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I have 2 siblings for a total of 3 of us. My father lived in a home worth $300,000. However, we inherited 2 million split 3 ways. My brother wants the property, and buy us out. When thinking it over and researching, I mostly see people dividing it three ways and then paying out the siblings... so in this case he would pay out $200,000 total, 100k to each sibling. But he will own the home (which holds his 100k portion)

So my math brain kicks in and so I’m thinking if it’s split 3 ways... he theoretically gets 100k of his share from the property (yes, it’s still IN the property) and after buying us out he will be theoretically negative 100k. (100k-200k= -100k) But say he immediately sells the house for 300k. He would then be up 200k (-100k + 300k = 200k) which would essentially doubling his portion of the property.

Is that how it could work? Or is my thinking about it way off?

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  • 1
    You forgot that he also doubled your portion of the property by giving you 100k. You also have 200k of the property.
    – DonQuiKong
    Mar 26 at 6:38
  • 29
    his 100k is already IN the house, so you can't include it in the initial calculation, and then also get it back when you sell. If you look at the CASH he has, it's 0-200k = -200, sell house, -200+300 = 100k
    – stanri
    Mar 26 at 8:24
  • 28
    why does your title ask should you, but the rest if the question is about the math if they buy you out? Mar 26 at 10:16
  • 2
    Also, for people in the UK: there is stamp duty when selling property, so rather than inheriting equally then one party buy the other out, it is better to agree to a variation of the will (can be done if all who inherit agree) that one party inherits all of the property and less of the cash. Mar 26 at 13:47
  • 8
    The key thing to realize about buying and selling assets like property is that you're just converting cash to something else that has the same value. When you buy a house for $300k, your net worth doesn't decrease - that $300k doesn't disappear, you're just trading $300k worth of cash for $300k worth of house. In theory, you should be able to trade the house for $300k cash if you wanted, although that gets into issues of liquidity rather than value. Mar 26 at 13:56
72

You’re thinking about it wrong. To make the maths easier, assume the estate has just $600K in cash and the $300K property. If you each inherit equally, you each end up with $200K and a third of the property. If one sibling buys out the others, then he ends up with the $300K property and no cash, and the others each have $300K in cash. So you all end up with something worth $300K.

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    Let's note that a house that appraises for 300k is not equal to $300k in cold cash. First given its an estate there is probably a multitude of maintenance needed on the house to make it sellable. Let's say 10k - that is being super nice (not getting into holy cows). Then you are looking at 15k in agent fees. Plus time on the market. So being really really really nice and optimistic if you and siblings think that the house is worth 300k it is worth 270k in cash. That's being ultra nice. So if sibling gives you 100k that is a good deal for you!
    – blankip
    Mar 26 at 16:58
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    ...cont... I have seen many families tie in the estate house and decide for someone to keep it. It can be done without causing a ruckus. First 90% of market value in cash is very very fair. You can always add in a rider and I have seen them... "if sale of home in less than 3 years is over $350k then anything in addition to $350k will be split 50% home owner 50% other siblings." This only doesn't work if they want to do major updates to house and you could even adjust for that. Never though have more than one person on a title which is a mess as different states handle this poorly.
    – blankip
    Mar 26 at 19:06
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    @blankip: that is correct but not germane. OP is asking about a 100k error in the accounting that does not involve the costs of sale. Mar 27 at 3:19
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    @blankip - all that may be relevant in the real world, but certainly not at all to this question. If it was, OP would have included such sums. That side of the deal is fairly and squarely down to the sibling who wants the house - for whatever (Undisclosed) reason. Can't see why so many agreed with the comment.
    – Tim
    Mar 27 at 8:47
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    @Darren I don’t think he’s assuming it’s a country estate, I think he’s assuming that the owner was probably old and frail before dying which means there’s a backlog of maintenance issues.
    – Mike Scott
    Mar 28 at 9:55
27

Imagine if there was no money in the inheritance, just the house. However your brother has his own $200k account with money he saved from his day job. He starts with $200k, inherits $100k worth of house, total $300k. He pays you and your third sibling $100k each, now he owns an entire house worth $300k but his bank account is $0, total is still $300k. He sells he house and now he has $0 worth of house but $300k in his bank account, total is still $300k.

Your scenario is the same except that the bank account was funded with the inheritance instead of his day job.

15

This is very simple. The 3 of you need to split a $2M estate (or whatever the TOTAL value of everything is). So that's about $670k each. If one of you wants the house, then they can take the house worth $300k, plus another $370k on top of that. The other two just get $670k in cash. And that's it.

Just divide up the total value (including all property and cash) and divide by three. Then each of you can take whatever you all agree on, as long as it adds up to the total value divided by three.

8

You start with $2 million total inheritance. That means $1.7 million in cash, and $300k in the house. I think this is the part that you're missing - the house is part of the total inheritance, not anything on its own.

You each get $567k in cash, plus a third share in the house.

Then your brother buys you and your other sibling out. That's $100k for you, and $100k for your other sibling.

Your brother now has $367k in cash, plus a house worth $300k. You and your other sibling now have $667k in cash. Everyone's square, and no-one's lost out.

Of course if your brother has done a side deal with a property developer and immediately sells it for $500k, then he'd be a weasel. Clearly the house would have been worth more than $300k at the time it was valued, which legally would give you a potential claim against both your brother and the agency which valued the property. (Although realistically the only people who'd win there are the lawyers. You don't need the extra cash, and you'd be better cutting your losses and cutting a toxic person.)

