Beyond the need for a lawyer to handle the contract side of things, it's not necessarily equitable to split it as you suggest.
In investment you have a concept of leverage, which is when you invest some money but borrow more in order to make an investment that hopefully returns a greater return than your interest rate on the borrowed money. You put in $20k, borrow $80k at 3% p.a., put that $100k in AMZN or AAPL, and make, say, $20k in two years; you earned ($20k-$4.8k) = $15.2k, which on $100k is an okay 7.6% return, but on $20k is an incredible 75% return!
Your house is the most common form of leverage used by folks in the middle class in the US (and probably most countries). While the standard warning applies - that housing is only sort of an investment, and it shouldn't exactly be treated as such - it makes sense to look at it through that lens in this case.
Let's say you buy a house for $1M, and you put in $200k. Then you live in it for five years, and sell it at the end. Payments are, say, $60k/year, and for simplicity let's assume of that a flat $12k/year goes to principal (this is inaccurate, but not important). What are the possible outcomes?
| Sale Amt |
Mtg Balnc |
Equity |
Paid(P1) |
Paid(P2) |
Proceeds(P1) |
Proceeds(P2) |
Return(P1) |
Return(P2) |
| $800,000 |
$740,000 |
$60,000 |
$350,000 |
$150,000 |
? |
? |
? |
? |
| $1,000,000 |
$740,000 |
$260,000 |
$350,000 |
$150,000 |
$230,000 |
$30,000 |
(34%) |
(80%) |
| $1,200,000 |
$740,000 |
$460,000 |
$350,000 |
$150,000 |
$330,000 |
$130,000 |
(6%) |
(13%) |
| $1,300,000 |
$740,000 |
$560,000 |
$350,000 |
$150,000 |
$380,000 |
$180,000 |
9% |
20% |
| $1,500,000 |
$740,000 |
$760,000 |
$350,000 |
$150,000 |
$480,000 |
$280,000 |
37% |
187% |
The first row you'd need to have an answer for in the contract: what if you lose money, and sell for less than the initial cost (s? Are you just giving the $200k person all $60k of the equity, or does the other partner still get some back for their payments?
The next two rows show modest "losses", which aren't true losses in terms of the house losing value, but the property taxes and interest paid aren't being fully recouped in the sale, so you don't end up with as much as you put into it. In both cases there is a negative return for both participants, and the return is "larger" proportionally for the partner with no down payment, though it's the same total dollar value... and odds are they are feeling okay ultimately, as they at least got some value out of the house while living in it.
The final two, though, show where the power of leverage comes in handy: if the house sells for a lot more, P2 is really making out. They're putting in $150k, and they're making almost double their initial investment! If I'm investing money, I want to be P2 here, assuming I believe the house will sell for a net profit.
Where it really becomes a killer deal to be P2, though, is when you consider the cost of renting - basically, without this house they'd be spending that anyway (and not recouping it). Take the table and factor that in, and P2 is ahead in basically every scenario. Let's say the cost to rent a similar house is $50k annually ($250k/5 years), split evenly.
| Sale Amt |
Mtg Balnc |
Equity |
Paid(P1) |
Paid(P2) |
Proceeds(P1) |
Proceeds(P2) |
Return(P1) |
Return(P2) |
| $800,000 |
$740,000 |
$60,000 |
$225,000 |
$25,000 |
? |
? |
? |
? |
| $1,000,000 |
$740,000 |
$260,000 |
$225,000 |
$25,000 |
$230,000 |
$30,000 |
2% |
20% |
| $1,200,000 |
$740,000 |
$460,000 |
$225,000 |
$25,000 |
$330,000 |
$130,000 |
47% |
420% |
| $1,300,000 |
$740,000 |
$560,000 |
$225,000 |
$25,000 |
$380,000 |
$180,000 |
69% |
620% |
| $1,500,000 |
$740,000 |
$760,000 |
$225,000 |
$25,000 |
$480,000 |
$280,000 |
113% |
1020% |
In a very optimistic scenario (+50% in 5 years), P1 makes double their money - not bad, a 23% return p.a.. But for P2, they double their money if the house sells for basically anything above the starting amount! Even selling for $1,050,000 they make more than double their input (net of their rent-equivalent costs). And they have nearly no risk - they risk a measly $25k, even if the housing market collapses and the house sells for nothing, while P1 loses their life savings.
So... how do you resolve this?
There are two ways that make sense to me.
The first is to throw this whole post out the window and decide that you're going to acknowledge the emotional/social aspect of this transaction, and agree to something that's realistically unfair to you, but is better for the relationship. This is what most people do, as far as I can tell. In this case, don't try to get so detailed as you have above: do it like I did in the table above. Sale price minus mortgage balance equals equity; you get $200k off the top of that, then equity is split 50/50, no worrying about anything else. Maybe you get that $200k no matter what (so if it loses money, you get all of the equity), that seems like a fair exchange for the partner.
The second is to treat this as you owning the home, and your partner renting it from you - perhaps "rent to own", but where your partner's share in the return is limited. You're taking basically all of the risk, so you get basically all of the windfall. Your partner gets some fixed amount based on the payments - 50% of the principal paid off each month - and then gets some fixed percentage above that amount based on the house's appreciation (so if it sells for 150% of the purchase price, they get their principal payments plus 50%, say). Let's see that table one more time with this example... and we'll pretend they paid off $5k of principal each in the first 5 years for simplicity. We'll also leave in the "rent" factor subtracting from the amount paid, so the more realistic return is seen.
| Sale Amt |
Mtg Balnc |
Equity |
Paid(P1) |
Paid(P2) |
Proceeds(P1) |
Proceeds(P2) |
Return(P1) |
Return(P2) |
| $800,000 |
$740,000 |
$60,000 |
$225,000 |
$25,000 |
40,000 |
20,000 |
(80%) |
(20%) |
| $1,000,000 |
$740,000 |
$260,000 |
$225,000 |
$25,000 |
$235,000 |
$25,000 |
4% |
0% |
| $1,200,000 |
$740,000 |
$460,000 |
$225,000 |
$25,000 |
$430,000 |
$30,000 |
191% |
20% |
| $1,300,000 |
$740,000 |
$560,000 |
$225,000 |
$25,000 |
$527,500 |
$32,500 |
234% |
30% |
| $1,500,000 |
$740,000 |
$760,000 |
$225,000 |
$25,000 |
$722,500 |
$37,500 |
321% |
50% |
In this second example, they're getting very little back if you sell it in the first several years. It won't feel very fair, as you'll stand to get the far majority of the gains, but it's probably the most fair from a pure investment point of view - remember, odds are you won't even sell for 20% more, and you may well sell for less. They're not at risk for losing much, and their return is still really good compared to what they're putting in! That top line is far more likely than you probably think, especially in California...
