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Featured Article

Jun 24, 2015

Asset-Rich But Illiquid Parents


.

Question: Hi Rose. My parents are asset-rich but not liquid. Now that they’re old, they need more cash for their medical and other needs. I’ve suggested to them that they sell some of their real estate properties. For one, their house has become too big for them. However, they are not happy with that idea. They also say that they want to leave something for us to inherit so they’d rather not. How can I convince them? – Devoted Son via email

 

Answer: Hi Devoted Son. You are not alone in this situation. There are different aspects at play here. Let me outline them for you.

 1.    Parents really want to leave something valuable to their children. Somehow our parents always want to be the providers. Maybe it’s part of the parental psyche so even in death they’d still want their children to have something. The truth is, distributing real estate properties among children is trickier because these properties don’t have the same value. However, I’ve always felt that it’s the prerogative of parents what assets they want to leave behind to their children, and the latter should respect the former’s decision. But of course, jealousy may not be eliminated.

 2.    Endowment Effect. Let me guess. Maybe your parents always find the available offer price to their house too low. If that’s the case, they are exhibiting what Behavioral Economists call the Endowment Effect (also known as Divestiture Aversion).  This is the tendency of people to ascribe more value to things merely because they own them.

In an experiment by Kahneman, Thaler and Knetsch, participants were given a mug and then offered the chance to sell it or trade it for an equally valued alternative (pens). They found out that the amount participants required as compensation for the mug once their ownership of the mug had been established was approximately twice as high as the amount they were willing to pay to acquire the mug. (Click link to read the study Anomalies: The Endowment Effect, Loss Aversion and Statusquo Bias)

Another experiment was done by my favorite Dan Ariely, together with Ziv Carmon. One group was asked to state the highest price they would pay for a ticket to the NCAA Final Four basketball tournament (a much-coveted ticket). The other group was told to imagine they had such a ticket and was asked for the lowest price at which they would be willing to sell it. The median selling price was $1,500 vs. the median buying price was $150. (Click link to know more about it http://web.mit.edu/ariely/www/MIT/Press/washpost3.shtml).

 3.    More than the Endowment Effect. Over the last few weeks, I had the chance to encounter senior citizens who expressed their unwillingness to part with their homes, their major asset that could bring in considerable amounts of cash. One inherited an iconic ancestral house, another, a simple house in a far-flung village that she gets to visit only twice a year. They are not willing to part with their respective homes but somehow I tend to see “the rationale for this irrational decision.” You see there is a non-monetary value in the wonderful memories that these senior people attach to their respective homes. One remembers how her father used to play the piano in the living room of that house; one recalls how she and her late husband tried hard to finish construction; both recall the growing up years of their children and many more. Probably, there is also pride attached to being able to keep your home despite the lure of liquidity.

 

What to do

It is not always easy, but I think a family conversation is in order. It’s best when all members are present so that nothing is lost in translation.

  1. Find out what your parents really want at this point in their lives.
  2. Find out if they have resorted to loans in order to meet liquidity needs, so you can take all those amounts into consideration in their decision-making.
  3. Instead of ramming down their throats the rational choice to sell and enjoy the liquidity in their senior years, you may wish to consider the following options:

 a. Sell the less sentimental properties first.

 b. If the proceeds are not enough, consider the option mentioned to me by a billionaire in the know. He said that he knows of old ladies who refuse to leave their extremely valuable homes in high-end subdivisions despite their liquidity problems. They have opted to sell their houses at deep discounts in exchange for the right to live there until “the time” comes. This way they get to enjoy liquidity and still stay in their beloved homes.

 c. If anyone among you and your siblings is capable and willing to provide the above or any similar arrangement, you should openly discuss the terms and conditions so that everything is “above board.” Sometimes there is also this tradition of wanting to keep ownership of family properties within the family, so this option might be more palatable to your parents. This is prevalent in the province when it comes to the disposition of pieces of farmlands inherited from parents and grandparents.

 

When you discuss with your family, make sure that your parents’ interest is on top of the priority list. Make them feel that they have the right to make the decision. Hopefully, no child will exhibit any arrogant feeling of entitlement to an inheritance, especially if all of you have graduated. Remind your parents that they’re done with their parental responsibilities and their decision should be primarily based on what would make them happy and enjoy their remaining years, instead of worrying about inheritance.

Good luck and may this be the start of regular healthy discussions about money in your family. Cheers to high Family FQ!

 

****************************************

ANNOUNCEMENTS

  1. I will speak at Cordlife’s event called Grand Bumps, Babies & Beyond (Mommy & Daddy Ready, an exclusive but free event for pregnant parents) on Saturday June 27, 2015 12noon to 5pm at the SMX Convention Center, SM Aura Premier, Taguig City. You may still register at www.CordLife.ph
  2. Catch my sons Martin and Anton Fausto on the radio show entitled Enjoy & Invest also on Saturday June 27, 2015 from 8-9 pm aired over DZME 1530 AM kHz or livestream: www.ustream.tv/channel/dzme-manila.
  3. I will speak at Avida’s 25th anniversary event Homepossible 2015 on July 11, 2015 at Fairmont Hotel, Makati City. 
  4. Catch me at TV 5's Happy Wife Happy Life on Thursday June 25, 2015 as I discuss the case of a mom who wants to raise her daughters with high FQ while the lola (he own mother) sometimes does things in conflict with how she wants to raise her girls. This will be aired at 10:15 - 11:00 am.

 

Rose Fres Fausto is the author of bestselling books Raising Pinoy Boys and The Retelling of The Richest Man in Babylon. Her new book is the Filipino version of the latter entitled Ang Muling Pagsasalaysay ng Ang Pinakamayamang Tao sa Babilonya. Click this link to read samples of the books. Books of FQ Mom Rose Fres Fausto. She is also the grand prize winner of the first Sinag Financial Literacy Digital Journalism Awards.

 

Photo Attribution:  Images from RetireEasy.com and cliparts.co put together by the author to help deliver the message. Behavioral Economics studies stated are available for free download online.

This article is also published in FQMom.com and PhilStar.com.

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