More and more parents are shopping for, and buying, Manhattan apartments for their grown children. The reasons: estate planning, general financial support (it's EXPENSIVE to live here!) and it's often the only way a young adult can afford to get his or her foot into the home ownership door.
These apartments are typically studios or small one-bedrooms, but on occasion they are bigger-ticket items because parents see it as a long-term investment and a good place to park their money.
In many cases, the parents do not live in the New York area. Sometimes they view the apartment as a potential pied-à-terre for themselves when the child decides to move on. Some buy it as a straight-out gift, a gesture of profound affection sweetened by tax benefits. Others buy it as an investment and retain ownership, and still others acquire it through a family trust for joint ownership.
These purchases raise several financial and estate planning questions, and lawyers and tax advisors should be consulted about how best to structure the arrangement. Building managers must be questioned as well; for example, does the chosen building permit parental gifting, guarantors, parents staying in the unit or dropping in whenever they want?
There are mundane issues to be hammered out, like who pays the coop's monthly maintenance (or common charges in a condo), who pays for any repairs that need to be done, and who gets the profits when the apartment is sold. We have seen some families sign formal agreements and others make verbal agreements. Often families don’t talk about what will happen in the future which creates tension when the issue presents itself and the parties have different ideas about how to proceed. It’s always best when an arrangement is discussed and agreed upon in advance. Think prenup for home ownership (rather than marriage).
From a real estate perspective, because family circumstances vary and buildings have different practices, each particular situation will dictate what makes the most sense. Written agreements will need to be specifically drafted and customized because there are no standard forms that address these issues.
In one of the simplest scenarios, the parents buy and keep an apartment in their name and agree to pay the monthly carrying costs, and the child lives there as a family member, not a renter. Condos permit this, but some co-ops allow only owners to be residents and may require that the child’s name be put on the stock and proprietary lease.
There are questions about renting and subletting which need to be addressed. Young adults may have their careers and personal lives dictate that they move, either permanently or temporarily. Assuming that the family wants flexibility about renting the unit in the future, the building rules will factor into deciding where to purchase.
One client, a recent college graduate, moved to NYC to pursue a career in television. She asked her parents, who live in the Midwest, if they would help with her rent. The parents decided it would be wiser to buy a studio apartment in their names and allow their daughter to live there, rent free. They learned that banks viewed the place as an investment property and not a second home and typically charge higher mortgage rates and require higher down payments for investment purchases.
There are many traps for the unwary when parents are buying property for a child. Some buildings require both the parents and the child to be listed on the ownership documents. Many co-ops frown on buying a property in a child’s name, because the child may not meet the co-op’s income requirements. And when a property stays in the parents’ names, its classification as a second residence or investment property can have financial consequences. My clients were unable to get the mortgage loan they wanted from their local, out-of-the-area lender despite their long-standing banking relationship. When negotiations with a second bank stalled, the frustrated family decided they would simply pay cash for the apartment. However, we urged patience and introduced them to a specialty, boutique, local lender from whom they eventually secured their financing. They closed and their daughter moved in shortly thereafter. Success!
Mom and dad are comfortable that their daughter is living in a safe and good place. Their daughter is easing herself into the cold reality of housing costs by paying the maintenance fee of $850 a month, to her parents. She recognizes that without her parents’ help, she wouldn't be able to live in Manhattan and would have roommates regardless of where she lived.
Another family experienced the heartbreak of a board rejection when Mom and Dad attempted to purchase a coop for their adult son. The family also had other offers on coop apartments fall through because sellers deemed other buyers more "board-worthy". This is even despite their very strong financial position and their offers to put a year's worth of maintenance in escrow with the coop. The family switched gears and chose to look for a condo rather than continue with this painful coop purchase process.
A condo in a new development is the simplest type of transaction for parents buying for a child, especially a purchase directly from the building's developer. There are typically fewer or no restrictions with this type of purchase: little or no formal application process, no right to turn down the deal, and no Board interview. There may, however, be additional costs associated with a purchase of this type. Many consider the peace of mind and absence of red tape well worth the additional expense.
This family did in fact purchase a new construction condo from a building developer. They chose to take ownership through a family trust.
Some parents choose to make an official gift of an apartment by writing a check for the apartment and putting the title directly in the child’s name. Others hold ownership jointly. Some parents choose to guarantee payment of the loan or monthly fees to the building. Some transfer cash to the child in advance of the purchase so the child can close in his or her name alone. There are tax and legal consequences to consider with each of these scenarios.
For both parents and young adult children, purchasing a home, especially in Manhattan, is a complicated and nuanced matter. There is a lot to be discussed and considered. In my opinion, however, regardless of which property is chosen and how title is taken, all of the home ownership options are much better than renting.
