I have found only one source on the entire internet for this. It happens to back up everything I’ve heard from attorneys and real estate people, but I thought I’d throw it out the smartest group of folks I’ve ever had the privilege of having access to.
I live in California, but I think the principles are fairly universal. However neither I or my next door neighbor, a real estate attorney, have been able to find anything in California code to say that is law, I’m wondering if the law is clearer anywhere else.
Where two parties own a piece of property, a primary residence, and the two parties are no longer together, one wishing to buyout the other and the other wishing to be bought out, what is the standard means of calculating this in your experience?
The answer I’ve gotten, and which was written up on a California RE atty’s website is this:
Treat it as though you had actually sold the property to a third party, and split the equity as you would in that instance. Meaning:
Sales price: 500,000 (I live in LA, this is actually less than my house is worth)
Commissions, 4% min 20,000
closing costs 1% 5,000
Subtotal 475,000
Damn, who knew accidentally hitting the space bar at the wrong time would equal sending?
Anyway,
subtotal $75,000
split 50/50, the price party A pays to Party B: $37,500.
Yes? No? How did YOU do it? What are the arguments for and against doing it this way or any other way?
Furthermore, let’s say that Party A stopped making any kind of payments on the mortgage debt or property taxes a year earlier. Let’s say it amounted to $15,000. Would you deduct it from the buyout amount? Deduct part?
Please share any and all your thoughts, experiences and knowledge in this matter, I am eager to hear it.
That description fits what I’ve been told re. dissolution of societies - but I’m in Spain, so the whole legal system is different. I think this is simply an issue that’s not adversarial enough to have a lot of attached legislation anywhere (in those cases where people are throwing stuff, it’s either a business society going bust or a divorce, which do get legislation).
Why would there be any commissions involved? You’re not listing the property with an agent. It’s just a transaction between two individuals. There may be fees for drawing up the paperwork, etc. at the title company, but that would be part of the closing costs.
IMO, assuming that the person retaining the house will be refinancing, the mortgage company will take care of all the paperwork, and has dealt with this kind of thing on many occasions in the past.
I’m not al all familar with CA tax law, but you really need to talk your accountant before divinding the equity. There may be certain ways to handle the trasaction equity disbursement that are more tax advantaged than others.
Thanks for the help. I’m still surprised at how difficult it is to get this information! My next door neighbor is an RE attorney and she couldn’t answer.
If he were to force a sale, it would cost a certain amount off the top. He doesn’t get to avoid that by having me buy him out, because it exposes me to getting royally screwed. If I refinance for too much money so he can avoid costs, then 6 months down the line I am forced to sell because I can’t cover this big mortgage, I will have to eat those costs. Not fair.
So… you’re effectively having him pre-pay (as a cost of the transaction) a prospective sales commission if you’re forced to sell. If you’re hanging onto the property, how are you guys arriving at an agreement as to the current value of the property in excess of the mortgage? Have you had the property professionally appraised? Re this issue be aware that many economists are projecting a value/pricing shrink of around 3%-7% (possibly more) in housing prices across the nation in the next several months going into 2007.
If you’re concerned about getting screwed upon a forced sale in the near future it’s quite possible that a prospective sales commission won’t be the only thing impacting the equity of your property if it drops 5% - 10% over the next year or so. You have best be pretty conservative re any appraisal values you are attaching to the property re this buy out. It’s quite possible your property will decrease in value over the next year or so.
If you are worried about not being able to afford the payments on the house after you buy him out, it might not be a bad idea to sell the house and that way, the two of you split everything and you can find something that won’t be prohibitively expensive.
First we determined the value of the house. This is easy. You get a licensed real estate appraisor who is hired jointly to avoid any appearence of partiality.
We then subtracted what was owed on the mortgage from that value and split it in two. I was the one who kept the house and it never occurred to me to subtract any potential real estate fees that may or may not happen if I were to sell the home. My understanding is that my method was standard but maybe that’s not the case. In a divorce, if you can’t come to an agreement on who gets the house or how the buy out will happen, the Court will force you to sell. I know that this isn’t a divorce but the rule might be similar.
