Planning to buy house with sister who has a small chance of getting divorced

[rarnaldo]

Hoping from some advice from fellow mustachians that have more life experience than I do! Really appreciate any advice y'all may have.

TL;DR version up front: I'm (31 yr old male; Texas) in the process of buying a house, and everything will be in my name. My sister (27 yrs old) is planning to contribute 20-25% to the down payment, but she could potentially be getting divorced in the next 1-2 years. I want to make sure I'm protecting myself in case something goes awry. Any suggestions?

Longer version:

About 4 months ago, my sister and brother-in-law proposed the idea of going in on a house together as an investment. I liked the idea because I've been renting for the past 10 years and am ready to invest in real estate, but I definitely don't need a whole house to myself. My brother-in-law also owns a roofing company and has several contracting connections for any repairs/renovations we need to do. Our plan was to find something that was sound structurally but needed lots of cosmetic updating.

After getting out of a long-term relationship myself, I moved in with them temporarily while we started the house hunting process. About 2 months into the process, they started having some semi-serious marriage issues (nothing major such as physical abuse or cheating; they're just questioning if they're hindering each other's long term happiness) and are currently going through counseling. I'd say there's only a small chance that they end up getting divorced, but it's a possibility.

Once they started having these issues, I was no longer comfortable being involved in this with my brother-in-law. I trust and have a really great relationship with both of them, but it was becoming more complicated than it was initially. I had this discussion with them and let them know that I only wanted this agreement to include my sister in case they got divorced. I have plenty of money saved to do this all on my own (and everything will be in my name, regardless), but I like the idea of having this as a project with my sister since she’d be able to help quite a bit with renovating, house upkeep, and dealing with potential renters (the house has 5 bedrooms). I also like that it would serve as an investment for her in case she needs to become financially self-sufficient in the event of a divorce. I could see us continuing on with these types of real estate projects in the future, as well. The only reason neither of them were going to be involved with the mortgage application was because my brother-in-law started his business within the past year and didn’t have sufficient work history, and my sister was a nanny on the side for a little bit of extra income (she only recently got an admin job to begin generating her own income).

I recently had an offer accepted on a house for $207K, and closing is set for 12/21. Before it gets too far along, I want to make sure I put some type of legal binding agreement in place to separate myself from my brother-in-law. I’ll be using 100% of my assets to cover the down payment and closing costs (~$50K). My sister has about $20K of her own money to work with and will most likely be transferring $15K of that as a gift (to avoid taxes) to me after closing. The other $5K will likely be used for our first few projects. I still need to figure out a way to determine ownership stake since this isn’t going to be a 50/50 split as was originally intended. I’m thinking of keeping track of how much and when we each put money towards the house then calculating the future value of those funds (using something like the interest rate of the mortgage) whenever we’re ready to sell it in the future.

My sister and I will be living together, and my youngest sister will also be renting from us. My brother-in-law will be traveling for work for the next 1-2 years and may or may not be staying with us when he’s back every few weeks (he may just stay at their house where I’m currently renting).

If anything, it seems like more legal risk for my sister (since everything is in my name only), but I want to make sure that we’re both protected in case something goes awry. Any suggestions? Do I need to get an attorney involved, or is getting some type of detailed notarized agreement enough? I really appreciate any feedback and am happy to answer any other questions for more context.

[GizmoTX]

What a mess. Family arrangements almost never turn out the way you plan.

Can you handle this purchase 100% on your own, including all expenses & taxes? If not, this is extremely risky.

If everyone is contributing cash, then a family partnership might be the cleanest way. Know that most will consider themselves equal partners regardless of contribution, which will be an ongoing problem.

[rarnaldo]

Yes, I know it's a risk going in, and I've heard of other projects/investments such as this not turning out well. I certainly don't think I'm immune to problems arising, but I feel like the pros outweigh the cons. If I didn't think of my sister as an extremely reasonable person, I wouldn't be doing this. But yes, I could afford to do everything 100% on my own. I chose not to for the reasons I mentioned in my post. She understands that her ownership percentage will be directly linked to the amount of capital she contributes.

Thanks for the input! These are the types of perspectives I'm hoping for.

[terran]

What a mess. Family arrangements almost never turn out the way you plan.

Agreed. I wouldn't want to go here even ignoring the whole possible divorce angle.

[englishteacheralex]

I would never do this. Just buy the place and rent a room to her/BIL (house hack). If she wants to invest in property, let her buy her own place. The potential to screw up multiple relationships is very high.

If you own the place you can easily rent rooms to other people should sister/BIL move out. Joint ownership means any kind of life problems/changes for you OR her OR BIL will result in the whole thing imploding.

I guess people do this kind of thing, but personally it just seems messy and complicated. At least get a real estate attorney involved so that they can help you think through the implications that haven't occurred to you yet, and come up with contingency plans.

[KBecks]

It is likely so much better for your sister to keep her money liquid than tie it up in a house that's in your name only.  Buy the house on your own and work out your rentals on your terms, don't get your sister tied up in it.   Pay your sister and your BIL for their labor, or barter with them for free or reduced rent at your new house.

What is your exit strategy for your proposed plan?  You have to think long term, and keeping the house in your name gives everyone the most flexibility.

[rarnaldo]

This is all great feedback ... thanks, everyone!

