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Seeking out some financial guidance...

My partner and I recently purchased a home with my sister and brother-in-law. All spaces will be shared with the exception of bedrooms. We will be meeting with the lawyer next week to do up an agreement, but want to wrap my head around what to expect. This is a 5 year plan and then reassess. We are currently trying to figure the most fair way to split the profit. We are putting down $100,000 they will be putting down $500,000 ($400,000 more than us) with a purchase price of $2,175,000. We agreed to split all expenses, carrying costs, mortgage 50/50. We are wondering the most fair way to split profit (e.g. if house price goes up 20% in 5 years) given that we’ve split all costs 50/50 with the exception of the down payment.

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    My partner and I recently purchased... and ...they will be putting down... are at odds. Have you already purchased this property? The best time to sort our these details would have been before doing so.
    – yoozer8
    Mar 25, 2021 at 19:36
  • Welcome new user. If in fact you have already bought the house with this "arrangement", I would truly urge you all to dump the house and forget about it as an unfortunate ill-conceived plan. It will not be possible to "guess numbers" later for capital, costs, implied rental, etc. It will end up as a massive lawsuit. (Unless, rhetorically, every party involved has the attitude "oh it's only a million here or there - no worries!" The horror is that if one does a disastrous deal like this with acquaintances, it ends up as "just" a massive legal battle.With family, it rips family apart.
    – Fattie
    Mar 26, 2021 at 12:19
  • A nightmare is that when all four of you folks are deceased, there will be an insane argument over this amongst the children/grandchildren. Best of luck, but one can't solve a mixup like this I fear :O
    – Fattie
    Mar 26, 2021 at 12:20
  • You know if you do not get an agreement written out, that some states basically allow a free for all on the estate with some very very very goofy laws. For instance I could declare separation from the estate, tell the courts... then the other three would pay my lawyer fees until we decide how much I get (possibly for years). Think of that. Also FYI most states will split this really easy... Everyone gets their money back. Then everyone splits profits losses equally - yes even if down payments are different by 100x.
    – blankip
    Mar 27, 2021 at 2:45

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Fair is obviously in the eye of the beholder and whatever the four of you agree to is, by definition, fair.

Were it me, I'd do something like this

  • Initially, sister and brother-in-law own 500,000/ 2,175,000 = 22.98% of the house
  • Initially, you and your partner own 100,000/ 2,175,000 = 4.60% of the house
  • Initially, the bank owns the remaining 72.41% of the house

When you sell the house or when you want to re-assess

  • Determine the amount of the house the bank still owns (outstanding mortgage amount/ 2,175,000)
  • Whatever ownership percentage the bank has lost is split evenly between the parties. So if the bank's ownership is down to 60%, both couples get an additional 6.2% ownership.
  • Determine the house's current fair market value (FMV) and multiply by each couple's ownership to determine the value of each couple's equity. If the house in the future is worth $3 M and you have 4.6 + 6.2 = 10.8% ownership, your share of the house would be worth $324,000.
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  • Your last point doesn't seem quite right, the bank only ever gets the remainder of the mortgage payed out, not a % of profit, so you would need to use the ratio between % ownerships excluding bank to divide the remainder after the bank has been payed.
    – Jack
    Mar 26, 2021 at 1:14
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    @Jack - Right. Which is why the amount the bank still owns is based on the original mortgage amount not the current FMV.
    – Justin Cave
    Mar 26, 2021 at 4:28
  • Justin, noting that for me: this is insane and everyone should run away ..... but just theoretically if you and me did a deal where you put in 8m and I put in 2m {and then there were some expenses for each, equal and paid equally, so a wash} and ultimately our profit was $X, then. for me obviously, pretty much unmistakably, you'd get 80% of X and I'd get 20% of X. I can't see any other way that could be chopped up. So .. like I say for me, this is insane and everyone should run away.
    – Fattie
    Mar 26, 2021 at 10:53
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    @Fattie - It depends on the amount of the equally paid expenses though, right? If I put in $8M up front and you put in $2M up front and then we each put in $10M more over the course of a decade, you'd surely find it unfair if I took 80% of the profit in the end when you had put in 40% of the total capital (ignoring time value of money).
    – Justin Cave
    Mar 26, 2021 at 11:01
  • I am not sure it is the right thing to say "The bank owns a part of the house". When I buy a house (be it only me or together with others), I am on the deed. The bank holds a lien on the house and expects us to pay the loan. It is up to us how we do that.
    – glglgl
    Mar 26, 2021 at 12:03
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Whether or not the spaces are shared seems to have little to do with your actual question, and I agree with the comment that you mixed past and future tenses.

I don't know why you would wait until after the property has been purchased to start thinking about a profit-sharing agreement.

