In the headlines today is a Canadian case between parents and their daughter. The parents loaned their daughter $110,000 to purchase a home. However, the parents ran into tax trouble and needed access to cash. The parents asked their daughter to repay the $110,000 by selling the home. Daughter refused.
Surprisingly, the judge ruled in the parents’ favor and ordered the house to be sold. Such outcome is highly unlikely here in Arizona. Although the parents now have their money, they lost their daughter. (Not to mention the tens of thousands of dollars in legal fees.) The Vancouver Sun quotes the mother saying, “We were never vindictive to (our daughter), but we’ve lost our daughter now. I just don’t know how it can be repaired because it’s done so much damage.”
I have seen a similar tragic occurrence. Parents moved from out of state to live near their child and grandchild. Child needed help with a down payment on a house. They loaned the child $125,000. Although they wisely drafted a promissory note and had the child sign it, the terms of the loan state that child is to make monthly payments for 30 years. However, the child also had agreed that the loan would be repaid when the house sold. Within five years the child sold the house. However, the child refused to repay the loan insisting the only requirement is monthly payments for the remaining 25 years.
I wish the parents had asked my advice before they made the loan. Sadly, they didn’t. I would have advised the parents to include all the terms of loan in the promissory note. Most importantly, I would have advised the parents to record a deed of trust against the property. A deed of trust creates a lien on the house forcing repayment when the house is sold. I did not enjoy having to inform them that they cannot force early repayment of the loan. The parents must wait for the loan to be repaid at a very low interest.
Not only will the parents have to wait for their money, but unfortunately, like the Vancouver case, they lost their child. They no longer have a relationship with the child as they say it is beyond repair.
The lesson learned is to be careful when loaning money to family and friends. Before you make a loan, please contact me to have the proper documents drafted and potentially recorded to protect you. More importantly, such documents will help protect something money cannot buy – the relationship between you and your loved one.
Such occurred with a client who did see me before loaning money to her child. The proper documents were drafted and recorded. The child sold the property and the client was repaid. Client and child continue to have a wonderful relationship as no dispute ever arose.
If you desire to make a loan, please contact me before doing so. It will not only save you money, it can save the relationship.
– John Skabelund