how to fairly pay joint owner to assume full ownership

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What is the name of your state (only U.S. law)? Oregon
Hi Folks,
Myself and a family member own a condo, 50% each, split down the middle in every way. We're both on the title and both on the loan. The family member wants out of it, and I'm considering buying them out rather than losing it by selling it on the market to a 3rd party. We're trying to settle on what amount I should pay my family member to make them whole on the sale, and so that it's fair for both of us. One appraisal sets the value at $315k, and we're waiting on the results of a second appraisal. For round numbers, let's say we owe $154k on the current loan, which we both share equal responsibility for. If we sell to a third party, it's easy - we simply split the proceeds 50% each. But if I want to keep it and assume 100% ownership, we realize the other family member would have to quit claim off the deed, and then we're working the plan that I would refinance the loan in my name. But we're not clear on what the fair amount would be for me to pay the family member in this situation. Any advice on this? Also, do you know of any authoritative documentation on how this should be done?

thanks in advance

 

[FlyingRon]

The "fair amount" is whatever you two agree to have. One way to do that would be to compute what the proceeds would have been if you had sold it to a third person and pay him that share, along with the requirement for you to refinance it in your name alone, as consideration for him giving up his interest in the property. He would be a fool to sign ANY sort of deed unless it is concurrnet with your refinance (or otherwise disposing of the existing loan he is subject to).

 

[LdiJ]

What is the name of your state (only U.S. law)? Oregon
Hi Folks,
Myself and a family member own a condo, 50% each, split down the middle in every way. We're both on the title and both on the loan. The family member wants out of it, and I'm considering buying them out rather than losing it by selling it on the market to a 3rd party. We're trying to settle on what amount I should pay my family member to make them whole on the sale, and so that it's fair for both of us. One appraisal sets the value at $315k, and we're waiting on the results of a second appraisal. For round numbers, let's say we owe $154k on the current loan, which we both share equal responsibility for. If we sell to a third party, it's easy - we simply split the proceeds 50% each. But if I want to keep it and assume 100% ownership, we realize the other family member would have to quit claim off the deed, and then we're working the plan that I would refinance the loan in my name. But we're not clear on what the fair amount would be for me to pay the family member in this situation. Any advice on this? Also, do you know of any authoritative documentation on how this should be done?

thanks in advance

The fair amount to pay your family member would be 1/2 of the current equity. So, you would need to refinance for enough to cover the current mortgage balance plus 1/2 of the equity unless you would have other funds to draw on to pay out 1/2 of the equity.

 

[justalayman]

There is no fair anything here. Fair has nothing to do with the matter. It is whatever the parties can agree to. If they can't agree then somebody can sue to partition the property where all can bid on the property at the auction and if neither owner wins, the money realized from the sale will be split as their ownership interest demands.

 

[FlyingRon]

The fair amount to pay your family member would be 1/2 of the current equity. So, you would need to refinance for enough to cover the current mortgage balance plus 1/2 of the equity unless you would have other funds to draw on to pay out 1/2 of the equity.

He might negotiate a little less as if they had sold it outright, there'd be costs of the sale (real estate broker commissions, etc...) that would have been due. Perhaps somewhere in the middle.

 

[LdiJ]

He might negotiate a little less as if they had sold it outright, there'd be costs of the sale (real estate broker commissions, etc...) that would have been due. Perhaps somewhere in the middle.

I agree with you but over the years I have had so many people disagree with including expenses that didn't actually happen (like broker commissions) that I stopped mentioning them.

 

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trying to be fair is important

You folks have quickly come to exactly where myself and the family member are in trying to calculate what is fair. One suggestion already has been to do exactly this: "to compute what the proceeds would have been if you had sold it to a third person and pay him that share". So that would be taking the appraisal value (currently $315k, pending second appraisal, and we could take the average), subtract 6% realtor fees ($18,900) and escrow fees ($1,542.50 - not exactly sure how a realtor got this number), subtract the balance of the current loan ($154k), and that leaves you with $140,557.50. Divide in half and that would mean I pay the family member $70,278.75. The family member objects to this and has suggested taking only sale price ($315k), subtract current loan value ($154k), to get $161k, divide in half and I would pay the family member $80,500. A difference of $10k is not trivial! My view is that whether we sell to a third party or I buy it myself, the family member should walk away with the same amount either way. Any less would not be fair to the family member, any more would not be fair to me. Any further advise on how to arrive at what's fair to both of us?