What is your exit strategy for your proposed plan?  You have to think long term, and keeping the house in your name gives everyone the most flexibility.

The plan was to live at this house for the next 3-5 years as we gradually update it and make renovations, then we'd most likely sell it and split whatever profit we made based on the amount invested. The other option would be to move out and keep it as a rental property (and again split the income based on contributions).

[clifp]

Hoping from some advice from fellow mustachians that have more life experience than I do! Really appreciate any advice y'all may have.

TL;DR version up front: I'm (31 yr old male; Texas) in the process of buying a house, and everything will be in my name. My sister (27 yrs old) is planning to contribute 20-25% to the down payment, but she could potentially be getting divorced in the next 1-2 years. I want to make sure I'm protecting myself in case something goes awry. Any suggestions?


If anything, it seems like more legal risk for my sister (since everything is in my name only), but I want to make sure that we’re both protected in case something goes awry. Any suggestions? Do I need to get an attorney involved, or is getting some type of detailed notarized agreement enough? I really appreciate any feedback and am happy to answer any other questions for more context.

I've posted another thread, that I've generally had a positive experience with the 4 communal house buying situations I was involved with. Even the one where my GF and I split was financially a good deal even if if was emotionally painful.

However, your deal seems really complicated even if your sister and BIL marriage wasn't rocky. I did one 60/40 purchase and added a lot complexity to our arrangement.

I think it's worth stepping back and asking what problem are you trying to solve.  It sounds like you have money to do it, and are you trying to help your sister or is there something more?
Cut her a break on the rent and then maybe you can joint buy a rental property on 50/50 basis in the future.

As far as getting an attorney, HELL YES.  This is not one of those situation where you can download something from NOLO press.  Causes yours is totally not cookie-cutter.

A good attorney will ask you question that you probably haven't thought off and then you three can discuss.  Like what happens if you want to sell and they want to stay there or vice versa

[rarnaldo]

I think it's worth stepping back and asking what problem are you trying to solve.  It sounds like you have money to do it, and are you trying to help your sister or is there something more?

Yes, I would say this is partially to help my sister financially in the event of a divorce, but I would also benefit in terms of having someone else to help with the renovations, improvements, and general upkeep. It's a fairly large house and needs a good amount of cosmetic work, and I would genuinely enjoy doing these types of projects with her. She's reliable, fun to be around, and also has experience renovating (whereas I would be new to most of this).

[frugaldrummer]

The plan was to live at this house for the next 3-5 years as we gradually update it and make renovations, then we'd most likely sell it and split whatever profit we made based on the amount invested.

Here's the potential flaw in your thinking:
You're basing the equity split on money invested but not accounting for sweat equity.

Extreme example: sister's investment is 25% of the money down but she ends up doing 90% of the cosmetic repairs. Her 25% equity doesn't reflect her much larger investment in sweat equity.

Or imagine the reverse - she does none of the sweaty work but still gets 25% of the equity you earned with that sweat.

Does she pay 25% of the property taxes going forward? Does she get 25% of the income from renting those bedrooms? Is the money she's using money that she always kept separate or can it be considered community property in a divorce?

There's a boatload of unanswered questions here.

[cchrissyy]

good point right above by frugaldrummer  but also the unfairness could hit in the other direction.

imagine if you both put in the right % of money and effort, but since it's all in your name, you are shouldering all the biggest risks - a major repair. a lawsuit. a long vacancy. a market crash and the equity goes negative.

even without any of those troubles, every month when you pay the mortgage or the taxes or the utilities, the money % of this deal becomes more lopsided away from your original split.  depending how long you own this thing, it's possible that she gets 25% of the equity when you took on 100% of the legal liabilities and in the end, maybe 90% of the out of pocket costs.

I very much agree that the right way to handle this is to directly hire her for the work, and/or to let her rent the place. those are both very helpful things you can choose to do that don't open yourself up to this many future headaches. Don't overcomplicate this. It just adds to the ways it can go wrong and adds stress to both of your lives.

Also, I think *anybody* married has some small chance of divorce and sight unseen I would think her specific risk is rather high!  It's such a real enough possibility that she has told people about it. And the husband is moving out. Those are huge clues. I don't care if it's for work, it's a very destabilizing thing even in good times, and in a less-stable marriage moving out is hardly the way to get strong again.  As a divorced person myself, I agree with whoever above says that form your sister's point of view it's probably best she holds onto cash for maximum flexibility, and does not tie it up with you or any other investment. Unless of course a lawyer advised her to do so. State laws vary.

Good luck!

[DrMoney]

I would not do this. "Investment" in the home extends far beyond the initial down payment, and some kinds of investments don't have a simple dollar amount to attach to them, and this can begin to cause resentment. Good luck in whatever you decide to do.

[Catbert]

Texas is a community property state.  Whatever property or money you sister acquired during her marriage is 1/2 her husband's.  There is no easy and legal way to cut him out in the event of divorce.    Th nk about it the other way - if her husband used  part of their money to buy a semi and put in someone else's name.  In the event of a divorce your sister would rightly claim it as a marital asset.

[rarnaldo]

Thanks for everyone's input. This has helped me consider lots of issues I hadn't considered previously. I just had a conversation with my sister that was extremely civil and went really well in terms of talking about my hesitations. I'm still not 100% sure how I'm going to proceed, but I'm happy with how the discussion went even though we didn't agree on everything.