Home Buying in Rocky Point>Question Details

Barbara Sand…, Home Seller in 18324

My sons want to purchase a house together. If one eventually has to move out, how does a buyout work?

Asked by Barbara Sandberg, 18324 Wed Jul 9, 2008

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This will probably cause problems in the future. Too many variables. Sounds like a bad situation in the making.
0 votes Thank Flag Link Wed Jul 9, 2008
A buyout works any way the two parties agree on. But what's important is that the buyout agreement must be written prior to the purchase. Don't try to negotiate it when one decides to move out.

Back in the 1980s, equity sharing was popular, and there were many "flavors" of buyout agreements. Today, there's a variation of land trusts that approach the same subject. And lease-options can be structured the same way.

Going into it, there should be a specification about who is putting up the money for the downpayment and who will be responsible for monthly payments. It can be split down the middle, or structured so that one puts up the cash for the downpayment and the other pays most of the mortgage. There are many possibilities. Along with this, the ownership percentages should be determined. Maybe each owns 50%. But if one put up more of the downpayment, or if one is paying more of the mortgage, the ownership percentages might be unequal--for instance, 60%/40%, or 70%/30%.

To oversimplify somewhat, usually there's a specified mechanism for determining the property's fair market value. It might be a Realtor's CMA...or CMAs from two Realtors, one selected by each party. Or it could be a formal appraisal. (Actually, in some cases it doesn't even have to be fair market value. It can just be a number agreed to in advance. But it generally seems more fair to both parties if you go with a fair market value.)

So, the first step is defining how the value of the property will be established. You've already defined the ownership percentages. So the second step is defining the buyout process. Is the buyer required to refinance? To pay cash? Or will the seller "finance" the buyer. If so, over what period of time? At what interest rate?

And if one party wants to sell, but the other doesn't want to buy, what happens then? Can the seller sell his portion to someone else?

A lawyer familiar with equity sharing arrangements should be able to help. Or, if you go the landtrust route, a lawyer familiar with land trusts can structure the deal so it works for everyone.

Hope that helps.
0 votes Thank Flag Link Wed Jul 9, 2008
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
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There is nothing written in granite or cement saying this situation will eventually be a disaster or a calamity, it may work out very well. However I would strongly suggest you get solid legal advice on this matter and get everything in writing before purchase. States take real estate ownership laws, regs...etc. very seriously. There are all sorts of complex angles and eventualities to consider on this. Its always best to get very solid legal advice on this type of joint ownership. In short, buyouts work in anyway
the partners (and possibly courts) want it to in terms of the specific agreement and contract involved.
0 votes Thank Flag Link Wed Jul 9, 2008
Saying that buying real estate is like being married (as Cameron mentioned) is a good analogy.When it comes time to divide the property it can't be done overnite.If there is a falling out (divorce) it will take legal action know as a suit for partition in order to settle the sale should the parties not agree..I won't be quite as negative and say don't do it but please treat it like a business deal and have a contract drafted that covers the situation ahead of time.Partnering can make any venture more feasible but there are bumps in the road that should be consideredbefore hand.Good legal and accounting advice is needed.
0 votes Thank Flag Link Wed Jul 9, 2008
Barbara,

If you have any influence to stop such an arrangement I would strongly encourage you to. It would be much better for one to buy the house and the other to rent from his brother. If you buy a house with someone, you are married to that person come rain or shine until the house sells. If one wants to buy the other out they would need to come up with the cash to pay for their half. They will still be on the mortgage together however. What if one of them meets someone and wants to get married? What if one gets a jpb transfer? What if they have a fight and can't stand to live with one another? Real estate isn't liquid enough to just up and decide to sell.

Here is a thread of why the situation they are proposing is a bad idea.

http://www.trulia.com/voices/Home_Buying/My_now_ex_fiancee_a…

Cameron Piper
Web Reference: http://www.campiper.com
0 votes Thank Flag Link Wed Jul 9, 2008
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