 

[LdiJ]

You folks have quickly come to exactly where myself and the family member are in trying to calculate what is fair. One suggestion already has been to do exactly this: "to compute what the proceeds would have been if you had sold it to a third person and pay him that share". So that would be taking the appraisal value (currently $315k, pending second appraisal, and we could take the average), subtract 6% realtor fees ($18,900) and escrow fees ($1,542.50 - not exactly sure how a realtor got this number), subtract the balance of the current loan ($154k), and that leaves you with $140,557.50. Divide in half and that would mean I pay the family member $70,278.75. The family member objects to this and has suggested taking only sale price ($315k), subtract current loan value ($154k), to get $161k, divide in half and I would pay the family member $80,500. A difference of $10k is not trivial! My view is that whether we sell to a third party or I buy it myself, the family member should walk away with the same amount either way. Any less would not be fair to the family member, any more would not be fair to me. Any further advise on how to arrive at what's fair to both of us?

As I said, I would tend to side with you, but there are others that would adamantly side with your family member. What about splitting the difference?

 

[justalayman]

You folks have quickly come to exactly where myself and the family member are in trying to calculate what is fair. One suggestion already has been to do exactly this: "to compute what the proceeds would have been if you had sold it to a third person and pay him that share". So that would be taking the appraisal value (currently $315k, pending second appraisal, and we could take the average), subtract 6% realtor fees ($18,900) and escrow fees ($1,542.50 - not exactly sure how a realtor got this number), subtract the balance of the current loan ($154k), and that leaves you with $140,557.50. Divide in half and that would mean I pay the family member $70,278.75. The family member objects to this and has suggested taking only sale price ($315k), subtract current loan value ($154k), to get $161k, divide in half and I would pay the family member $80,500. A difference of $10k is not trivial! My view is that whether we sell to a third party or I buy it myself, the family member should walk away with the same amount either way. Any less would not be fair to the family member, any more would not be fair to me. Any further advise on how to arrive at what's fair to both of us?

As I said; fair has nothing to do with this. An number acceptable to both of you is the only thing that is important.

If he wants out badly enough he will lower his demand. If you want the entire thing badly enough you will raise your price. If neither moves, it will stay where it is unless somebody sues to partition the property.


But to counter ldij's position;

Those are not realized costs so why should your brother take the hit? You actuslly will benefit by including those unrealized costs in the calculation. Your brother is effectively giving you $9450 if you use your numbers. As you said yourself, not a trivial amount.

 

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looking for a standard practice

Appreciate the thoughts. It seems like this would be common enough that I wish there was an accepted standard published for how to do this to give people in our situation something to work from. I haven't found anything yet, but doesn't mean it doesn't exist.

 

[page1]

As I said; fair has nothing to do with this. An number acceptable to both of you is the only thing that is important.

If he wants out badly enough he will lower his demand. If you want the entire thing badly enough you will raise your price. If neither moves, it will stay where it is unless somebody sues to partition the property.


But to counter ldij's position;

Those are not realized costs so why should your brother take the hit? You actuslly will benefit by including those unrealized costs in the calculation. Your brother is effectively giving you $9450 if you use your numbers. As you said yourself, not a trivial amount.

justalayman,
curious if you think it would be right for the co-owner to walk away with more money from me buying him out than he would get if we sold the condo to a third party?

 

[not2cleverRed]

You *do* realize that sometimes properties go for more than they were appraised for... and sometimes less?

 

[page1]

You *do* realize that sometimes properties go for more than they were appraised for... and sometimes less?

yep, understood. both co-owners seem to have fairly good agreement in this case on accepting the appraised value as the hypothetical sale price - or are very close. the bigger question is how to determine the fair and reasonable buy out amount.

 

[justalayman]

justalayman,
curious if you think it would be right for the co-owner to walk away with more money from me buying him out than he would get if we sold the condo to a third party?

Yes, absolutely because you do not have those costs yet you are wanting to charge them against him.

If you really want to be fair you take the value and subtract the mortgage and the actual costs of the sale and split that in half. Your costs are not a lot.

 

[LdiJ]

Yes, absolutely because you do not have those costs yet you are wanting to charge them against him.

If you really want to be fair you take the value and subtract the mortgage and the actual costs of the sale and split that in half. Your costs are not a lot.

Part of the argument for the other point of view, is that the seller is taking cash out of the home without incurring any broker's fees or true selling costs...whereas later on down the road if the buyer wants to take cash out by selling they will incur brokerage/selling costs...and double or more of what would be incurred now if they sell.

I totally ride the fence on this one. I tend to lean in favor of 1/2 of the equity after selling costs, but I can see the other point of view.

I have also known people to just give up on buying out the other party and simply going ahead with selling it now and splitting the proceeds.