Parents Helping Kids Compete in Bidding Wars

October 13, 2017

To help their adult children, more parents are reportedly taking out equity in their own home so their child can buy a home of their own.

Parents are refinancing and then sharing some of the equity in their own home to help fund some or all of the costs of a home for their adult child. When the sale closes, the child then refinances their new home and pays back the parents, The Wall Street Journal reports.

More parents are finding that their adult children need the extra financial footing in order to compete in areas where bidding wars have become commonplace. The additional funds are helping adult children avoid making a deal contingent on financing and also helping to make their offers more attractive to sellers.

Parents have several options for tapping the equity in their homes, such as cash-out refinances or a home equity loan.

Kas Divband, a real estate practitioner with Redfin in Washington, D.C., told The Wall Street Journal that he has worked on six deals where buyers have relied on a parent’s mortgage in order to make an all-cash offer.

Even millennials with high-paying jobs and sizable down payments have been losing out in some bidding wars due to high competition, particularly in markets like Washington, Boston, and Seattle, says Nela Richardson, Redfin’s chief economist. By having a parent take out a home equity line of credit to give their child a full purchase price, some millennials are better positioned to then win against multiple bids.

Parents also may step in during transactions where home prices are bid above the list price and then the appraisal comes in under the contracted price. If sellers refuse to lower their price, buyers must come up with the extra funds or walk away. Lenders won’t often increase the borrowing price if an appraisal comes up short.

Many parents may not find these arrangements practical. Parents will need to have enough equity in their own home to make a refinance worth it. Also, the child needs to be able to qualify for a loan. Divband says it’s important to let a lender know the plans beforehand.

Parents will want to factor in the extra costs: A purchase mortgage or refinance typically costs about 2 percent of the loan value. Gift rules need to still be followed, too; the IRS says gifts of more than $14,000 per person per year are subject to federal gift taxes for the giver. Both parties will likely want to consult a tax professional.

Source: “Millennials’ New Weapon in Bidding Wars: A Parent’s Home Equity,” The Wall Street Journal (Oct. 10, 2017) [Log-in required.]