If you have purchased real estate with a romantic partner or business partner and did not have a co-ownership agreement defining the terms of your joint purchase and you no longer wish to own real estate together, then you may be scrambling to figure out what makes sense in terms of a settlement between the parties and selling real estate, or in other words, you have a real estate breakup to work through. I discussed the topic of how to negotiate a real estate breakup on 1150am KKNW radio and you can listen to that segment here:
The first step, if possible, to avoid any of these complications in a real estate breakup is to create a co-ownership agreement prior to the purchase of the property. That way everything you could possibly think of or scenarios are already defined and everybody is on the same page. Of course, if you are reading this, then you likely did not create a co-ownership agreement and are wondering where to go from here.
The first thing to understand during a real estate breakup is that if you were in a committed intimate relationship when you purchased the property then a court could have the authority to divide the property or force a sale of the property if the parties cannot agree to terms and is likely to determine what is fair and reasonable rather than simply diving property or proceeds 50/50. A court is likely to consider the (1) Continuity of the cohabitation, (2) Duration of the relationship, (3) Purpose of the relationship and (4) Pooling of resources and services for joint projects.
There is no official calculation or steps to follow but when I advise on how to split proceeds from the sale of real estate, however I would follow these steps.
Determine if either party wants to retain the real estate as Part of the Real Estate Breakup.
If one party want to retain the property, then they may have to pay a lump sum to the other party in order to convince that party quit claim their interest in the property over to them. Also, something to think about is whether both parties are on the mortgage account associated with the property as the party who no longer owns the real estate will want to be associate with a mortgage on a property they do not own. If both parties want to sell the property, then the proceeds can be divided based on the calculations below, otherwise one party can pay the other the fair share.
Determine the value of the property.
The best way to come up with a value is to get a formal appraisal. Websites like Zillow or Redfin may not be accurate, and tax assessed values also tend to be inaccurate as well. At a minimum you should get a couple brokers priced opinions and take the average from them.
Calculate each parties’ contributions to the home.
During the course of ownership, it is likely each party may have contributed to the ownership of the property. Parties should review how much each party paid towards the down payment and closing costs to obtain the property and then calculate how much each party paid towards the monthly mortgage and taxes. Additional considerations should include the cost of any repairs. Parties may also decide to include the percentages or amounts contributed to utilities or other household expenses that may have been shared. For example, if one party paid the mortgage and the other food and utilities then the outside expenses should be considered.
As a caveat, if the property was a rental property you may need to figure out rents received and what happened to those funds as part of your calculation as well as maintenance of the property.
Once you have these numbers you can determine a percentage of what you think each party has contributed towards the household which should equal the percentage of sale proceeds or hypothetical sale proceeds, they should receive.
Calculate the Cost of Selling the Real Estate.
This aspect comes into play if one party wants to retain the property. In a hypothetical sale, taxes, recording and escrow fees, real estate broker fees and possible repairs etc. need to be taken into account. This can vary but on average figure 7-10% of the expected proceeds are to be considered selling costs of a home. I typically subtract 50% of this amount from the calculations above as each party would need to pay these expenses in a hypothetical sale of real estate.
Communicate your Offers Clearly and Negotiate.
It is likely that you and your former co-owner are not going to land on the same number right away during a real estate breakup. Offers should be communicated clearly and supported by evidence to support your arguments. Just remember to get what you want you might have to give a little. For example, if you want to retain the property, maybe you pay a little bit more to resolve any issues.
Keep in mind, if you are unable to come to a resolution and no action is taken you could be headed to court where a judge may make these decisions for you. Family or real estate litigation attorneys are not cheap as this process can be time intensive. Therefore, it would be in both parties’ interest to reach a settlement, otherwise legal fees could end up eating away at any possible additional equity you were fighting over, making the entire process moot and nobody wins. Of course, to the contrary there may be enough equity to fight over if one party is not being reasonable so these are decisions you will have to think about.