The Moneyist: I bought my parents’ house at below-market rate — my sister wants me to give her $50K to build my mother an annex. Is that fair?

Dear Quentin,

My mother turns 81 this year. For years, she and my sister talked about building an annex onto my sister’s house so my mom could move in with her. My mom promised to pay for the addition.

Together, they hired an architect and decided to start construction. I was not consulted on any of this. As the pandemic set in, my sister’s contractor told her that lumber prices would rise, so she purchased lumber and kicked off the project.

Of course, when she went to my mom for the money to finance the addition, my mom didn’t have it. So now my sister has a bunch of lumber sitting on her lawn, and no money to pay the contractor.

“ ‘To complicate matters, my stepfather decided he wanted to stay in their house, and not move to my sister’s house.’ ”

It would have been easy to finance all of this by selling my parents’ fully paid-off house. But to complicate matters, my stepfather decided he wanted to stay in their house, and not move to my sister’s house.

So we came up with the idea of my getting a mortgage to purchase my parents’ house from them. My parents would split the money from the sale. My mom’s half would go to finance the addition to my sister’s house where my mom will live, and my stepdad’s half would be used to pay me market-rate rent so he could stay in their house for at least 15 years.

Unfortunately, I was unable to borrow as much as we needed. My parents lowered the price of the house below market value and gave me a gift of equity so that I could qualify for the loan.

When we set up trust accounts to manage the proceeds of the sale, my mom’s trust got $350,000 to pay for construction on the addition to my sister’s house, and my stepdad’s trust got $41,000 — not even enough to pay mortgage, taxes and insurance for 17 months, let alone 15 years.

COVID has, of course, sent construction costs skyrocketing. My sister has informed me that she now doesn’t have enough money to complete construction on the addition for our mom. In her mind, because my parents’ home was appraised at $800,000, my mom’s trust should get $400,000 from the sale.

“ ‘My parents reduced the price of the house below market value and gave me a gift of equity so that I could qualify.’ ”

In order to make up this balance, I would have to give her the remaining $41,000 from my stepdad’s trust (leaving him with nothing for rent), plus another $9,000 from my own pocket, and then I would have to come up with cash to make the mortgage payments on my own.

I get that my sister, through no fault of her own, doesn’t have the money to finish the addition — but I used every last scrap of my credit to finance the purchase of my parents’ home, and now I’m faced with there being no proceeds to finance the rent for my stepdad.

We are fighting about this pretty hard, and it’s bringing up a lot of resentments. My sister feels I’m being selfish because I got our parents’ house for a “song.” I feel resentful, because I never wanted the house and have constrained myself financially so the three of them could have what they wanted — and now I’m being asked to stretch myself even more.

There are arguments on both sides. My sister gets all the cash now to invest in the house she owns, which will go up in value. I get all the equity in our parents’ house, which is a great long-term investment, but one that leaves me cash poor and struggling in the short term.

Both parents have retirement funds, but my mom won’t contribute more to the building project, and I don’t have the heart to charge my stepdad additional money for rent when he’s already gifted me so much equity in the house.

How do we make this fair? Should I give my sister $50,000?

Signed,

No Good Deed Goes Unpunished

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.

Dear No Good Deed,

There has been a lot of borrowing from Peter to pay Paul going on, but it looks like Peter and Paul’s resources have run dry, along with everyone else’s bank accounts. You all appear to have created a problem for yourselves and one another. In fact, this addition was a solution to a problem that did not exist. There are so many wrenches in the works, you are going to run out of wrenches.

The original plan was flawed in that your sister — and now, ultimately, you — are faced with the task of housing your parents under two different roofs. You are bending over backwards to help your parents, but your stepfather is staying put, and your mother’s finances did not support this grand plan. The people you are trying to help are not participating fully in the process.

Before I give you one solution, I have a few observations: Your sister and your mother hatched this plan together. They both need to take responsibility for that. Your stepfather refuses to cooperate with the plan. He needs to cop to that. You were presented with an opportunity to help and, yes, hopefully make some money. You need to own that.

Your mother also saved significant broker costs, 5% to 6% of the sale price, among other costs, by selling to you. That’s even assuming that you are both correct about the market value, and the price that a third party would be willing to pay. Plus, you are not responsible for your sister’s hasty financial decisions, or your mother reportedly reneging on an earlier promise.

So where does that leave you? My solution, as far as there is one to all of this real-estate maneuvering, is to treat the $50,000 as a gift to both you and your sister, and to give her half ($25,000). You are taking the risk and the financial burden of owning this home, so any appreciation you have is fair game. But resist being embroiled in these financial family drama ad infinitum.

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