0

In CA, how is it approached when 2 parties enter a loan to purchase a home then either want to sell and split ways or sell and move together.

The issue: Party A brought 35% equity into the new loan, Party B is shopping but is not sure they want to go into the new home with party A or not. In conversation, party B feels the equity should be split 50/50. Party A feels the original 35% should be returned, then any equity there after accumulated in the time they were on the loan together can be split 50/50. If it was not in writing, what needs to be done to protect party A's investment. Just for clarification, both parties live on the property and expenses are split fairly evenly including mortgage.

  • 1
    This question seems to be better suited to Law.se as it appears to concern contract law more than personal finance. – GOATNine Feb 7 at 21:59
  • 1
    Yet another example of why mixing money and family is a terrible idea. That said, IMO money out ∝ money in. Figure out how much each of you contributed and split the proceeds proportionately to that. I probably wouldn't bother factoring the time value in, but a stickler might care enough to. – Kevin Feb 7 at 22:34
  • Are you saying that A paid 35% of the original down payment and B paid 65% of the original down payment? Or that A made a down payment worth 35% of the price of the home and B made no down payment? – Justin Cave Feb 7 at 22:39
  • Justin Cave - Party A put 35% of the home value as down, Party B brought good credit and zero $. – Concerned in California Feb 7 at 22:45
  • Would you have been able to buy the house/get the mortgage without B's good credit? If the answer's no, then B did contribute something substantial. The question is how much was that good credit worth? – mkennedy Feb 8 at 19:12
3

If you want the answer of what the law would do if the two parties don't come to an agreement, you'd want to talk with a lawyer. In the future, you'd really want to spell this out in writing before the transaction. For what would seem financially fair, though, you'd want to A to get all of the appreciation from his original equity and to split the remainder.

Let's say that the house was worth $100,000. A put down $35,000. B put down nothing. The original mortgage was $65,000. Some time later, the house is worth $200,000 and the balance on the mortgage is $30,000.

The house value doubled so A's original 35% is now worth $70,000. Together, A and B have $170,000 in equity (200,000 - 30,000). A gets $70,000 to account for his 35% original equity leaving $100,000.
The remaining $100,000 is split between A & B $50,000 each. So in total, A gets $120,000 and B gets $50,000

You could get the same answer by saying on day 1, A owned 35% of the house, B owned 0%, and the bank owned 65%. When they sold, A and B owned 170,000/200,000 = 85% of the house and the bank owned 15%. Since they were making equal payments, the additional 50% gets split evenly. A owns 35 + 25 = 60% of the house, B owns 25% of the house, and the bank owns the remaining 15%. So when the house sells for $200,000, A gets $120,000, B gets $50,000, and the bank gets their $30,000.

1

As Justin Cave notes, that is the mathematically accurate way (short of totaling up every transaction to determine the true ratio) to determine each persons share. However, practically speaking, it may be tough to actually get Party B to agree to it without legal persuasion. (This is why you should only get into partnerships with a formal written agreement covering the 5 D's; Death, Disability, Divorce, Departure and Disagreement.) But since the Parties are past this point, options are as follows:

1: Party A convince party B to agree to Justin Cave's math. (Which based on the issue in the question, is not likely.)

2: Go back through every transaction to determine the exact amounts of each parties contribution (including the original down payment) and split out the profit based on that ratio. (Time consuming, but would likely result in a similar amount as option one.)

3: Party A accepts a smaller amount (such as the original investment, or somewhere in between the current value of the initial investment and the amount of the original investment) off the top, then splits the remainder 50/50.

4: Party A gives up and splits it 50/50.

5: Party A does their homework to estimate how much it'll cost to take Party B to court to see if that will cost more than what they should have gained on their investment. (Party A would have to talk to a lawyer to consider this option. I am not a lawyer and this is not legal advice.) If Party A thinks they can get more (net of lawyer fees and court costs), than they could get from trying to negotiate with Party B, then that would be up to A to pursue. (This option, I think, would be more hassle than it's worth, but we don't have the actual numbers to play with.)

Party A really needs to weigh their options and think about the consequences to the relationship between the parties in addition to their personal financial situation and goals. Options 1 and 2 are the best for Party A. Option 4 is best for Party B, but B would also come out ahead on option 3. While options 1 or 2 would be better, option 3 could potentially be a middle ground to just move forward. Good luck in resolving this. In the future, consider one person or family buying and the other renting (maybe even at a discounted rate) so there is no partnership and no question of ownership.

Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Not the answer you're looking for? Browse other questions tagged or ask your own question.