But if he lives in it for a while and then sells it for $500k a few years down the road, that was his choice for how to invest the inheritance, and either of the rest of your could have done the same with a different property with your chunk of cash. (See the Parable of the Talents, for example.) Equally the roof could fall in tomorrow and he has to spend $50k fixing it up, and that's on his dime too.

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  • 1
    Indeed, just get two appraisals from local agents and use that as the basis.
    – Jon Custer
    Mar 26 at 14:30
  • @JonCuster Isn't the norm to get 3 and take the middle one?
    – stannius
    Mar 26 at 23:22
  • @stannius - bugging 3 agents might be a bit much. Depends how far apart the two are. Usually they are pretty close.
    – Jon Custer
    Mar 27 at 0:04
  • @JonCuster I think the way around the whole "bugging several agents" issue would just to be up front: You're not looking to sell the house, you just need a value to settle a will. Then instead of trying to get a free work by leading the agents on with the prospect of a commission from selling it you just pay them $nnn for the appraisal on a fee for service basis. Mar 28 at 18:49
  • @DanIsFiddlingByFirelight - agreed, and appraisals for things like getting rid of PMI are pretty easy to arrange for a small fee.
    – Jon Custer
    Mar 28 at 18:50
5

Ignore the inheritance, and for a moment ignore the fact that your brother would be on both sides of the sale.

You and your two siblings each own an equal third of a $300,000 property ($100,000 each). A buyer gives you $300,000 in exchange for the property. You now do not have the house, but you each have a third of the $300,000 payment ($100,000 each). So you each are now -1/3 house, +$100k. The buyer has -$300k and +1 house.

Now consider the buyer being one of the three sellers. As the buyer, he is -$300k and +1 house. As a seller, he is +100k and -1/3 house. Together, he is -$200k and +2/3 house (having paid $200k to you and the other sibling in exchange for your 2/3s of the house). From his starting position ($0k and 1/3 house), this leaves him with 1 house and -$200k. If he then sells the house to someone else for $300k, we add in +$300k and -1 house, bringing him to $100k and no house, the same as the other two siblings.


You say he theoretically gets 100k of his share from the property (yes, it’s still IN the property) and after buying us out he will be theoretically negative 100k. (100k-200k= -100k), but this isn't right. Either he pays each of you $100k for your shares (pays $200k and receives $0), or he pays $300k for the whole house (pays $300k and receives $100k). If he only pays $200k, and you and your other sibling each get $100k, there is no additional $100k for him to receive.

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Others have shown how to do the math correctly. I'll try to show where, exactly, you had it wrong.

Lets break up the equations in your sentence:

he theoretically gets 100k of his share from the property (yes, it’s still IN the property) and after buying us out he will be theoretically negative 100k. (100k-200k= -100k)

But now he has another 2/3 of the house. So, balance 1 (B1) is:

B1 = 1/3 house (held initially) - 200k (buyout) + 2/3 house (just bought)

If you consider 1/3 house = 100k, (as you did) and sum it with the -200k, the real balance will be:

B1 = 100k (held initially) - 200k (buyout) + 2/3 house (just bought)
B1 = -100k + 2/3 house                  (Equation 1)

Or, alternatively, if you sum the house fractions:

B1 = -200k + 1 house                    (Equation 2)

See, both B1 above are equivalent. Either he is only $100k in debt, but has 2/3 of a house, or he had a full house and a $200k debt.

You have chosen the first, but omitted the share of the house he now have, which is only 2/3, because you have considered his original 1/3 as part of the buyout payment.

But say he immediately sells the house for 300k.

So, he gave up a whole house, and got back for it 300k:

B2 = B1 - (1 house) + 300k

Replacing B1 in this new equation:

B2 = (-100k + 2/3 house) - 1 house + 300k
B2 = 200k - 1/3 house
B2 = 100k

See? He only got $100k, as expected.

Now the mistake you made is that, after the buyout, you considered he owned a full house, like in Equation 2, but had only a -100k debt, like in Equation 1. Both can't be true, because you can't use the 100k he initially had in the house to offset the 200k he spent buying the other two thirds, and still have the original one third. In your calculations, the original third was spent.

1

Your thinking is way off. If he buys you out at 100k each, he started with 100k worth of the house and now owns a 300k house and is out 200k cash for no change. If he sells the house he is now +100k cash as are the two of you. This is the appropriate accounting if the house is worth 300k.

The point that there are costs involved in selling a house is important, but on another scale. An appraisal assumes you have a willing buyer and willing seller. The alternative to one of you buying the others out is to sell the house, netting 300k less the costs of sale. If the costs of sale are 10% or 30k, you would only get 90k from the sale of the house. There is a negotiation to be held that should be between 90k and 100k. Is it important to keep the house in the family? If so, maybe you settle lower in the interval or even lower than 90k.

0

You missed the initial balance in your calculation when he sells the house:
Here it is in long form.

Networth before: 0.

Networth after he buys out siblings: -100k.
100k - 100k (Bankloan1 to sibling A) - 100k (Bankloan2 to sibling B) = -100k

Network after he sells the house: 0
-100k + 300k (= 200k) - 100k (payback bankloan1) - 100k (payback bankloan2) = 0

※ You can substitute the bankloan with part of the cash inheritance, but it doesn't change the net result.

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