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Old 07-23-2015, 04:47 AM
 
488 posts, read 815,763 times
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Say my sister and I own a house together. Both of us want to sell, but my sister is in a bit of a hurry and is willing to accept a slightly below market price, while I'd like to wait for a good price, which could take some time, maybe even a couple of years.

To estimate a fair buyout price, I reviewed comp sales to estimate market value. From this I deducted hypothetical realtor commissions and other selling/closing costs as if a sale to a third party were to occur (even though it won't be, since I'd be buying my sister's interest and will sell the property later on). I then evened up the cost of any capital improvements we paid for individually and applied sister's ownership % to the net proceeds.

My sister disagrees with the deduction of selling costs since the house won't actually be sold when I buy her out. Even though I intend to sell it eventually, there's a possibility I won't. My view is that deducting selling costs is the most equitable, since we both bear the costs proportionately. Is there a clear right and wrong way to handle this, or does it just depend on one's point of view and should therefore be negotiated? Thanks in advance.
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Old 07-23-2015, 05:30 AM
 
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There's no "clear right and wrong way" about this in the absence of a prior buy-out agreement which specified the terms of a buy-out, effectively having negotiated all of these costs.

IMO, a "fair" immediate settlement would be 50% of present-day FMV, adjusted for your individual capital improvements and not including a hypothetical real estate sales commission since none is incurred in your buy-out (you both get the benefit of not having spent that money to complete the sale). Of course, she gets to pay her share of this year's property taxes and insurance to the date of sale.


There's no "equitable" way to have the asset and sell it, too, since it's all speculation on both of your parts. Such is the stuff of partnership disputes as to time value of money and use of assets. You get to accept that she's not responsible for potential future costs but she doesn't get to participate in possible future profits in the risk you're taking on. She pays for that by accepting a lower present day valuation of the asset for your buy-out.

Last edited by sunsprit; 07-23-2015 at 05:47 AM..
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Old 07-23-2015, 07:02 AM
 
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Does it make a difference if your sister's half is based on half her below market price you say she'll accept? Or are you basing the split on your good price you hope for?
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Old 07-23-2015, 07:04 AM
 
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The solution most people come to in instances like this is to split the costs. You deduct 3% from your proposed buyout price rather than 6%. That way both parties feel some pain, but also gain some benefit, relative to what might have been.
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Old 07-23-2015, 08:57 AM
 
Location: Riverside Ca
22,146 posts, read 33,215,981 times
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Quote:
Originally Posted by mark85 View Post
Say my sister and I own a house together. Both of us want to sell, but my sister is in a bit of a hurry and is willing to accept a slightly below market price, while I'd like to wait for a good price, which could take some time, maybe even a couple of years.

To estimate a fair buyout price, I reviewed comp sales to estimate market value. From this I deducted hypothetical realtor commissions and other selling/closing costs as if a sale to a third party were to occur (even though it won't be, since I'd be buying my sister's interest and will sell the property later on). I then evened up the cost of any capital improvements we paid for individually and applied sister's ownership % to the net proceeds.

My sister disagrees with the deduction of selling costs since the house won't actually be sold when I buy her out. Even though I intend to sell it eventually, there's a possibility I won't. My view is that deducting selling costs is the most equitable, since we both bear the costs proportionately. Is there a clear right and wrong way to handle this, or does it just depend on one's point of view and should therefore be negotiated? Thanks in advance.

Technically you can only deduct 1/2 the costs but that was if you went through a actual outside sale. 1/2 you pay 1/2 she pays . When I had partenerships and wanted out we simply figured out comps/value and we split it in whatever ratio of ownership. In some cases the contract stipulated some percent of future gains as additional payout. The rest of the parteners ponied up that total amount to buy me out. That's what we walked away with. There is no commission/fees because it's a internal sale.

Your sister is right. There are no costs to bear at time of transfer because your transaction does not include any outside costs like closing or commissions etc. so there is nothing to deduct. You're attempting to make her take the hit for a fee/service that isn't there but it will be incurred by YOU at a future date when/if you sell.
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Old 07-23-2015, 10:18 AM
 
7,672 posts, read 12,723,309 times
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Are you going to pay her more when you sell the house for that better price in the future? If not, then I wouldn't charge the selling/realtor fees. You aren't using one to sell to your sister now. I would minus out half of repairs, half of the up to date of buyout the taxes/insurance. Then 50% of that proceeds go to your sister. Don't be greedy.
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Old 07-23-2015, 10:28 AM
 
Location: Austin, TX
1,825 posts, read 2,810,386 times
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+1 on if you're not selling in the immediate future, and you don't intend to include any appreciation in her share, then you also shouldn't include selling costs in her share. Path of least resistance is to only charge or collect monies actually realized; next least are monies you fully intend to realize in the near future; beyond that, you can't really promise anything, so don't.
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Old 07-23-2015, 03:43 PM
 
488 posts, read 815,763 times
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Thanks for the great input, everyone.

I forgot to mention that the house is currently listed. We are actively trying to sell it and so far have only received low offers. My sister would be okay with accepting one of these offers, but I think we should hold out for a better one, which I'm hoping we'll get by the end of the summer, if not by the end of the year. This is the reason I feel it's fair to deduct selling costs - I'm not planning to keep it long term and it could be just a few weeks or months after buying out my sister and actual sale of the house. However, there's always a chance a better offer might not come in, in which case I'd be fine with renting it out and waiting. I agree, if the house wasn't listed and I had no immediate plan to sell it, it wouldn't be fair to deduct selling costs from the buyout price.

I'm thinking that a good solution would be to see if my sister can wait two more months to see if we can get a better price. If not, then at that time I could buy her out at the highest offer received, deducting half of the selling costs (3% rather than 6%). I just want to come to an arrangement that is fair to everyone. Does this seem fair to you guys?

By the way, many real estate pros and lawyers seem to feel that selling costs should be deducted when buying out a co-owner even if the purchaser doesn't intend to sell the property to a third party.

From Equity Sharing 101:

"Why subtract "costs of sale" in a buyout?

The calculation of Cotenant Equity should always include the subtraction of the approximate seller closing costs even though these costs will not actually be paid in a buyout. This procedure prevents the purchasing owner from paying more in a buyout than the selling owner would receive in a market sale.
"

Last edited by mark85; 07-23-2015 at 04:00 PM..
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