It’s an experience that many advisors don’t exactly relish: A client walks into the office and talks excitedly about how he or she is planning to buy a vacation home with friends.
The advisor faces the unenviable task of putting the client’s dream into perspective. The truth is, buying a vacation home with a friend is a business transaction, and so it’s the advisor’s job to point out the financial realities of making such a move.
“It comes down to planning, and it comes down to recognition that, oftentimes, as with any major purchase or decision, sometimes the perceived benefits can be very compelling upfront but you have to think through the decision, including the downside,” said Eleanor Blayney, a certified financial planner and CFP Board’s consumer advocate, in a phone interview.
Blayney pointed to the natural human desire to buy something now because we perceive its value to be greater today than what we think its value will be in the future.
“When you purchase anything, you’re saying that the perceived benefit outweighs the cost. That’s human behavior,” Blayney added. “Behavioral economists have studied how we tend to discount the future relative to today. A lot of times, what we want looks more valuable today than in the future. It’s why we enter into these ideas with such enthusiasm but overlook the future problems.”
Financial advisor Sarah Halpin of Wells Fargo Advisors in Portland, Maine, writes in a blog post for CFP Board’s Expert Corner about the financial-planning realities of buying a vacation home with friends, saying, “Unfortunately, owning real estate with people you like can become a major headache if you don’t share the same goals and take the time to do some upfront work.”
Read on for five financial-planning tips from Halpin and Blayney on what to tell clients who are considering buying a vacation home with friends.
See also: 4 estate planning concerns for clients with vacation homes
1. It’s a business transaction.
This can be the hardest pill for a client to swallow when planning to buy a vacation home with a friend. “In financial transactions between family and friends, we rely on goodwill, trust and love, and we don’t treat it like a business transaction,” says Eleanor Blayney, CFP Board’s consumer advocate. “You need to have things documented. It’s akin to writing a marriage prenup that anticipates its dissolution.”