The only real issue here is the down payment differential, which becomes less significant over time as mortgage payments are made at an equal split. Why is this true? Well, because the total of all payments grows over time, with the down payments making up less and less of the overall total paid (down payments + mortgage and expenses).

I suggest that perhaps you could offer to carry a larger-than-half share of the mortgage until you've made up for at least some of the difference between your down payment and theirs. So for some period of time, you could pay 60% of the expenses, for example. Or, you could offer to pay the property taxes (if they're separate from the mortgage) and insurance for a period of years. You would have to agree upon what's fair in that regard, since making up $400k could take awhile.

Much of this assumes that things remain amicable between you and your sister and brother-in-law, but as is often the case, those bounds are severely tested when it comes to property and money. Hopefully all goes well!

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  • Unfortunately the elephant in the room here is the overwhelming implied rental cost. In para 3, "the total..." also includes the (epically large) implied free rent, and deciding on the value of that (ie: "guessing", which means: "arguing") is the rub.
    – Fattie
    Mar 26, 2021 at 12:23
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    Yup. Can anyone say "train wreck"?
    – RiverNet
    Mar 26, 2021 at 14:29
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The fairest thing would be to

  • form a kind of community (call it as you like), and be it only in the form of a shared account
  • treat the downpayments of each couple as a contribution to that community

Then pay a kind of "rent" 50/50 which covers mortgage payments, utilities and maybe a certain saving amount for repairs etc.

How you treat the downpayment is up to you again:

  • either treat it as a long-term investment and credit it with interest for each couple
  • split the payment in a way that reduces the difference in amount
  • or treat it as a loan and pay it from one couple to the other.

The long term goal should be that every couple has contributed in an equal way.

This assumes each of the couples have their finances combined. If they treat their finances separate from each other, do the same with 4 participants, or virtually form two other communities, representing each couple separately.

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It's completely bizarre that you are putting down different amounts of money.

That would be "insane" and the only thing that can be said about that is:

"don't do it."

There is - simply - no way to price capital.

Further - this shouldn't even need to be mentioned - this entire deal hinges on the overwhelming figure in the spreadsheet: the implied rent benefit.

Everything else is small potatoes.

Have a guess in which direction each party will want to nudge that.

Run don't walk. Forget this idea.

Note that if there was a small difference in capital, the answer would be "RUN".

The fact that there is a multiple difference in capital is just bonkers.

If I misunderstood your description, I apologize.

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    I don't think you misunderstood the description at all, my friend. And you're right - The way they're going about this is not the wisest course of action, especially since (based on the OP) they've already bought the property before having an agreement in place. Whoever came up with the phrase "no honor among thieves" probably should've included "and family members"!
    – RiverNet
    Mar 26, 2021 at 11:45
  • Couldn't agree more, @SRiverNet . It's really unfortunate that someone downvoted ... the setup presented in the question is the road to HELL.
    – Fattie
    Mar 26, 2021 at 12:09
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A. You should not do this. B. You are talking about profit, but no guarantee of that. Could be a big loss.

If you want to do it though, it's actually pretty simple: Each party (couple?) should put down the same amount of money and be equal owners, sharing equally in any (possible) later sales proceeds. Your brother should loan you $200k on the side, so that you can both put down $300k. You'll be paying that loan back separately, and in addition to, the mortgage. Keep in mind that you will still owe your brother that $200k regardless of what happens to the price of the house.

Also, no need to handle this through the actual purchase. You can each just put in the money you have as planned (500k+100k), handling the loan part privately. But WRITE IT DOWN. Interest rate, payment schedule, what happens if you can't pay, etc. You could even set it up as a no-payment loan, with interest accruing monthly and just getting added to the balance, until you sell later. This is very risky though, as you could end up with a loan that exceeds your share of the equity, which would make it very hard for you to sell.

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  • Note that if you do this, the IRS would expect your brother to report the accrued interest as income even if payments are deferred.
    – Justin Cave
    Mar 27, 2021 at 0:30
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Setting aside my opinion on whether or not this is a good idea, I think it's actually very simple.

You keep track of amount paid for mortgage, improvements, and anything that increases the value of the house. If/when you sell, you total the amount you put in for the down payment and the other tracked expenditures, then divide by the total both parties put in.

Example:

You put in $100,000 for down payment. The monthly mortgage payment is $9,000, which you pay $4,500. At some point, you want to renovate the living room. Your sister and brother-in-law agree with the renovation but don't want to spend the money so you pay for the entire job, which is $20,000.

After 4 years, you decide to sell.
You and your wife have now put in 100,000+(4,500x48)+20,000=$336,000
Sister and BIL have now put in 500,000+(4,500x48)=$716,000
Combined, that is $1,052,000

You and your wife should get 31.9% (336000/1052000) of the profit
Sister and BIL should get 68.1% (716000/1052000) of the profit

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