Father in law in tight spot. recommendations on financial plan.

[k-vette]

My father in law is going through a divorce.  He was remarried about 10 years ago with money in the bank and a paid off house.  He and his wife purchased a 2nd house, bought property to eventually build on, etc. 

Now he's going to end up with no property or rental income, and a house with 175,000 left on the mortgage, (4.5 interest).  The only good financial aspect is that he'll receive around 125k in inheritance.  His father passed away last year and that will come soon.

He is 60 and was semi-retired.  He will have a pension, but its less than his mortgage payment.  His first thought was to aplly the 125 directly to the house, but I don't think that's the best best approach.

What would you do?

[Zamboni]

Hire a good family law attorney, because what you are saying doesn't really add up unless they've been very unwise with money the past 10 years, which I realize is possible.

The cleanest way to go is to agree to sell ALL of the real estate property and divide any proceeds with his wife via a fair legal agreement (that will be primarily governed by the laws in his state.)  Move into a cheap apartment until the property sells.

Then he will have cash, he'll have disentangled his financial life from his ex, and he can see what he can do from there.

[scrubbyfish]

What is the total value of the house? What are the rents in the areas he's willing to live? (Because my first thought is for him to sell the house and move into something smaller and cheaper.)

Why is he going to end up with nothing, as opposed to what he went into the marriage with, or at least half or more of the assets they built together, etc? Has he had excellent legal advice? Excellent (rather than no or sloppy) legal advice can be an excellent investment.

[AccidentalMiser]

I think I'd un-semi-retire and get a good lawyer.

Why on earth people remarry will always be a mystery to me.  Why they'd do so without a pre-nup is simply baffling.

[Abe]

I agree that he should keep the $125k, try to sell the house, and down-size to a small apartment. The liquidity of the inheritance money is especially important in a time of turmoil.

[k-vette]

Thanks.  I have doubts he will sell the house since he has owned it for many years.  Its where my wife and her brother grew up.  It does however make the most sense.  Its worth far more than the mortgage.  I'd guess 250k or so.

Renting is for sure cheaper than the mortgage in this area.  He doesn't need a 3 bed house.  He may do that.

As far as the divorce goes, I think he is stuck.  She used some of her inheritance to buy the new house and property.  She is a legal secretary and knew there was a loophole there that's in her favor.  He went to a lawyer who said she's got him there.

They did have a large investment that went wrong.  Idk the details, but unbeknownst to them their investor did something illegal and lost everything they put in.  Thats a wash for both.

[scrubbyfish]

If she bought the second house and the property, those should be hers, yes.

So, it sounds like the major issue is that together they invested some shared money and the investment went poorly. So, the problem isn't that she's taking him to the cleaners, or that she found a loophole, or that he remarried, but rather that he invested his money and the investment went poorly. Is that right? A terribly crappy event, especially for someone his age. Argh.

But yes, he can be totally financially well if he's willing to sell and move to what he actually needs. There will be emotional losses in that, for sure. But there will also be major gains: financial ease, simple maintenance (freedom), etc. And these can go a long way in terms of happiness! It is likely he would need to release the house eventually anyway, if ever long term care is needed, for example.

(Sometimes I'm especially grateful that I haven't had a house to lose. I did own once, and loved it, and planned to retire in it. But I sold after only a few years and am grateful to live in places I am unattached to, so that I can keep moving to cheaper ones!)

[Frankies Girl]

I don't know what state your FIL is in, but if he inherited money and kept it separate (not putting it into shared accounts or used ANY of it for shared expenses) then I think he technically should be able to keep all of his inheritance since it shouldn't fall under community property. My sister divorced her husband after her inheritance, and the lawyer was very specific about keeping all of it completely separate so she opened up a new account in her name only to hold the funds until the divorce was finalized. So I would tell him to get that confirmed for his situation.

Fact of the matter, the smart thing to do would be to split all shared assets and if that means selling off the house that your spouse and her sibling grew up in, then that's just the breaks of not having a formal agreement (prenup) going into this marriage. I get sentimental attachment - I'm in the process of fixing up and selling my own childhood home and it is hard - but what exactly is he saving that house for? Are either of his kids planning on living there after he's gone? If not, then hanging onto a larger home that could be sold and provide him with funds to live comfortably in a smaller place (like a nice apartment) with no maintenance and taxes seems like the logical thing to do.

[frugaldrummer]

So.....he's currently semi-retired, and can expect a small pension in the future?  Will he also collect social security, or just the small pension?  Would the pension be enough to pay expenses (including property tax) if his house was paid for?

