When lending to family, be prepared for all eventualities

04/27/2014 7:36 PM

04/27/2014 7:36 PM

DEAR JEANNE AND LEONARD:

My son-in-law has proposed that my wife and I lend him and my daughter the money to buy their first home. They would pay us a higher interest rate than we can get on CDs, and we would have a predictable source of income in our retirement. Plus, the interest they’d be paying us is less than the mortgage rate they’d have to pay a bank.

Because they’d be giving us a mortgage on the house, I’m not too concerned about the financial risk. But I wonder about the emotional risk. Suppose they’re late with a payment? That’s one of many things that could go wrong and cause a rift. Could you please comment on both the financial and emotional risks of making a several-hundred-thousand-dollar loan to family? — Tom

DEAR TOM:

What about the risk that they get a divorce? Would you call that one financial or emotional?

Our point is that the distinction is artificial and irrelevant. When it comes to deciding whether to lend a family member the money to buy a home, it all boils down to one question: Are you prepared to foreclose?

Forget about the myriad reasons you believe you’ll never be faced with that decision. The whole point of a mortgage is to provide security for the lender if the borrower runs into trouble. And there’s no security for you in this deal if you’re not willing to foreclose.

Sounds harsh, we know. But unless you’re either prepared to foreclose on your daughter and son-in-law or prepared to allow a six-figure loan to become a six-figure gift, don’t make the loan.

You owe friend at least half of trip

DEAR JEANNE AND LEONARD:

At the same time that I signed up for a kayaking trip, I offered to pay for it. But “Gloria,” the person organizing the event, said I could pay on the day of the trip. Unfortunately, a conflict arose the day before, so I emailed Gloria and explained that I couldn’t go. She never replied.

When I ran into her two weeks later, I asked how the kayaking went. She said it was awesome, but that it cost her an extra $180 because I didn’t go. Do I owe Gloria that $180? — Jeff

DEAR JEFF:

So Gloria never told you — not when you signed up, and not when you emailed her — that, in making the reservation, you were obligating yourself to pay $180 to cover (we assume) your share of some expenses that were going to be incurred whether or not you showed up? And it never occurred to you that walking away from your commitment at the last minute could cost the organizer money?

Well, shame on Gloria for not laying out the deal when you signed up, and shame on you for not figuring out that her holding a place for you wasn’t necessarily cost-free. We suggest you tell Gloria that you wish she had explained at the outset that you’d be expected to pay whether you took the trip or not, but that since she didn’t, you’d like to split the cost of the mix-up with her. Then hand her $90.

There’s no reason Gloria should have to bear the entire burden of a mutual misunderstanding.

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