we are looking forward to the future although treading lightly.
Cheers
There might be a CGT issue or a GST issue for your Dad. Doing things on the cheap can be very expensive.
You could also keep things as is and just build on your dad’s land. You might be $100k short now, but you could possibly borrow from your dad or do a bit of owner building.
If your dad dies first you could then inherit the land. If you die first you dad gets a house. You could have an legal agreement drawn up – common in granny flat type situations where a parent sells and uses proceeds to build on adult child’s land but this is in reverse and on a bigger scale.
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2. Assuming the value of the property after the build would be $700K + $350K (added by you)= $1.05m.
I have got slightly stuck on this. A property evaluator warned Dad that adding a house onto land does not always increase the price to include the house build cost.
So say in 10 years time, if I did not build, the land alone is evaluated at $1m. My three brothers and I would receive $250k each (25% share). Now with the situation that I have placed a house on it, that cost me all up $400k (including power, septics, etc), the property is now worth $1.2m. I expect to take my building costs out, so $1.2m – $400k = $800k. My brothers now only get $200k. $50k less thanks to my building project.
Is what the evaluator suggesting quite likely?
You could also keep things as is and just build on your dad’s land. You might be $100k short now, but you could possibly borrow from your dad or do a bit of owner building.
Thanks for the input but I have decided to go through a bank loan if possible to make the situation more fairer for everyone. Furthermore, it looks like we may have to borrow $200k.
I think we have ironed it out and ready to take this to the solicitor:
– Dad adds me to the title of that block of land as tenancy in common with a 25% share. This allows me to obtain a bank loan and build.
– Upon Dad’s passing, the land without the house and associated infrastructure that I added is valued. I contacted another property valuer who said this was possible.
– My father’s 75% share would be distributed to my three siblings, however I have the option to buy them out with the portion of inheritance from the other two blocks first.
– This allows security for my family and a share in property growth for my father and siblings.The only issue I see now is in the case that I need or want to leave the block before my father’s passing. Possibly an agreement that Dad will buy the house from me, maybe minus a percentage value? Not really fair he would have to reimburse all my costs.
Thoughts?
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Cloudburster.
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