I certainly understand that he might want to keep the family home if he raised his kids there.  If so, is he willing to return to full-time work for a few years and throw all the extra money into paying that off?  Is he the kind of guy who could tolerate taking in a room mate to help with expenses?

On the other hand - if his income in retirement will be too small to handle the expenses of house maintenance and taxes, even if it's paid off - he should consider downsizing.

[k-vette]

It really is a bum deal.  The ex will end up with a lot more due to the use of the inheritance money.  That's hers and understandable, but she only use a part for certain purchases, but by law gets all.  I don't understand it, but it's the way it is.  He has not received his inheritance yet and won't have any issues keeping all of it.

He will be working as much as possible.  I'm not sure how the pension and SS work out, guess I'll have to enquire further on that.

So assuming he is willing to downsize, then what?  Would you payoff a new smaller home in full so you have no mortgage expenses?  Then use any income proceeds and pensions, to cover living expenses? 

[frugaldrummer]

So assuming he is willing to downsize, then what?  Would you payoff a new smaller home in full so you have no mortgage expenses?  Then use any income proceeds and pensions, to cover living expenses? 

Yeah, that's probably what I would do.  Given this experience, and his lack of investing savvy (as evidenced by his catastrophic bad investment that helped get him here) the security of having a paid-off home is priceless.

[scrubbyfish]

...she only used a part for certain purchases, but by law gets all.  I don't understand it, but it's the way it is.

What a horrible and shitty law. Ugh. (I know there are some horrible and shitty laws in my relatively progressive area that leave me living apart from my boyfriend.)

So assuming he is willing to downsize, then what?  Would you payoff a new smaller home in full so you have no mortgage expenses?  Then use any income proceeds and pensions, to cover living expenses?

This will depend. In some areas, it is much more cost effective to own vs rent, in other areas the reverse is true. (You can look at some threads here about that topic.) Where the difference isn't great, he can decide which option is more appealing to him emotionally, psychologically, etc.

Personally, I've owned and rented and prefer renting by a long shot. It's freakishly cheaper in my area, for one. I also prefer to have a much smaller place, and there's not a lot of 400-500 sq foot ownership opportunities up for grabs. One day I may own again, but only when I can buy a little place in a quiet spot. In the meantime, I'm thrilled to rent a little place in a quiet spot for very little.

Maybe you can post here some rents and some ownership prices (including taxes, strata, maintenance, insurance, etc) for the kinds of places your FIL would be happy living in, and take things from there.

[k-vette]

Well we're in northern calif.  We pay less than $1000/mo to own a 3 bed 2 bath with a garage and a yard including taxes.  Homeowners insurance is less than $700 per year.  I know someone at work is paying around $1500 to rent in a similar setting.  Month to month seems cheaper owning around here. 

I think he'd consider a smaller home with garage - but no apartments.  He's does a lot of woodworking in his garage, has a boat, etc.

I've talked about my investment strategy and I think it would be hard for him to do that again.  He does however sound more interested than years past.  I just don't see investing as a "long term" strategy for him.

This is certainly giving me some ideas.  Ill pitch it and see if he swings....

[frugaldrummer]

If his pension is from government work (teacher, police, firefighter, public service etc) he will NOT be able to collect social security too.  If his pension is private (say, from working for a large corporation or a hospital or such) he would also be able to collect social security.

If the difference between the house he owns, and a downsized house that still has a garage and such, is 50k or less, I'd say stay put, get a room mate, and crank up work hours to pay that sucker off ASAP.  Let's say he took a second job (or increased his work hours) to make another $20 k take=home/year.  Let's say he also got a roommate  who paid him $500/mo.  There's $26k/yr he can throw at his mortgage. Between that and his inheritance, he could pay it off in two years.  Then he could work like that for 4 more years, until he turns 66, and bank another 104k.  That would generate an extra $300-400/mo (depending on your life-expectancy calculations) on top of his pension (and possibly social security?), with a paid-off house.  If he keeps the roommate, he's got $300 + 500 = $800 s month above his pension.

[Rural]

If his pension is from government work (teacher, police, firefighter, public service etc) he will NOT be able to collect social security too. 

That's only true if his government job is one of the ones that has made special arrangements not to pay into Social Security (and not to withold it from employee paychecks). That does happen, but it's pretty rare, and the FIL should know whether it's the case because those employers make a big deal about it (bigger paycheck!). The vast majority of government workers also pay into SS and can collect like everyone else who paid into it.

[Mori]

And, if he won't downsize, you might look into recasting his mortgage (if his bank does this). You usually have to pay a percentage of the principal down (like 10%) and they'll redo the payments to match the current loan amount and duration. May take care of the "unable to afford the payment" part.