Advantages to keeping the house: You don’t have to move. In CA you get to keep your Prop. 13 basis (for those of you who are out of state, this usually results in significantly lower yearly property taxes.)
Disadvantages to keeping the house: If you were to sell in a situation where you had to pay capitol gains tax, you have to pay on the entire amount, even the part that you gave to your ex. (However, it is unlikely that you will find yourself in this situation.)
No, I’m having him pay the costs he would pay in a sale.
Let’s say our equity after all the debts against the house are covered is a total of $100K.
Sell house. Commissions come off the top, effectively reducing our combined equity to $60k. He gets 30K and I get $30K.
So, rather that go through all that, I tell the judge/mediator,whomever: “Well, since we are going to end up with 30K each, I offer to pay him $30k myself right now, to avoid having to be put out of my house.”
I guarantee you the judge/mediator would look at him and say “Why are you wasting my time, sir? She’s offering you what you’d make in a sale. Why should I force her to sell, so you can be a vindictive bastard?”
See, I just can’t find anyone who has been able to refute this logic, which is why, I’m beginnning to suspect, this is not codified: the logic is self-evident.
I simply don’t agree with you, stoid, because you’re probably not going to sell the house you can’t charge him for something that might happen.
He can rightly say to the mediator, If I take my money and buy another house of the same value, my property taxes will be X times what hers will be. I want her to split the difference with me every year. Additionally, one day he may be selling the new house and will have to pay fees then. Should you pay half of those?
I did a little research last night and, as you suspected, there doesn’t appear to be a hard and fast rule. It’s whatever you negotiate. A negotiator isn’t going to tell anyone what to do. They will present options and one of those is that if you can’t come to an agreement, you’re going to have to sell.
If I were you, I would at least try to meet him halfway between the two points of view to see if you can get him to budge. If he wants to be vindictive and stubborn, he can force a sale and there’s not a thing you can do about it.
What I want to know is, what real estate agent are you using that takes a 40% commission?
Also, the other party deserves some consideration int he fact that he’s NOT forcing the sale. By paying him only what you’d get after a commission, you’re effectively keeping the commision equity for yourself, in this case, $40K. So you’re getting 70K and he’s getting 30K. I’d object to that as well, and I think if he other party noted that disparity, it would be a fairly convincing argument for my side.
If this is a no-fault type of settlement, there is no reason for one of you to walk out of it with a better deal on the assets that were derived as part of the relationship.
Commission are based on a percentage of sales price, not equity. No one is charging a 40% commission here. Your conclusion that a 40% commission is beaing charged is apparentlly based on a misunderstanding.
Not really, he can only try to get the judge to force a sale based on the idea that my offer is less than he would get in a sale.
And I don’t think it’s at all reasonable or fair to make any judgments based on anyone’s future. He wants to sell the house to get out his equity, period. Whether he buys in teh future or I stay here forever is completely beside the point for a bunch of reasons, not the least being that we can’t make decisions today based on an unknown future. But apart from that, if he forced a sale he’d be in the same boat tax wise…by what logic are you determining that I should suffer because of his decisions (looking at the tax situation)?
And if we are going to use that as the reasoning? Well, then it doesn’t apply. He has no intention whatsoever, nor even the ability, to buy another piece of property. The money will go to pay the debt he’s already created and if there’s any left he will live on it until its gone or MAYBE use it to fund a business. Not my guess, his reality. So his tax base is a fantasy that shouldn’t affect me.
I don’t think that you’re being logical here at all. If we can’t make judgments based on anyone’s future (and I agree with this) then we can’t give you the closing costs for a sale that you may or may not make.
Anyway, the reason for the bump is that I spoke to my good friend about this. He was a divorce lawyer for years and also did divorce mediation. He practiced in IL and MO but the laws are similar enough that this shouldn’t make a difference.
He told me that while there isn’t an official rule and that the parties can come to any agreement that they want, he has never heard of anyone taking sales commissions or closing costs into account when one party is buying the other one out of a home. He also said that if the two parties can’t come to an agreement, the judge will almost always force a sale.
Finally, he explained that there are two types of mediation. The first is non-binding where the mediator comes up with a deal but either or both sides can reject it. There is also binding mediation where both parties agree in advance that they will adhere to whatever the mediator says.